Friday, June 9, 2017

Four Little Words

I’ve written a lot in this column about the failings of American business, but I neglected to point out that most of them stem from the demise of the “Ma and Pa” small business at the hands of Big Business, whether corporate-owned or corporate-controlled franchises. When individuals own their own businesses they are fully invested in them, both financially and emotionally. Not so, the wage slaves of the corporation. Middle managers seek only to please the home office, not the customers they serve, while hourly employees are more finely attuned to the stroke of the clock as it nears quitting time than to customer service. 

Small business owners who are deeply invested in their business and therefore care about their customers can still save American business. They are the heart and soul of what makes America great, not the billionaire industrialists paying below-subsistence minimum wages to their employees while huddled in the White House with one of their ilk conspiring to gain even larger tax cuts from the pocketbooks of their middle and lower class employees and customers. But how can a small business owner hope to compete when the deck is stacked in Big Business’ favor?

When I was a boy, my stepfather owned a toy store; four of them spread across town at one point. Then, a chain store called Lionel Playworld entered the market. They had dozens of toy stores all over the state. They bought inventory in large quantities to supply all their stores and were able to negotiate bulk discounts. If a toy didn’t sell well in one area, they were able to transfer inventory from one store to another hundreds of miles away, not only helping them with inventory control but making it appear to the customers as if they had a burgeoning and ever-changing product selection. They could buy what were then prohibitively expensive advertising spots on television and radio and say “Come to the Lionel Playworld nearest you” and divide the cost among the dozens of stores within the state. The same economies of scale applied to the full-page newspaper ads they took out in the major metropolitan newspapers. All of this also built remarkable brand awareness for the toy store chain.

My stepfather’s family-owned business simply couldn’t compete against the economies of scale employed by the chain store. Our four stores became two, which struggled for several years before eventually shuttering. But the thing about Big Business is that there’s always a bigger fish. A few years later, a larger toy store chain called Toys “R” Us spread across the country employing the same economies of scale that Lionel Playworld had, but on a much, much larger scale. I imagine my stepfather may have felt some degree of schadenfreude when Toys “R” Us put Lionel Playworld out of business.

Back when I was earning my MBA from one of the Top 20 business schools in the nation, I noticed the proliferation of franchised hair salons like Supercuts and Fantastic Sam’s. This led to an incident that has now become an iconic model of how small businesses can effectively compete against better financed corporate and franchised competitors. A sole proprietor who had operated his hair salon for many years charged $25 for the shampoo and styling service. He had calculated his profit margins and knew this was what he had to charge to pay his staff, his rent, and his advertising and other expenses and still make enough profit to live on. All was well until the franchises came to town, including one that opened directly across the street with a big sign in its window advertising “$10 haircuts.”

The franchise, through economies of scale and cooperative advertising programs offered by the corporation, could afford to undercut its competition. There was no way the sole proprietor could compete on price. He would be losing money with every haircut. The situation was grim. Customers would drive down the street, look to the left at the small salon charging $25 and then to the right at the sign in the store window advertising $10 haircuts. It didn’t matter that the sole proprietor had been a pillar of the community for many years; that he knew and greeted every one of his customers by name; that he and his stylists were very good at their jobs; or that they were friendlier and even offered better customer service than the franchised chain salon. This was a no-brainer: $10 or $25 out of your pocket. What would you, as a customer do? 

More saliently, what would you, as a small business owner do? He could not compete on price. He could not compete on location or proximity because his competitor was only a few feet across the street. He could not match the advertising available to the franchise from its economies of scale. He could not compete on value, because he was charging two-and-a-half times more than his competitor. But as he looked out the window across the street, he noticed an empty billboard behind his competitor’s store. He rented the billboard and painted a large arrow pointing from the franchise to his own salon across the street and added four little words. His customers began returning in droves. Business at the franchise dried up, and it soon had to close.

You see, while the proprietor could not compete on value, he could compete on perceived value. He believed he had a better-trained, professional staff and that the quality of their service was infinitely superior to the assembly line approach of the franchise. People care about how much they pay for the product or service, but they care even more about what they get. When they walk out of a hair salon, they want to look good; really good. Especially if they’re headed for a job interview or a dinner date. So when they drove down the road and they saw the sign in the franchise salon’s window advertising  $10 haircuts and then saw the billboard with the big arrow pointing to the sole proprietor’s hairstyling salon with the four little words written in large bold letters stating “We fix $10 haircuts” the message was clear. And ironically, the more the franchise promoted its cheap haircuts, the better it made the small business look.

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