Wednesday, May 27, 2009

The Vendor Client Relationship

If you have ever worked in production, you'll understand this video. And if you've never worked in production, you may be surprised to learn that this is how business is done.

The teacher in me wants to explain things about this video and why something that looks ridiculous is actually just about economic leverage.

All of the above examples are from the world of retail. There are several important things to realize about this. First, items are relatively inexpensive. I don't know how much that meal or hair styling cost, but let's say $100 or less. Second, the market of potential customers is large. These two things give the retailer the right to tell a customer to take a hike. There are lots of other customers and the loss of a sale of a $20 CD or a $100 meal is not going to make much of a difference to the bottom line.

Let's amp it up a notch and talk about kitchen renovators. A reno is going to cost $10,000 and up. If the reno company is in a fairly large city (500,000 plus), there's no shortage of customers so they can still afford to tell a customer to take a hike. However, the length of time it takes to do a reno means that a company can only do so many in a year. This is fundamentally different than retail. A restaurant or hair stylist is capable of doing dozens of transactions in a single day, so time is not really an economic constraint for them.

Let's say the renovation company is able to do 20 renovations in a year and they need 15 to break even. It's now December and they've only done 14. They've got a possible client, but the client refuses to pay the price and wants a healthy discount. The reno company is faced with taking a loss or taking a smaller loss, so the cheap client has leverage and the reno company is likely to give in.

When you get to the film and television business, the clients have even more leverage. People with money to finance a project are rare. Each job represents a large chunk of money and your facility can only handle so many projects a year. Since clients are rare and each job is worth a lot of money, you can't afford to offend anyone. Losing a client in a retail situation is a petty annoyance. Losing a rare client client with an expensive job can be the difference between life and death for a company. Taking a hard line with those clients often means that the client won't come back. Both the client and vendor know it, and the client takes ruthless advantage of that fact.

While the video above looks ridiculous at the retail level, it makes economic sense based on supply and demand. There's a huge supply of retail customers, but there's a short supply of film and television customers. In film and television, production company demand for jobs outstrips producer supply. When the equation is so uneven, the scarce side inevitably takes advantage.

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