by Norm Brodsky
By then, moreover, you wil probably have lost your current ful -price customers—which is the fourth, and most important, argument against discounting to fil capacity. The practice alienates precisely those customers you must have to be successful, maybe even to survive. They’l be furious when they find out you’re charging other people less for exactly the same service. They’l think you’ve been ripping them off al along. From then on, forget it. I don’t care what price you offer them. Those customers are gone.
The truck example is a clear case of the capacity trap, but you also have to beware of it in bidding situations. I remember a large city contract that came up for auction. I real y wanted it, but I lost it to a new records storage company that had offered a monthly rental fee of 13 ¢ per box, about 40
percent below my bid. I just laughed. At that price, I didn’t want the business. Frankly, I couldn’t see why anyone else would want it, either. A couple of weeks later, the guy who won the contract—we’l cal him Jerry—came to see me. The owner of his company is a friend of mine and had asked me to give the kid some pointers. I quickly realized that Jerry was perplexed at how the bidding had gone. “I was surprised you didn’t come in lower,” he said.
“I’d never bid what you did,” I said. “There’s no way you can justify 13¢ a box. You’re losing money on the deal.”
“That’s not true,” he said.
“Oh, no?” I replied. “Let me show you something.”
We sat down, and I took out a pen and paper. I asked Jerry how high his building was and then calculated the number of boxes he could fit from floor to ceiling. Since we knew the total number of boxes involved and the size of each box, we could figure out how much floor space the stored boxes would take up. We also knew the total monthly revenue from those boxes. Dividing the revenue by the floor space, we determined that Jerry would be getting monthly rental income of $6.60 per square foot for storing the boxes. “You could rent that warehouse to another guy for $8 or $9 a square foot, and he would pay the taxes, the heat, and the lighting. With this deal, not only do you get less revenue, but you have to cover al those expenses yourself.”
“Omigod,” said Jerry. “I never thought of it that way.”
Now I know some people would argue that Jerry did the right thing. After al , his warehouse was empty at the time. He was already paying the taxes, heat, and lighting, as wel as numerous other expenses. Even at 13 ¢ a box, the city contract would help him cover those expenses. So why shouldn’t he have taken what he could get? Something is always better than nothing, right?
The answer is no. I mean, what sense does it make for Jerry to go to al the trouble and expense of having a records storage business when he could do better being a landlord? In fact, it should always raise questions if you find that you could earn more money by using your capital another way. Unless you have a clear plan for improving your returns in a specific time frame, you’re probably doing something wrong.
To be sure, there are exceptions to every rule, and this one is no different. I have to admit that sel ing capacity at a discount does make sense occasional y, as long as two conditions are met. First, you and the customer must agree up front on the duration of the discount and what wil happen when it expires. Second, you must be able to explain the deal to other customers who raise questions about it. They need to feel that you’ve been fair. At one point, for example, I used some of my excess capacity to take a 200,000-box account away from my largest competitor. The customer had discovered that it was paying above-market rates, thanks to a series of automatic price increases, and had begun looking for another vendor. We proposed a ten-year contract with the first two years heavily discounted. We could make that offer because we temporarily had a lot of extra space in one of our warehouses. In the third year of the contract—when the customer started paying normal rates—we finished building a new warehouse. We then replaced our construction loan with a mortgage, and the increase in revenue from that one account covered the monthly mortgage payments.
So the customer knew in advance exactly what the deal was. And if other customers asked me about it, I could point out that we gave al of them discounts in the beginning as wel . I could even offer them the same deal we’d given our new customer—provided they were wil ing to sign a new ten-year contract for 200,000 boxes.
That’s an unusual situation, however. In general, it’s a bad idea to discount excess capacity, which is not the same as saying you should never offer customers a discount. There just has to be a reason for it other than excess capacity. Volume, for example, is a reason that everyone understands. Or you might offer a discount to a customer who agrees to certain special terms. Better yet, maintain your price but offer something extra, a value-added service. What it is wil vary from customer to customer, depending on their needs. Even if it costs you something to provide the service, at least you’re putting your money to good use. You’re getting a ful -price customer. You’re not undercutting your normal prices. And you’ve done nothing to alienate your existing customers. The worst that can happen is that they’l want the service, too. That’s a positive, not a negative. If you get known for this value-added service, customers wil start coming to you for it, and you may find that you can charge more to provide it.
Then again, you may not be so lucky. You may be sitting there with an empty, idle truck, and a customer wil come along who is not interested in a value-added service, or a volume discount, or whatever. He just wants to rent the truck for $25, instead of the usual $45. In that case, you go back to the first lesson of business, the very first lesson: you can’t do business with everybody. There are people in this world who want more for their money than you can provide, and no amount of negotiating wil change their minds. There is only one word you can use to deal with them, and you have to learn it, hard as it may be to say when the customer is standing in front of you and the sale is on the line. That word is no.
The Bottom Line
Point One: You’re better off with a base of many smal customers than with a few large ones.
Point Two: Showing is more effective than tel ing when it comes to signing up new customers. Let them experience what you have to offer.
Point Three: Listening is a lost art. You can gain a competitive advantage just by listening careful y to what your prospects and customers are saying.
Point Four: It is almost always a bad idea to reduce your prices just to fil unused capacity. You wil just undermine the more profitable part of your business.
CHAPTER NINE
Customers for Keeps
There is a basic rule of business that’s easy to forget, especial y when you’re competing with other companies for the same customers: Winning is not just about closing the sale. You win when you close the sale and at the same time lay the foundation for a good relationship that al ows you to keep the customer for a long, long time.
The name of the game is customer retention. Growing a business is much harder if you are constantly having to replace customers you’ve lost.
Which would you prefer, after al —making fifty sales in a year and having a 100 percent customer retention rate, or making a hundred sales a year and having a 50 percent retention rate? I’l take the former any day of the week. Yes, you’l have more sales during the year, and you’l wind up with the same number of customers at the end, but, if you lose one account for every two you land, you’l spend twice as much time, energy, and money to get them as you would if you made half as many sales but were able to hold on to al the customers you signed up.
I went through that with my messenger business, Perfect Courier. We regularly lost 25 percent of our customers every year, mainly because we were operating in an intensely competitive industry with no barriers to entry and almost nothing to stop customers from switching from one supplier to another if they could save a few dol ars. I’d wake up every morning and ask myself, “Which customer am I going to lose today?” People would switch suppliers for pennies. We’d sometimes
lose accounts to competitors who we knew wouldn’t survive six months at the prices they were offering. The customer would say, “We’l come back when they go out of business.”
And yet we managed to make the Inc. 500 list for three consecutive years. We did it partly by coming up with mechanisms that would tie customers into our service—lor example, the invoices that showed them the amount of money they could charge back to each of their customers.
Because we were one of the very few messenger companies with a computer back then, we were alone in our ability to produce the invoices. Even with such tie-in devices, however, we stil began each year having to replace a quarter of our sales just to stay even, let alone make the Inc. 500.
So how can you make sure that you hold on to most of your customers? Clearly, it helps to be in an industry with high barriers to entry and numerous obstacles to switching suppliers, as is the case with my records storage business. But mainly it’s a matter of building strong relationships. No customer enjoys the process of switching suppliers. It’s a pain. It takes time and money that could otherwise be spent elsewhere.
The people responsible for the function in question have to get the rest of the company to buy into the change. They have to meet with new suppliers. They have to negotiate new agreements. Why would they go through al that? Usual y it’s because they’re real y upset with the current supplier.
That said, it’s also true that customers do not treat al suppliers alike. Everyone makes mistakes from time to time, but not everyone loses accounts as a result of its mistakes. In some cases, the customer’s people say, “They’re a good company. Let’s give them another chance.” In other cases, they say, “These people can’t do anything right. Let’s find someone who can.” What’s the difference? It almost always has to do with the relationship that the supplier has cultivated with the customer.
That relationship starts, not when the customer signs on, but rather when the initial contact occurs, long before any deal is closed. You need to find out in advance what it wil take to keep the customer happy after you’ve closed the sale. For instance, I want to know how long the customer waits to pay its bil s. If you don’t ask about that, you could be headed for trouble. You may assume the customer wil pay in thirty days, as is your policy. Its accounting people may assume they can pay in ninety days, as they do with their other suppliers. When you cal up after forty-five days and discover that you’re not getting paid for another forty-five days, you’re not happy. You pressure the customer’s people, and then they’re not happy. The relationship goes downhil from there.
And whose fault is that? I say it’s your fault for not inquiring beforehand about the customer’s bil -paying policy. If you’d known what it was, you could have built the carrying costs into your proposal, accepted the payment terms, or simply decided not to take the business. Whichever option you chose, you would not have had the bad feelings engendered by a misunderstanding that could easily have been avoided.
But beyond learning what you need to know to keep from inadvertently souring a future relationship, it’s also important to use the period before the sale to start building the trust that wil let you hold on to the customer for the long term. That means going out of your way to show your intention to do whatever is necessary to ensure that the customer wil be happy after the sale.
There was the time, for example, when we found ourselves competing for the business of a medium-size law firm and—as usual—invited its representatives to come visit us, see our warehouse, meet our people, and assess our capabilities. We gave them the standard tour. Afterward, we told the firm’s records manager that we’d like to visit his offices in Manhattan. He was surprised. Nobody else had made that request. “Why?” he asked.
“For one thing,” I said, “I want to see how long it takes to get up and down on the elevators. I also want to see what the building looks like. And I want to see how you do things. Maybe we can give you some suggestions.”
“What if we don’t select you?” he asked.
“So we’l have spent a day with a couple of nice people,” I said.
As it turned out, we were the only contender who bothered to visit the law firm. When the bidding began, most of the other records storage companies were quickly eliminated. Of the three finalists, we were the most expensive. The records manager contacted our salesperson and said,
“We want you, but there are certain things in your package we can’t live with. You can have the account if you’re wil ing to make some changes.”
“Why do you want us?” our salesperson asked.
“Nobody else came to our place,” the records manager said. “Nobody else asked us the questions you asked. You’re the only one who understands how we operate.”
We had to make certain concessions, but we did get the account, and we had the opportunity to get it for one reason: we’d built a relationship.
Ask Norm
Dear Norm:
I am the owner of a small handbag company that is facing a tremendous amount of competition. My business was doing very well until about a year ago, when sales started to slip. I have received wonderful editorial credits in the top fashion publications and have had placement in the finest stores in the country with good sell-through. Last year I decided to take sales in-house, because I thought I could be the best spokesperson for my product. My primary goal is to build a solid brand. How can I get to the next level?
Nancy
Dear Nancy:
Handling your own sales is not how you build a brand. You need to develop a certain mystique as the person whose name is on the product.
You can’t do that if you’re spending your time qualifying leads, making sales cal s, getting doors slammed in your face. To build a brand, increase your sales, and grow the company, you need to turn responsibilities over to other people. That can be hard, I admit, particularly when you believe you can do the job better than anyone else. I was the first dispatcher in my delivery business, and I always thought I was the best at it. But if I were stil dispatching, I’d have a very smal company today.
—Norm
Building Loyalty
To be sure, you can’t stop working on the relationship after you’ve made the sale. Customer relationships—like other relationships—atrophy unless they are constantly nurtured. There are many ways to do that. One of them is to teach your customers your business. They want to cut costs, and you’re in a unique position to show them where they can find savings. After al , you know your business better than they do. You know where they lose—or waste—money. You know how they can cut costs by operating a little differently. In short, you can help them to be smart buyers and smart consumers.
In the records storage industry, for example, one of the first things you discover is that most people keep their records forever. Customers give a company their boxes and forget about them. There’s often no reason to hold on to the records after a certain number of years, but nobody checks to see which ones can be destroyed. Meanwhile, storage fees pile up.
We saw a chance to help our customers by developing a system whereby we enter a destroy date in our computer for every box we receive.
When the time arrives, we notify the customer, who then tel s us whether to destroy the records or continue holding the box. In the process we’ve saved some customers as much as 40 percent of their storage costs.
Understand, we wind up with fewer boxes as a result. So our sales are somewhat lower than they might otherwise be. But we do get compensated for showing customers how to save money. They pay us by staying with us even when they might get a slightly cheaper price somewhere else. Over the long run, that loyalty is worth much more to the business than the extra boxes.
Another way to build the relationship is to make a point of treating established customers like new prospects. That’s a bigger chal enge than you might suppose. There’s a natural tendency to treat customers differently after they’ve been around for a while. You’l do anything for the
m when you’re trying to win their business, but once you’ve landed the account, your attitude starts to change. By the time you go back to renegotiate the contract, you’ve developed a whole new set of expectations. You’re not focused on making the sale anymore. Now you’re thinking about getting a better deal. It’s an easy way to lose business. You leave yourself wide open to competitors who are looking at the customer the way you did when you were starting out.
So I do everything I can to make sure we treat our established customers with the same care that we showed them the first time they walked through our door. It’s a promise I make to them when I’m closing the sale, and it’s a way of thinking I try to instil in my staff. I want al of us to ask ourselves constantly how we can improve our service, what we can do to make our customers’ lives easier. For example, we developed a new computerized service at one point that al owed customers to dial in and look up anything they want to know about their account, the records they have in storage, the status of their boxes, whatever. When we did it for them, it took longer, and we had to charge them $1.50 a lookup. I preferred that we didn’t do any lookups. We had many more profitable ways to use our resources. By using the online service, customers saved themselves time, money, and aggravation, and they helped us reduce our costs, which makes it easier for us to maintain our prices.
The Customer Touch
In al this, it’s important to remember the critical role that you—as the entrepreneur in the business—have in building and maintaining the customer relationships. Unfortunately, the more successful your company is and the bigger it gets, the harder it is to play that role. You have fewer and fewer opportunities to interact with customers. You just can’t spend as much time with them as you did in the early days. There are always more pressing matters to attend to—problems to solve, financing to arrange, people to hire, deals to make, and on and on. You increasingly count on employees to handle the day-to-day relationships with customers, while you yourself become more and more removed from them. It’s a process that can undermine even the most promising young company—unless somebody makes a conscious effort to ensure that doesn’t happen.
