“The bitterness of poor quality remains long after the sweetness of low price is forgotten.” —Benjamin Franklin

If you are like me, you missed that day at school where they told you how to run a business, make it profitable and then take a good exit. Oh, wait… there isn’t that day at school. Even if you’ve been to college or grad school, there isn’t a streamlined approach designed to help small business owners figure out that special sauce to creating, running and exiting a successful business, especially in one day. The biggest thing going for small business owners is that they are deeply passionate about their product or service and that focus can lead to extraordinary customer service.  Being part of a community and being known in that community is oftentimes the superpower of small businesses that large corporates just can’t touch.  So what’s a small business owner to do when the marketplace has gotten so price driven that even luxury product buyers are now walking into stores with a coupon in hand or asking for a discount? How is a small business owner to thrive in an environment not designed for their customer service superpowers?

Before we answer this question, let’s look at how we got to the business conditions we’re living with today because when we understand where we’ve come from, we can see where we’re going with more clarity.

Two big things happened that has caused consumers to be more cost conscious and price driven—

  • Big Thing Number One: The Internet.
  • Big Thing Number Two: The reduction of disposable income post-recession for the middle class.

Big Thing Number One

The freemium model used by software or app companies was specifically designed to capture as many customers across a broad swatch of users.  Of those who use the free version of their product a percentage of them will upgrade and purchase a version with expanded capabilities.  This is great for consumers who want to use a product for free and great for companies who want users to become reliant on their software so they can start charging for upgrades. This is great for software companies because it allows them to make a product once and sell that product millions of times. As the world is in the midst of this digital transformation, this model has begun to set expectations for consumers not only in the digital world but the physical one as well.  Now there is an expectation of “getting something for nothing” even though the digital world’s business model is very different than a physical product’s model.

Big Thing Number Two

Macro-economic forces slammed feet first into the housing market and the long term effect of this is that a fair portion of middle class America lost the equity they accumulated over the years from paying their mortgage and having their homes appreciate in value. This then reduced the overall wealth for these individuals and families. Although we’ve been in a record economic recovery, the residual effects of the loss of equity compounded with the negative psychological effects of the recession linger.  I won’t go into how this all happened but if you have a few hours, you could watch Adam Mckay’s “The Big Short” movie based on the book by Michael Lewis. They breakdown the housing market and the recession in a way that is entertaining and terrifying all at the same time.  Consumer behavior has been changed in a deep and meaningful way because of these two colliding forces.

This big one-two punch has made structural changes to the economy whereas previously we would have seen the ups and downs of the business cycle. Now we’re dealing with other factors as well that impact small businesses’ ability to compete in the marketplace—

  • The Power of Buyers Versus Suppliers
  • The Small Business Owners Kryptonite is Empathy

The Power of Buyers Versus the Power of Suppliers

According to the father of modern business strategy, Michael Porter, there are five forces that impact competitiveness in business. The ones that are most in play day to day for the small business owner is “the power of buyers and the power of suppliers.” Think of this like a scale where one side balances out the other. On occasion, one side of the scale tips heavier than the other and the ballasts get out of balance.  This is what happens when there is scarcity in the marketplace (think about the hot toy over the holidays that your kid wants but is nearly impossible to get and people are paying over retail for the product) or when there is a recession and disposable income dries up and you’re struggling to find new customers.

The long term residual effect of the recession is that the scales haven’t tipped back into balance for the small business owner and many of the middle class customers that would have been regulars are no longer able to buy at the volume or frequency that they had in the past.

The Small Business Owners Kryptonite is Empathy

We like to talk to customers that “just get it” and in turn our customers like to talk to us because we’re their “go to person” that they trust to get something done right the first time. There is a lovely sense of equanimity when business goes that way. It’s what we search for in finding those “inner-circle” clients or customers.  Sometimes in the search for equanimity, small business owners confuse empathy for the client or customer with driving down prices or a way to give a “friends and family” discount.  There are  number of reasons that small business owners do this: we think that the relationship we have with good customers means we have to discount a service (treating them like a friend or family member) instead of offering them some other kind of acknowledgement for being a good customer.

We take our empathy for the customer and extend our thought process to “would I do that?’

Just because you wouldn’t pay $100 for a purple stuffed elephant for your puppy doesn’t mean that your customer wouldn’t. We take our own thoughts about perceived value and extend them to our customer believing the drivers behind our decisions are the same for our customers.  It is absolutely a misstep for small business owners to use their own yardstick to measure what is of value to your customers. We are taught from childhood how to be “good shoppers” but we are not taught how to be good entrepreneurs. Good entrepreneurs see an opportunity, work to understand the customers and then design an offering that would serve these people or companies. Good shoppers look for discounts, saving money and making “smart decisions” which translates into behaviors like deferred decision-making that elongates the sales cycle, and “showrooming” small businesses and then buying the product in a low service environment (they’ve gained all the product knowledge from you and then buy it through a low-cost no-service company).

The Most Expensive Lessons Learned By the People Who Can Least Afford It

Small business people are the least able to afford the kinds of deep discounting that large companies are using to push products and make their money through volume sales. You can make money in two ways, volume with reduced prices or make money on margins by selling products and / or services with a particular profit built into the offerings.   Small businesses never win the volume discounting game because there is never enough volume for a small business to be able to make up the margins. Small businesses can’t and shouldn’t compete with Walmart or Amazon. It ends up that these small business owners sell enough to keep the doors open but not enough to really be profitable which disables their ability to grow the company to the next level. The people least able to afford to work this model are trying desperately to copy those big companies that do. As a small business, you cannot afford to compete with the Walmarts of the world. This mistake, choosing the wrong model to try to compete with larger companies is the most expensive and potentially deadly lesson for your small business.

How to Combat the Shifting Sands of the Consumer-Driven Marketplace in a Resource Constrained World.

There are smart solutions to the problems that you encounter as a small business and you must be willing to change your mind about how you engage with your customer base, how you’re seeing your business model, who your competition is and even the product or service mix you are offering to your customers. Taking on the commitment to level up your business will mean that you will have to change directions and step outside your comfort zone. It’s possible and it takes discipline and if you’re really committed, you will see the changes that you are seeking.

I’ve got three distinctions that will help you change your mind and your direction:

  • Quality is an Expectation that Pricing Reflects
  • Affordable Luxury and Servicing the Customer
  • It’s the Special Sauce Moment for the Experience Economy

Quality is an Expectation that Pricing Reflects

When you ask ten people if they believe in quality products, all ten will say “yes, of course.” When you ask the same ten people to define and describe quality, you may get ten different answers.  People’s opinions of quality vary depending upon what they’re passionate about.  If you’ve got a fashionista who loves clothing, they have different ideas about the perceived value of beauty and quality and their willingness to pay for it than someone who doesn’t really care much about fashion or wearing clothing that is on trend.

My previous company manufactured luxury furnishings and interiors. We had three levels of quality–high quality, super high quality, and museum quality. Most of our customers didn’t know the difference in the quality levels just by looking at the products. When we educated them about some of the features of each quality level they then were able to discern for themselves where the value was for them. They paid for the quality level they believed matched their expectations. Can you guess which kinds of customers bought museum quality products? Museums. They did because they cared the most about that kind of quality. Mostly, our customers selected “super high quality” because of the perceived value of the features of this product level. Most often when consumers are given a choice, they will pick the one that sits between the low-cost choice and the most costly choice.

Oftentimes, small businesses do not distinguish or deliver different levels of service to the customers regardless of what the customer’s expectation of quality or service is. It stems again from that sense of equanimity and fairness. We like to believe we should treat people all the same. I’d like to suggest that different people have different levels of expectations that you as the small business owner needs to understand so that you can best assist them in choosing what kinds of products and services will make them feel that they’ve gotten the quality, value and service that meets their expectations.

Affordable Luxury and Servicing the Customer

The new new economy gave birth to what’s called “Affordable Luxury” a new product category that was created to fill the unmet needs of middle-class customers who didn’t want to buy mass market products but could no longer afford True Luxury products. Companies participating in the new Affordable Luxury category created a subcategory of their products as to provide a new midline product that is furnished as an accessible means to luxury without the deep service component offering that a luxury product used to require. This sub-branded experience allows the buyer to feel like they’re engaging with branded pre-recession luxury products which engenders a certain quality and fashionableness.

Let’s look at where retail is thriving—the outlet malls. No longer being called outlets for overruns or overstocked items, these have become a “premium shopping experience” for shoppers who had lost purchasing power for higher end luxury manufacturers. When you shop at an outlet mall or a premium mall experience, the mall includes every aspect of luxury retail and now includes brands like Jimmy Choo, Gucci, Burberry and others.

What is important here for a small business owner to know is that the “affordable luxury” category’s success in the marketplace indicates that people will still buy what they aspire to. The difference between  “Affordable Luxury” and “True Luxury” categories are two-fold: the quality of the products sold and the quality of the service offered at these two distinct expressions of the luxury market. Although the quality of Affordable Luxury products cannot and does not attain the quality levels of True Luxury products, they are better quality than the mass market category of products that have flooded the market since the recession.  This makes Affordable Luxury products appear to be much higher quality than less expensive products, thereby bolstering the perceived value of the products.  Even though Affordable Luxury stores have customer service persons working in the stores, they are not trained in a manner that a True Luxury salesperson would be.  Consumers make a trade-off of quality and service in order to purchase Affordable Luxury products.

What the takeaway here for small business owners should be is that customers have made adjustments to their expectations and buying habits—they are willing to reduce their expectation of quality and service and yet still pay a premium for Affordable Luxury.  This is a model that small business owners can embrace. You can see examples of this not only in retail but in fast casual dining, and other sectors of direct to consumer products and services.

It’s the Special Sauce Moment for the Experience Economy or How to Make your Customers Feel “Rich” in a Resource Constrained World.

Pop-ups, special trunk shows, manufacturer’s exclusives, cross-brand partnerships and brand activations are just some of the ways to have your brand be experienced by your customers and potential customers in a special way. The way to compete with the “price, price, and more price” conversation is to have them fall in love—with you, your products or services in a way that elevates their experience so that it creates an imprint of your brand with a feeling of love.  Think about a store, a hotel, a product experience that you still remember very fondly even though that experience happened years ago.  This experience is imprinted into your mind’s eye leaving a positive memory and a yearning to return to that feeling.  Small business most often creates these kinds of experiences around a community or sense of belonging to something special. Creating this experience for your customers is a way for them to say “I may have spent more than I imagined but it was totally worth it and I would do it again.”  This is the kind of qualitative data that can’t be captured in a data-driven world. Whenever you receive a “friends and family” coupon in your email from a large corporate do you ever mistake it as something from your friends or family? No, of course not. Small business creates a sense of belonging, specialness and authenticity that can’t be matched by a big brand’s factory store. Having your customer feel “rich” in a resource constrained world means they get value from being a customer of your business. This causes a transformation from a customer to an advocate.  Advocates take a real interest in the success of something (like your business) and bring others in their circle into your world. That is how organic and viral growth happens.

You’ve Got the Special Sauce Now Go and Use It

Competing in a price driven commoditized world means small businesses have to change the game to tip the scales in their own business so that “the odds be in your favor” as it was once so eloquently said. Using your special sauce of affordable luxury, tiered service offerings and an experience of authentic belonging to something different will turn your customer into an advocate—and when this happens, you have changed your business model and approach so that you can win the game of being customer focused in a price driven world.

Small business is the cornerstone of the American Dream. It’s the promise we’ve embraced where hard work, dedication and grit deliver on a vision to create something greater than ourselves. Changing tact in your business model to meet the demands of today’s marketplace will only make you and your business stronger. You can withstand any kind of market change if you’re willing to shift your tactics and methods.  Remember, you’ve got the superpower of customer service melded together by belief and passion that wins over commoditization any day of the week. Giving people a reason to choose you, your products and services by making it feel great for them to do business with you may seem like a soft tactic to get to sales but remember, people don’t do business with you because of what you do, they do business with you because of why you do it. Connecting passion and purpose with customer experiences and offering new quality and service levels combined with product offerings reflective of today’s resource constrained consumer requirements and removing barriers to purchasing are the special sauce that will have you win at today’s price-driven marketplace game.

Lisa Hendrickson is the founder and president of Spark City, an innovation consultancy. She is the co-author of “Boom! Deciphering Innovation: How Disruption Drives Companies to Transform or Die” which was named one of the top books on innovation in 2018 (so far) by Inc Magazine. Prior, she was the COO of HCC, an award-winning values-driven luxury interiors company that became one of the fastest growing inner-city companies in America garnering a coveted slot in the ICIC 100. She’s been a featured speaker at both Inc 500 and Inc Magazine’s GrowCo conferences and Smart Hustle with Seth Godin. She is the creator of Morning Salon, collaborative problem-solving approach for companies and the Sh*FT MethodTM a for companies to pivot or design their digital transformation. She has appeared on BBC World Business Report, The New York Times, CBS’s The Early Show, ABC’s World News Tonight, Inc Magazine’s Video Playbook, Crain’s NY, and other media outlets.

 

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