Best! - No Need to Be Cheap If You Are...

By Mike Hohnen

Inspired by the principles developed in the "Service Profit Chain", Mike Hohnen takes you through each of the steps needed to create an outstanding service business.

We live in a world of abundance -- there is plenty of choice everywhere. And since 2008 we have experienced significant drops in demand as consumers became more careful. The result is a widening gap between supply and demand in virtually any category you can imagine.

When that happens, many companies have a knee-jerk reaction, and the recipe is more or less always the same: initiate rigorous cost-cutting programmes, reduce staff and/or services, offer discounts in many forms, and increase advertising aggressively.

This, however, is the equivalent of trying to steer and brake as your car begins to skid on black ice while going through a sharp curve.

As you hit that declining demand curve, you need to perform what at first seems like a counter intuitive move: hold your price, increase your services, improve your quality, and narrow your focus in the market.

In this book, you will not only understand why but also see how you can do that.

• Language: English
• Publisher: eBookIt.com
• Release date: Apr 26, 2016
• ISBN: 9781456606800

Book preview

place.

Making It in the Bazaar

When information is abundant and equally distributed we get market places – a bazaar.

– Ridderstrale, Jonas; Kjell A. Nordstöm, Karaoke Capitalism¹

It’s still early.

They go about their work with quiet determination, using as few words as possible. Just the odd shout to move someone out of their way as the trolleys are rushed up and down the aisles. Tables are raised from the folding trestles. Tarpaulins for shade. Then build the pyramids. Tomatoes, eggplants, each one polished to look its shining best, zucchini, lettuce, and bundles of carrots still with their tops on. Each booth gradually unfolds and becomes a stillleben on its own.

As it does, it looks more and more like all the others – beautiful – but aisle after aisle, they are all the same.

A waiter from the local cafe brings black coffee in small cups – no saucer, just a teaspoon protruding, ready for a serious dollop of sugar. Stir and gulp – and they are ready for business.

Tomatoes, tomatoes. Buy my tomatoes – only 3.99 if you hurry.

A new day has started in the bazaar.

Age of Abundance

Ask any vendor in the souk and he will argue that HIS tomatoes are much, much better than everyone else’s tomatoes. Just as I am sure that whatever it is you do, you will tell me that you do it much better than your competition. But, chances are, the fundamental service that you provide can be delivered just as well by somebody else at a comparable quality and price. Consequently, like it or not, if you’re not very skilful, you will end up – or have already ended up – in a commodities business. (Fig. 1.2)

The core characteristic of a commodity is that there is no qualitative differentiation; therefore, the price is determined by supply and demand. Copper and petroleum are typical examples of commodities.

But, providing the basic service in a hotel is no longer considered exceptional – it is expected and they all do it – thus, basic service also becomes a commodity.

The reason we easily end up as a commodity has to do with abundance.

No matter what business we are in, sooner or later we find ourselves in a situation where supply exceeds demand. In most cases, this happens sooner, not later.

In general, most businesses identify a need in the market that is not being served and they create their offering to meet that need. But if the product works, they are seldom left alone for

long, and others join in. What nobody saw initially is now obvious to everybody and we end up with a bazaar. The reason this happens is that, as a segment gets crowded, the offerings tend to go through a process of homogenisation, everybody tries to please everybody, best practices are established, and in the end the only differentiator left to work with is price.

Examples of Segment Saturation Are Everywhere

Sony managed to produce 297 variants of the Walkman® before the iPod® made them all irrelevant virtually overnight. Colgate® currently produces 32 brands of toothpaste plus four different brands for kids. Yet, that has not prevented others from thinking they can corner the market for toothpaste. In 2010, 350 new brands of toothpaste were launched worldwide.

In the supermarket industry, a mid-sized supermarket will carry around 30,000 different items, but that’s an outcome of a hard bid from manufacturers. In fact, each year manufacturers propose more than 17,000 new items that they would like supermarket chains to put on their shelves. In the publishing industry, the competition is even fiercer! More than 130,000 new titles are put on the market in the UK every year alone; alas, on an average, less than 100 copies each are sold.

The situation of oversupply is put even more into perspective when you realise that one of the fastest growing and most successful real estate concepts on the planet is Shurgard. What do they do? They store our stuff – all that stuff that no longer fits in our attics, garages, or basements. The storage business in the United States as measured by turnover has already exceeded that of the entire Hollywood film industry.

A Perfect Market

As a result of the significant oversupply combined with an increase in information flow, many industries are experiencing something close to what economists would call a perfect market. This typically occurs when the following conditions are present:

• All market information is available to buyer and seller.

• No participant has enough market power to set prices.

• There are low barriers to market entry or exit.

• There is equal access to technology.

Share trading and foreign exchange arbitrage are situations that resemble a perfect market. A more down-to-earth example that we can all relate to is the classic vegetable market where vendors offer their tomatoes and other produce from stalls, while shouting, Tomatoes, tomatoes! Buy my tomatoes! Only €1.20!

If the vendor in the next stall is unhappy with business, he’ll inevitably try to sell his tomatoes at €1.10, and will probably try to increase the volume and frequency of his shouting – also called advertising. As long as an oversupply of tomatoes exists and his tomatoes are of similar quality, size, and ripeness, the price war will continue to a point where both vendors manage to barely earn a profit. Technically, this is known as salami margins, as profits over time are reduced into thinner and thinner slices.

This is obviously a mug’s game and the only way to break the pattern is to be in a position where you can offer tomatoes that are better, bigger, riper, tastier or whatever, and command a better price. The name of the game is to create a monopoly situation – even though it may only be temporary. Then you reinvent yourself again and create a new monopoly situation.

You can create a monopoly situation by having a type of tomatoes that the other vendors don’t have, or you can cultivate relationships with your customers that are difficult or even impossible to match. Go to any French open-air market and you’ll see that shoppers have preferred suppliers in a marketplace with 50+ stalls. Each vendor sells more or less the same tomatoes, but relationships drive a large part of the traffic. As a newcomer, you may get frustrated when the lady in front of you in line starts telling the vendor about the last goo word that her granddaughter uttered, while the vendor listens patiently and answers all of her questions, while you think, Can we please get on with it? What the vendor is doing is cultivating relationships, and those in the know realise that they’ll also get their turn to tell their tidbits from life.

With the development of new forms of communication, especially the Internet, the perfect market situation occurs in a much wider variety of situations and markets than we were normally aware of. The ease and speed with which information flows create a high degree of transparency, low barriers to entry, and equal access to very similar technologies. Hotels, restaurants, airlines, car rental firms… They are all at risk of getting caught in the salami-margin trap. If they do, then they will end up as purveyors of commodities.

All Things to All People

Technically, what happens is that, as demand declines and/or supply increases, many companies react intuitively by trying to expand their offerings through both product variation and new market segments. They try to cast a wider net.

The recipe is more or less always the same: initiate rigorous cost-cutting programmes, reduce staff and/or services, offer discounts, and aggressively increase advertising. This, however, is the equivalent of trying to steer and brake as your car begins to skid on black ice while going through a sharp curve. The result is that you spin out and lose control completely…

Similar to taking a snow and ice-driving course, you practise what in the beginning seems to be a counterintuitive manoeuvre. As you thunder into that declining demand curve up ahead, you need to hold your price, increase your services, improve your quality, and narrow your focus in the market to increase your visibility to a select segment that will love you no matter what.

Taking the other route trying to be all things to all people will only result in your being nothing to anybody… except possibly cheap. And how much fun is that?

Surviving in the bazaar is no easy feat. No matter how innovative the product or service was when it first hit the market, we soon realise that the half-life of new technology or new service concepts gets shorter and shorter. (Fig. 1.3)

What we all hope for is to be able to make the transition from Unique/New to Unique/Perennial. The risk is that we let our guard down just a tiny bit, and then we end up as Stereotype/Perennial, as stereotype is just another word for commodity.

Creating a service business that is both Unique and Perennial is what this book is about.

Mind Space

Try the following exercise with a few friends or your management team. Point at a person in the group and ask that person to quickly give you the name of 10 car brands, and nobody else is allowed to help. Then, move to the next person and ask him or her to recite to you 10 coffee brands. As that person runs out of brand names, move to the next person and ask for brands of ladies clothing, dishwashing liquid, perfume, and running shoes. (Fig. 1.4)

As you move through the group, you will begin to notice a pattern. Most people can easily name the first brand name in a category, and then they pause and have to think a bit as numbers two and three pop into their brain. Most people pause for a while and some may even give up. Trying to extract additional brand names becomes harder and harder as we move from brand four to five to six.

Now, take two minutes and reflect on the fact that all of these categories are heavy advertisers. They bombard you with pitches for their stuff every day. They put millions into trying to get your attention. Sadly for them, you can only remember one or two, or maybe three brands. And if I ask you in a year to do the same exercise, you will most probably play back the names to me in exactly the same order as you did now, because we all remember brands in a certain order. Let’s take a common example that we all know very well. We decide to meet with four friends at the town hall square to go out for lunch. Once we are all assembled, the question arises, where shall we go? We look at each other with blank faces despite the fact that we are probably in a big city with more than 1,000 places to choose from. Chances are that we then end up going to a place that one of us has been to before, probably even many times before.

The only thing that might influence this decision pattern is if one of us has read a great review of a new place or if one of us has received a recommendation from an enthusiastic friend, insisting that, You must have lunch at Restaurant Nouvelle next time you are in town.

Like it or not, that is also the situation that most of your customers find themselves in. If your brand is not ‘top of mind’, when they need what you’re offering, i.e., you are within the top three that spring to mind when they start thinking of how to solve whatever need they may have, to put it bluntly, you may as well not exist. The scarcest real estate today is mind space.²

Inventing a New Ladder

Luckily, customers have different brand preference patterns. What is top of my mind when I think sports shoes may not at all be top of your mind. We each have our own brand mosaic or set of preferences. For some items, we are really sticky and will only purchase a particular brand, or nothing. Other items are less important and we take any available brand or version.

Because these brand positions are relatively set in our minds, it is very difficult to push a competing brand onto the perch, unless our favoured brand does something really stupid. Then, the only way to become top of mind is to create a new category and to redefine something in such a way that it appeals to a more specific category than the broader main category and therefore stands out. The list that you give me if I ask you to name five restaurants in your home city will be different from the list you give me if I ask you to list your five preferred business lunch spots or five family-friendly dinner spots. Depending on the situation or occasion, you have different preferences.

The question to start asking yourself is what ladder are we on? Is it overcrowded and how far down the rungs are we, or do we own one of the top rungs? Are there other ladders that we can try to own, providing they are not already overcrowded? If 10 fabulous wedding venues exist in your local area, securing the spot as the top wedding venue in your city may be do able if you invent a totally different wedding concept, but finding a different ladder (birthdays?) to climb might be easier.

Coca-Cola owns the top rung of the cola ladder – It’s the real thing, as you may remember. Pepsi, number two in many people’s minds, tried for years to push Coca-Cola off that top position without too much success, until they invented a sneaky Trojan horse for targeting the younger segments. Pepsi for the new generation indicates that Coca-Cola is for oldies. Over time, the strategy seemed to pay off because young people do not grow up and then switch to grownup habits.³ They take their youth habits with them throughout their life, so that what was at one time targeted to the new generation becomes mainstream over time.3What happens in most markets is that the war at the top is so fierce that those further down the ladder give up, break out, and form a new category. My first restaurant, Papas, which offered Mediterranean cuisine in Copenhagen, served specialties from almost all of the countries bordering the Mediterranean. We offered snails from France, paella from Spain, penne all’arrabbiata from Italy, and moussaka from Greece – and it worked well because, at that time, there were less than a handful of foreign restaurants in Copenhagen. As competition increased and we saw the arrival of Italian, Spanish, and Greek competitors, to be just Mediterranean was not distinct enough. We were much too broad. We needed to take a stand and decided to specialise in an Italian menu. You’ll see this kind of specialisation in many industries, as they become overcrowded with too many players.

The Gap Grows

This overcrowding of the market took a turn for the worse in 2008, and the relationships between demand and oversupply in many