Street Smarts

by Norm Brodsky

  They loved it. They said, “It’s fantastic, but can you change a few things? ”

  I said, “We can do anything you like.”

  The accounting people were thril ed. They went to the manager who’d turned us down and said they wanted the agency to hire us, provided that we made the changes they’d requested and, of course, that our service was good. The manager cal ed me. “Listen,” he said, “I feel an obligation to the people we’ve been using. I don’t want to dump them without giving them an opportunity to do the same thing you’re promising. Can I show them this sample bil you’ve put together for us?”

  I said, “Sure. Absolutely.”

  A few days later he cal ed me back. “They say you can’t do this,” he said. “They say it’s impossible.”

  “We can do it,” I said. “We just need a little time to set up.”

  “How much?”

  “Three weeks.”

  “OK,” he said, “you’ve got three weeks. Then we’l run an experiment for one week. At the end of the week, we’l decide who gets the account.”

  Now we had to get the computer programmed, and the programmers weren’t making any promises. Our fal back position was to produce the bil s on a typewriter, which would have been extremely expensive. Fortunately, we didn’t have to go that route. The program worked, the test went wel , and we wound up with the whole account, boosting our sales from $10,000 to $35,000 a month.

  And that was just the beginning. The new bil ing system quickly became our mainstay—our “core competency,” as it were. For a while at least, it was the one thing we had that our competitors couldn’t offer, and by the time they caught up, we had a foothold in the market and were known for providing that service. Indeed, it defined us as a business. It determined who our customers were, how much we could charge, how we went about sel ing, what additional expenses we provided, and so on.

  Technical y, we were stil a messenger company, but only in the sense that we delivered things and charged according to the number of deliveries we made. What we sold—what our customers bought—was our ability to solve their charge-back problems. Without even realizing it, we had moved from messenger service into information processing, and we rode that business al the way to the Inc. 500 for three successive years.

  That’s another example of the importance of being flexible when you’re starting out. It’s equal y important to remain flexible after you’ve built your company. No niche lasts forever. If it’s a profitable one, it’s going to attract competitors sooner or later. Other companies wil start copying what you do. The more profitable the niche is, the faster it happens. When it does, you lose the advantage that defines your niche, namely, the ability to offer something other suppliers don’t have. At that point, you need to find another niche—unless your business is wel -enough established by then to operate without one. How? By building a great reputation.

  Ask Norm

  Dear Norm:

  What should I do about an unethical competitor? I recently opened a service business that has been very successful, but our success has drawn the attention of a large established company in town, which is taking aim at us with marketing materials that misrepresent our service and professionalism. These people have played dirty before. I’d like to think their practices would catch up with them, but that hasn’t happened yet, and I’m afraid they have so much cash they can outlast the rest of us. Any advice?

  Rob

  Dear Rob:

  Yes. Don’t lose your focus. Provide great service at competitive prices and develop a reputation as the class act in town. Give prospects the names of customers they can cal to check you out. Above al , don’t bad-mouth your competitor, even if it’s bad-mouthing you. Customers wil think less of you if you do. That’s an iron rule in my company. If I’m asked about a competitor I consider unethical, I say only, “I don’t think they can provide the type of service you want” People get the message. If your competitor doesn’t mend its ways, it wil be the loser in the long run.

  —Norm

  Your Good Name

  So what exactly do I mean by reputation? I’m talking about what people think of the way you do business, how they assess your character as a businessperson. Do you compete fairly? Do you run a nice, clean operation? Do you treat your employees wel ? Do you go around bad-mouthing other companies in the industry, or do you speak about them with respect? Those are al factors that help to shape your business reputation, which in turn affects your ability to hire people, attract customers, get financing, make deals, and do everything else that goes into building a successful company.

  I’ve long believed that a good reputation is the most valuable asset you can have in business. What’s odd is the role your competitors play in creating one. Their opinion, I believe, counts more than the view of any other group—because of their credibility within the industry and with potential customers. Competitors have a unique perspective of you and your company. They face the same pressures and have to make the same choices that you do. If you have the respect of your competitors, you probably deserve it. If they think you’re a lowlife, you could be headed for trouble.

  So it’s important to act in a way that’s going to earn their respect. Not that you shouldn’t compete as aggressively as possible, but you need to play by the rules. Which rules? I have three:

  1 . Never bad-mouth a competitor. When I compete for an account, I always ask which other suppliers the prospective customer is considering. Most prospects name the same two or three records storage companies, our major competitors. “Those are al fine companies,” I say, “and you’re going to be happy if you choose any one of us. Of course, I think you’l be happiest with my company.” Then I talk about our strong points, taking care not to say anything negative about the other companies. To be sure, the customer occasional y includes on the list a company I don’t hold in such high regard. In that case, I simply say, “Wel , that firm isn’t real y a competitor of ours, but the others we compete against al the time, and they’re very good. I just think we’re better, and here’s why.”

  2. Don’t be a sore loser. It’s always tough when a competitor takes a customer away from you, especial y if the account is a big one. You get angry. You can’t help it. But you have to remind yourself that you never know what the future holds. The people you deal with at the account may not agree with the decision to switch suppliers; if they go to work somewhere else, they could bring you another customer. Even the customer you just lost could come back again someday, provided you keep your cool. In any case, you can only hurt yourself by letting your anger show. No matter how upset I may feel inside, I make sure we treat our customers as wel when they leave as we do when they come in.

  I want them to remember us as a class act al the way, and I want our competitors to hear about it.

  3. Always be accommodating. There are times when we have to deal directly with competitors—for example, when a customer is moving into or out of our warehouse. That’s an opportunity for us to send our competitors a message. Even if someone is taking a big account away from us, we’re as nice as can be. We acquiesce to the other company’s schedule and handle the process however the competitor wants us to. We’re equal y accommodating when we’re moving a new customer out of a competitor’s facility. We tel our drivers to be patient if they’re kept waiting, as they often are. They can take al day if they have to. We don’t want to provoke any fights or arguments, and we don’t want to rub salt in a competitor’s wound.

  Now, I’m sure some people wil ask, “What’s the payoff for fol owing those rules?” Often, I admit, it’s hard to quantify, but every now and then I get direct confirmation of the importance of having our competitors’ respect. Years ago, for example, I received a cal from a lawyer representing an anonymous client in the records storage business. The client had asked him to find out if I’d be interested in acquiring its accounts. “How did they get my name?” I asked.

  “To tel the truth, I don’t know,”
the lawyer replied.

  I insisted on meeting with the lawyer, who even then wouldn’t divulge his client’s identity. He did say, however, that he’d been told there were about 200,000 boxes involved. At the time, I had about a mil ion boxes in my warehouse, so 200,000 was an interesting number. I told the lawyer we should keep talking.

  Over the next two months, the lawyer and I negotiated the terms of a possible deal—how much my company would pay per box, when we’d take over an account, and so on. Although the lawyer stil wouldn’t identify the sel er, I could tel from the average account size and the bil ing method that it wasn’t one of our principal competitors. Most likely, it was an older moving-and-storage company. I also learned that five potential acquirers had been contacted initial y. Through the negotiating process, the sel er had whittled that group down to three companies, then two. Final y, the lawyer cal ed and told me that we’d been selected to do the deal, but the sel er wanted to meet with me first.

  He turned out to be a guy named Jack, whose family owned two or three moving-and-storage businesses in Manhattan. We’d taken some clients away from him in the past, and he’d liked the way we handled the transfer. He’d also checked us out with other people in the industry—our competitors. That’s how we’d wound up on the first list of potential acquirers. We survived the next cut because we were more flexible than our largest competitor. Jack was very protective of his customers, many of whom had been with the company since his father had run it. He put a lot of conditions on the sale, which we had no trouble agreeing to. Our giant competitor wouldn’t bend its own rules to fit Jack’s, and so it was dropped from the list.

  In the end, the choice came down to us and a company we constantly compete against. We won that round because of our financial strength. It turned out that the deal was much bigger than we’d been told—not 200,000 boxes, but more than a mil ion, almost al of them in very smal accounts, my favorite type. Jack felt we had deeper pockets than the other company had and went with us.

  So, in one fel swoop, we doubled the size of our business, adding the best kind of customer base you can find. Financial strength played a role, as did flexibility, but we wouldn’t even have been in the running if we hadn’t played by the rules and earned the respect of our competitors.

  Sometimes it real y does pay to be nice.

  The Bottom Line

  Point One: The secret of successful sel ing lies in losing your fear of asking. You don’t ask, you don’t get.

  Point Two: You probably won’t discover your company’s niche until after you’ve launched the business.

  Point Three: No niche lasts forever. You may have to discover new ones as you go along.

  Point Four: Your reputation is your most valuable business asset, and your competitors play a critical role in shaping it.

  CHAPTER EIGHT

  Good Sales, Bad Sales, and the Ones That Get Away

  While I completely agree with the old saying that “nothing happens without a sale,” it does not fol ow that al sales are equal. Some sales are much better than others—a concept that salespeople often have a hard time dealing with. That’s partly because they have a sales mentality. They’ve been conditioned to think that any sale is a good sale, and the larger the volume, the better. In fact, the size of the sale is a lot less important than the amount of gross profit you’re going to earn on it. Too many low-margin sales can drive you out of business.

  By the same token, many entrepreneurs think that they should focus on signing up big customers. I remember an e-mail message I received from a young man who was launching his first company, an advertising and marketing firm. He said that he had everything he needed to get started—

  money, contacts, experience in the business, a wel -equipped office, and so on. There was just one problem: he wasn’t sure what kinds of customers to target. “I don’t want to bore myself with smal clients,” he wrote, “but bigger clients seem out of my reach. Any thoughts?” My advice was to forget about boredom. Growing a business from scratch is never boring. Instead of shunning smal accounts, he should sign up as many as he could handle and charge premium rates. In the long run, he’d be much better off with a lot of smal customers than with one or two big ones.

  Smal customers are the backbone of a solid, stable, profitable business—especial y a service business. I’d like nothing more than to own a service company with 10,000 smal customers, each good for about $5,000 per year in sales. That’s my ideal. Not that there’s anything wrong with having big customers. Sooner or later, most of us need them to grow. But you should never look down on your smal customers or take them for granted. The more you have, the happier you’l be. Why? I can give you three reasons.

  First, you get better gross margins with smal customers because they pay more for your services. They have no choice. They simply don’t have the negotiating power of large customers. As a result, you can charge smal customers the top price. I’m not talking about gouging anyone. In my industry, the records storage business, for example, most companies have a book rate. That’s the price per box they charge any customer who’s storing up to, say, 500 boxes. A customer with 10,000 boxes usual y wil pay a much lower rate. I would never let the price go so low as to undermine our gross margins, but I have to offer some kind of discount because we’re competing with other suppliers for the business. With smal customers, I can afford to insist on the book rate, which helps strengthen our margins.

  Second, smal customers bring stability to a business. If you treat smal customers right, they’l stay with you forever. That’s partly because they’re loyal, and partly because—like most of us—they tend to resist change. It’s also true, however, that they’re much less likely than big customers to be lured away by competitors, if only because most companies don’t seek out smal customers. When I was in the messenger business, for example, everyone knew where to find the big accounts—the law firms, advertising agencies, and so on—and everyone went after them. It took almost as much time, effort, and money to land one of those customers as it took to locate and sign up the guy who’d have five messenger cal s a week.

  What’s more, you’d need two hundred of the smal customers to provide you with the same volume of business as one large customer. So our competitors’ salespeople general y ignored the smal accounts. When we got one, it rarely left.

  Third, a broad base of smal customers makes your business less vulnerable to the loss of any single customer. That’s why—when you apply for a loan—a bank wil ask you to list al of your customers that account for more than 10 percent of your sales, as wel as the percentage of sales that each one represents. If you do more than 30 percent of sales with any single customer, you’re in trouble. For openers, you have to be at that customer’s beck and cal . If you’re on vacation and the customer wants to have a meeting, you have to drop everything and come back. If you have a contract with the customer, you sweat bul ets when it comes up for renewal. The truth is, you’re not in control of your own business. The large customer can pretty much dictate prices and terms, and you can’t afford to put up too much resistance. It’s a lot like having a boss, which probably isn’t what you had in mind when you decided to go into business in the first place.

  Of course, you may not have the luxury of starting out with a base of smal customers. A lot of people launch businesses on the cash flow from sales to one or two big customers, and there’s nothing inherently wrong with that. But you need to start immediately to expand and diversify your customer base with smal customers, or you’l quickly become a slave to the big ones.

  What’s the goal? I don’t think any company can be considered secure until its biggest customer represents no more than 10 percent of its sales

  —and I wouldn’t stop there. As much as I love my large customers, I stil feel vulnerable to them, and so I continue to add as many new customers as I can get, especial y smal ones. That’s not easy. For the same reason that smal customers give your business stability, they are hard—
and expensive—to find. You can’t ask salespeople to devote al of their time to looking for them. Instead, I used to instruct our salespeople to drop by three or four potential smal accounts whenever they made their cold cal s on large accounts. If al the accounts were in the same building, the additional visits usual y took another hour or so, and the results added up over time.

  Sometimes you get lucky. That’s what happened with the acquisition I wrote about at the end of the last chapter. Almost al of the accounts were smal ones—literal y thousands and thousands of them. I asked Jack, the owner, how he’d managed to sign up so many smal customers without having large customers to provide cash flow. “Wel , we used to have large customers,” he told me, “but we lost them to guys like you. Al that was left was our base of smal customers. Of course, it took us sixty years to build that base, so it’s substantial.”

  To be honest, I thought Jack’s customer base was better than mine. When I lost a 40,000-box account, it real y hurt. He would have had to lose about 200 accounts to experience the same level of pain. Fortunately, I didn’t have to spend the next sixty years trying to match his situation. In about twenty-four months, we’d finished moving al of his accounts—about 400,000 of them—to our facility.

  When the Price Isn’t Right

  Unfortunately, most accounts don’t fal into your lap as easily as those fel into mine. Indeed, making a sale at a good gross margin is almost never easy, and at times it can seem almost impossible. We went through a period in the late 1990s when sel ing was the toughest I can remember. It wasn’t enough to come in with a low price, because everybody’s prices were low. Sure, there were some pockets of overpricing, but by and large the fat had been squeezed out of the system, and customers knew it. They knew they weren’t going to save much by buying strictly on price. So, to get their business, you had to offer something worth more to them than a discount. You also had to overcome customer loyalty, which was unusual y strong. Customers would say up front—when you first went in to solicit their business—that they liked their current supplier and probably wouldn’t switch. When that happens, it’s not enough to tel them why your product or service is better. You have to show them.