Do you like to pay lower prices for products and services? Sure, we all do. But lower prices sometimes come at a high cost. What we’re talking about is the effects of a “textbook” marketing theory called the “Wheel of Retailing.”
According to the theory, new retail businesses often break into an existing market with lower prices, along with generally lower levels of service. Traditionally in retail, what comes to mind is a “bare-bones” type of store with plain displays of goods in a warehouse-style atmosphere. Internet technology also brings us another type: the exclusively online business. Whether “low price and service” either describes your business or better describes the competitor you face, you both may fall prey to the effects of this ruthless theory. (Please note that businesses other than retailers may face very similar problems.)
That’s because the theory doesn’t stop at the entry of a low-price store. It is called a wheel because after taking part of the market (usually defined geographically), the no-frills store starts to think about retaining their new customers. They then add services — credit, delivery, in-store assistance, etc. — which puts pressure on their prices to creep upwards. When the wheel turns far enough (and prices and services increase enough), the formerly discount retailer may actually become the type of business they displaced. They then are likely to face a brand new competitor who will again offer lower prices in a plain-vanilla environment and possible go out of business as a result. While the classic version of this theory takes time to play out, it does not usually have a happy ending for anyone. Many businesses of all types are destroyed in the wheel’s well-rutted path.
The goal of a chamber of commerce is to help make all business members successful and their community prosperous. Their enhancement of the local business environment helps member firms avoid such destruction. Sometimes this means encouraging direct competitors to find ways to successfully coexist, often through shifting their products and services to serve distinctly different target markets. While shifting is easier for small businesses, larger businesses also need ways to adapt also.
Are there ways to steer the wheel of retailing off on different, more cooperative paths? Sure, but it is hard to accomplish. When the wheel first begins to turn, customers may complain about the loss of services. Nonetheless, people vote with their dollars, and majority preference has been usually been unmistakable. While they may be complaining about selection, lines, and lack of convenience, many of those same folks are reluctant to pay anything but the lowest price.
Throughout the “wheel of retailing” cycle, success is all about cost control and work-force motivation. If your business is the low price outfit, you need to struggle to stay there for as long as possible in the face of pressure to turn the wheel coming from employees, customers, suppliers, and other stakeholders. Keep inventory in line, employee costs low, and merchandise assortments general. Be promotional, use variable pricing strategies, maximize allowances and co-op, stay open as many days and hours as possible, and keep your people pumped. If you can maintain, it will keep anyone from undercutting your low price advantage.
However, let’s say that your business is the well-established one that has to deal with a new, low price entrant into your market. What can you do? Don’t try to go head-on, instead shift sideways. Here are five ways to “deal with the wheel” and better compete in the cyclical business environment:
#1 -- Be different in providing better service! That may be possible, but remember to look at your service objectively before you decide to compete on that basis. What people see as customer service has a lot to do with a positive employee attitude. Low morale and indifferent management take time to mature in a work force — so maybe your well-established business now has those problems in abundance. For some newer low price stores, they seem to initially have personnel filled with missionary zeal and entrepreneurial spirit. Do you still have the spark? Really?
A real service advantage is “marketed expertise.” You've invested a lot of years and a lot of money to become professional, so use that to your advantage! Do everything you can to solve problems for customers (don’t just sell them stuff, sell solutions). Remember the many times you’ve tried to find someone to help you in a low price store – someone who knew anything about the item you wanted to buy? It's frustrating! Unlike them, you have knowledge and experience as valuable as the product itself. All you need to do is market it!
If you have people working in your business who are not "up to speed" on all your product and service offerings, train them! It will hurt your business if employees can’t answer questions or arrange for service. Have a strong commitment to service after the sale. If you sell products from your store, promote your business on reusable shopping bags. If you install equipment in a customer's home or business, leave a nameplate on the equipment with your company's name and telephone number permanently affixed. If you are a service business, make a follow-up phone call to make sure everything's working okay.
#2 -- Maybe a more realistic way to compete is not to compete at all! Niche in! Offer a selection of products and services they just can’t match. Look at the true small business survivors in retailing. They see that mega-retailers have weaknesses, too. And if you learn to exploit those weaknesses, your business can thrive -- and even grow -- in the face of low price competition.
They may have items in your category, but are they adequate for your target markets? I once worked for a low price retailer. Their unofficial motto was: “The most with the best and to heck with the rest.” They offered customers little choice or selection. Let’s say the low price retailer sells books. A few bestselling titles do not a bookstore make. Where are their booksignings, special events, and customer loyalty programs? They don’t have them – just a few selected books priced to move quickly.
Establish and maintain your own specific target market in which to work. This market "niche" is populated by the customers that you can serve better than your competition. Use the Chamber’s free Marketing CD and other materials to help you figure out who these people are and how to serve them. What makes your business special? What makes people who do business with you different from people who trade with competitors? What unique qualifications do you have? What can you provide that customers can't get anywhere else? Do everything you can to make your business unique.
The average volume retailer may have 80,000 items in their store, but they are so general and focused on high turnover that they still can’t offer the range of specific products, equipment, parts, supplies and service you can. So, eliminate from your inventory any general items not specifically sought after by the people in your market niche. Specialize!
#3 -- Look like a national franchise, but act like a hometown business. One of the key factors in success of the low cost retailers is a no hassle return policy. Are you the friendly neighborhood store or do you make returning an item about as pleasant as the Spanish Inquisition? Instead, try: no receipt necessary, no huge form to fill out, no embarrassing questions, and no hassle. Just record the customer’s ID in a database to avoid the “professional” return thieves.
If you make a customer mad over a $9 return, you can lose hundreds of dollars in future sales from that customer. More importantly, you may now have an ex-customer who will bad-mouth your business all over town. A customer return is a signal that there was a defective product or insufficient service, either at the time of the sale to the customer or shortly thereafter. If the customer returns the item, it's your opportunity to sell the customer the correct item, or additional products, to make things right. Remember, the biggest hurdle to overcome in acquiring a customer is getting the customer to trust you. Once you've already earned a customer's trust, it's easy to sell to that customer again and again. Don’t blow it over a small return.
#4 -- You need to make your business schedule fit the schedule of the customers in your market niche. Whatever your specific line of products or services, you need to be able to contact customers when those customers can be reached. This may mean having to be open later one night a week, running customer service calls after 6 p.m., or doing installations on weekends. Whatever it takes (within reason, of course), you should do it. If you don't, a competitor just may!
#5 -- Above all, don't let your business become a wall flower. Make sure your company's name and logo is highly visible in the community. Get more involved in the Chamber. Let people identify with you through your cars and trucks traveling through town, your building or place of business, your letterhead and brochures, and through your retail and telephone directory advertising. Community businesses like yours only get challenged by competitors when it looks like there's a market to be captured. Don’t let somebody else eat your lunch!
NOTE: For a Word document with a graphic of the "Wheel of Retailing" e-mail me at dougklein@masonchamber.org
