The House in the Woods

The House in the Woods:

Value is just a bundle………………!

A true story………

Two executives living next door to each other owned property backing on to a delightful four acre wood.

One, keen to purchase the woodland, obtained a quote from the local council for a purchase price of £3000 an acre. The local estate agent confirmed the price as reasonable. On that basis, he submitted a bid of £12000 for the full four acres.

Unknown to him, however, his next door neighbour had done the same, also offering the council £12,000. Over the next few weeks, each tried to outbid the other and the price finally reached £24,000 per acre. At this point the first executive pulled out, and the other finally purchased the land for a total of £96,000. Relationships between the two were now distinctly frosty.

A few months later, the executive who had pulled out of the purchase received a call from the purchaser offering to sell him two acres. Would he like to make him an offer? The initial temptation was to say, “Get lost”, but on reflection, he decided to make an offer of £3000 per acre. “Get lost!”, was what he was told to do! When asked what the seller would accept, he was told £48,000. ”Forget it! The original valuation was £3000 and, while I am happy to go a bit higher than that, £24,000 an acre is completely out of the question”.

The seller’s response completely amazed him: “Get your house valued again, firstly without the woodland, and then again with the woodland attached. When you’re done that, come back to me and we’ll talk again”.

The executive agreed to do so. The surveyor who had initially valued both the house and the woodland separately now re-valued both. The house, initially valued at £450,000 had barely changed. However, with the woodland added, the surveyor estimated a fair sale price of just over £950,000! Astonished, he paid the seller a cheque for £48,000 the very same day, making an immediate profit on paper of nearly 100%.

This is a true story. Without considering why the two didn’t just talk to each other in a bit more detail about what each really wanted out of the deal (two acres each perhaps?!), the key value issues seem to be:

• The elements of the property, when valued separately and offered for sale as individual items, were at the most £450,000 for the house plus £48,000 for all the woodland.
• Each part of the package represents a “specification” market value. By linking both house and woodland as part of a “bundle”, the whole nature of the package became different… and (almost) unique. If there were several elements to the bundle, each element when added would change the proposal incrementally, and with it the price.
• The winners, finally, in this little scenario were the two executives. The value insight – verified by the surveyor as an independent and objective consultant – led to both parties gaining enormous advantage and a real win-win outcome. However, the win would have been seriously bigger if only they had spoken to each other in the first place. Their lack of communication cost them £42,000 each!
• The loser in this scenario should have been the local council. By valuing the woodland on a per acre basis they failed to identify the real commercial value and the whole woodland could have been bought for £12000. By pricing on specification, the council was potentially leaving a lot of money on the table. A little bit of thought around the true value to the purchasers might have resulted in a much better deal for them and a win-win-win situation. As it happens, they got that result by default rather than by adopting a value based pricing approach.

The moral of the story (other than to talk to each other!), is to constantly look at how changes to your offer impact your customers and price on the basis of the value they will enjoy as a result. Bundling is just one of a number of ways of enhancing perceived value – just look at Microsoft Office for an example of bundling in practice, or utility providers bundling gas, electricity, phone packages together. What could you bundle that would make your product or service more attractive – and valuable – to your customers?