A Cautionary True Story to Learn From
Let me tell you a Market Strategy Story
Many years ago, I was consulting for a small computer repair shop in Orlando, Florida. The shop had a single owner with zero employees. This guy was a one-man band and highly skilled in his domain, but was on the verge of bankruptcy, regardless of how well he knew his craft.
The primary service he provided was the repair of gaming consoles. At the time, he was also considering adding the building of high-performance gaming computers. He felt the margins were better, but he was unsure of moving in that direction because for every hour he spent building a computer for a future customer, was an hour not spent repairing an Xbox for a current customer.
So why was this shop owner on the verge of bankruptcy? Well, in our first meeting, he informed me that he was having trouble competing because his main competition for Xbox repairs were kids living at home doing the repairs for their friends. He, quite literally, was competing against children who had the same (or nearly the same) technical savvy that he did!
The problem was not simply that he had competition and was losing business. That is the nature of a free market economy. No, the problem was that his competition (children) could price their services so much lower than he because these kids had, literally, zero overhead. His competition didn’t lease a store front or pay for electricity. Heck, his competition didn’t even buy their own groceries! Every dollar they earned from their friends/customers was pure profit. Of course they could outcompete him on price! They had no overhead! These children had inadvertently adopted a Price Leadership strategy. What is Price Leadership?
In The Tradesman’s MBA, we discuss how there are only two business strategies that any business can adopt. Price Leadership and Differentiation.
“Price Leadership” is just the $10 dollar word for ‘the cheapest,’ and
“Differentiation” refers to a business that provides some unique service or product to its customers that its competition does not or cannot, (usually for a premium price).
That’s it. All things being equal, every business on the planet executes some variation on one of these two strategies.
Facing this problem, the shop owner reached out, explained his situation and engaged my services.
Fortunately for him, his problem didn't require any fancy financial analysis or statistical hocus pocus to magically fix his problem. His problem was that he was simply unaware of the market dynamics he found himself in and the alternative strategy of Differentiation that he could adopt; he never considered that another way to compete, besides lowering prices over and over again, was to increase value.
The Solution
About a week later, I returned to his shop for another meeting to present my plan of action. So how did I advise this business owner?
Stop competing with children!
His solution had four major components:
Step 1: Immediately raise prices. As we discuss in The Tradesman’s MBA, we illustrate how customers subconsciously assign value based on price. This is especially true in domains where the customer has little experience.
By raising his prices, the repair shop implicitly communicates to the market that his services are ‘better.’ This is Differentiation in action, but on an unspoken level. Now, if you’re interested, we go through the actual process of finding the perfect, profit-maximizing price in The Tradesman’s MBA. It isn’t rocket science, but it IS a process that must be demonstrated and explained.
Step 2: Switch to a Differentiation strategy and advertise as such. In concert with raising his prices, he should now explicitly communicate what his pricing implicitly communicates: that his services are better, more skilled and more reliable than the 14-year-old kid working out of his parent’s basement learning how to solder on your gaming system. I mean, the ads practically write themselves, and he could have taken a humorous approach to it! His ads would highlight his expertise and/or highlight the risk of taking your technology to children to get fixed.
Step 3: Identify his Ideal Customer and target that new customer segment: His marketing efforts up to that point were near zero. In our discussions, he told me that he once experimented with billboards for a month but saw little result from those dollars flushed down the toilet. Yeah, no kidding…
The shop owner made a few mistakes here: First, he thought marketing was a thing you do once in a while when in fact, advertising should be considered a regular recurring cost to the business. Second, he chose a medium that was ineffective; when you market to everyone by using a billboard, you market to no one. By using a billboard as his marketing channel, he was spending money advertising to people who had no interest in his services, they received his message only because they just happened to be driving by! Talk about wasted money...
Instead, in his advertising, he should specifically target customers who value high quality and reliability over cost and repeat that message over and over again.
Step 4: Start his new custom-built gaming computer line of products and market the hell out of them. Building the custom-built gaming rigs represented a product that his 14-year-old competition couldn’t compete with him on. Why? Because the components used to build those high-end gaming computers were pricier than his competition could afford. This is the very definition of Differentiation as a strategy; competing by offering something your competition cannot offer! The irony, of course, is that the kids taking his Xbox repair business would probably have given his money back to him by buying the gaming computers! George Lucas couldn't have written a better story.
So how does the story end? Did the shop owner adopt these golden recommendations and made so much money he had to open a second shop and hire 100 new technicians? Unfortunately, no, he didn’t. In fact, the shop owner stopped listening the moment I said “raise your prices.”
You see, he unfortunately didn’t know what he didn’t know about business strategy, market segmentation and market dynamics. And this is something I see over and over again. He felt that in order to operate a business, all he had to do was have a marketable skill and rent out some space to work. He had all the skills that make a great employee, but he never made the switch in his mind to business owner. This is lesson number one in The Tradesman's MBA
This mistake is made by small business owners every day; I see it all the time. This mistake was compounded by the lack of knowledge that there is more than one way to compete in the marketplace besides price. It never occurred to him that he could raise value and market to a different customer segment instead of lowering cost.
I’ll never forget it. When I told him that he needed to raise prices his first response was “but I’ll lose customers!” My response was brutally honest. I responded,
“You’ve already lost them."
I might as well have been speaking Greek.
So, while our friend failed to adopt the advice provided to him, maybe you might be able to leverage the lessons here and apply them yourself?
The Shameless Plug
Do you think your own business might benefit from expert analysis and advice on improving your bottom line? Then by all means, please reach out. I’d be happy to hear the challenges you’re experiencing and develop a plan of action to eliminate those issues and improve your business’ performance. I can even help you put it into action and monitor results.
And while you're at it, why not learn everything you can and get a copy of The Tradesman's MBA for yourself or your struggling self-employed friend?
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