Most Valuable Players

Slashing prices to keep up with the big chains can spell disaster for the average entrepreneur. It's better to stick with what your business does best: Offering customers value-added services.

Entrepreneur magazine - June 2003
By: Joshua Kurlantzick

John Reid should be worried. The owner of SPC Office Products, a chain of office supply stores, Reid has watched as self-service giants like Staples and Office Depot have come to dominate his industry. The closest self-service behemoth is only 45 miles from one of his SPC locations in western Oklahoma--a distance that, Reid says, "in our area is like nothing, since people drive that far for dinner." But Reid, 47, is not concerned.

Over the past decade, SPC has expanded from one to six stores, kept sales up--revenues were $7.2 million last year--and expanded its roster of large clients. How has Reid competed against the two office behemoths, which have more than 2,000 stores combined and enormous catalog and Web-based supply systems? Reid has convinced residents of western Oklahoma that, even if Staples or Office Depot offer products for slightly less, SPC can provide crucial value-added services--services that, in Reid's view, "are just enough to convince people they should come to us rather than drive 45 miles away."

Searching for New Value
Reid's situation is hardly unique. Over the past 10 years, consumers have been presented with many new avenues for buying products and services. Industries from office supplies to health food to books have become dominated by huge chains--chains that can offer lower prices on high-value products in predictable retailing environments, and that can blanket areas with mass-market advertising. Target is a prime example: Once known as a low-end chain, Target now sells designer clothing on the cheap and has poached thousands of customers from small fashion shops. Meanwhile, the Internet has made it easier for consumers to seek high-value products online and comparison shop among many stores.

Entrepreneurs have scrambled to survive. The number of independent bookstores has fallen by nearly half over the past 10 years, says the American Booksellers Association, a trend repeated in many other industries. In western Oklahoma, Reid says, nearly every other local chain of office supply stores has gone out of business.

According to business and marketing strategist Arnold Sanow, many entrepreneurs have tried to compete with the larger chains on price-almost surely a losing move. "Small businesses cannot win price wars since they do not have the bulk purchasing and margins," Sanow says. "They have to use a different tack."

Increasingly, this tack means not competing on price, but convincing customers that small businesses offer more value. To do so, successful entrepreneurs adopt several strategies. Like Reid, many emphasize value-added services. These services can cement customers' trust and foster the belief that entrepreneurial businesses provide more homespun authenticity. According to branding experts like Paco Underhill, author of the bestselling book Why We Buy: The Science of Shopping (Touchstone Books), authenticity is a value highly sought after these days--hence the popularity of Saranac, Sierra Nevada and other microbrewed beers that project an image of locally made authenticity.

Services that make consumers think they're receiving more value can take on several forms. For many companies, service means regularly traveling around the country to meet with large customers and gauge their needs. Judy George, founder of Norwood, Massachusetts-based Domain Home Fashions, a small chain of home furnishing shops in the Northeast, says she spends as much time as possible on the road chatting with her clients. Candy Nichols, owner of a chain of children's clothing stores in New York City's suburbs, uses a similar tack: She sends personal shoppers to some customers' homes with racks of clothes so clients don't have to leave their houses to shop.

In other cases, value-added service simply means always having a knowledgeable employee available to handle customers' needs, something very few large corporations can do. (Large companies like Dell Computer and Southwest Airlines that do offer a high level of service and a human touch have prospered enormously.) For Reid, this level of service requires spending the money to have more employees on the floor than his giant competitors.

John Moretti, owner of Fountain of Youth, a health-food store in Westport, Connecticut, provides this level of service by personally greeting every customer who comes through his door and asking each one what he or she is looking for. "We actually have benefited from having [health-food chain] Wild Oats open near us," says Moretti, 54. "People see some things at Wild Oats, don't understand what they are and come into my store. I greet them, they get advice about these products they saw, and they wind up buying many things." (Moretti answered Entrepreneur's questions via cellphone, and he occasionally broke off the interview to welcome each customer who came in.)

For Audiophile International co-founders John and Marianne Turton, 49 and 47, respectively, this level of service necessitates educating themselves so thoroughly about old records that they can provide more information about each LP than nearly any music store owner in the country. Operating their Web-based vintage records business from their home in Fair Oaks, California, the Turtons outsource tasks they know less about, like Web design, and spend nearly all their waking hours listening to records, writing commentaries about each LP, and personally communicating with customers by e-mail.

To provide this level of service, you must empower your employees. "Allow your employees to educate themselves about the business and make important decisions so they have a stake in the company," says Sanow.

Though large companies often can pay slightly higher salaries, entrepreneurial companies are better able to offer employees a variety of roles and greater involvement in the business, allowing them to more easily empower employees, notes business consultant Jerome Klein, president of JHK Marketing in San Rafael, California.

Many successful entrepreneurs also back up their commitment to value-added service with a guarantee. The Turtons vow that customers can return anything for any reason, and despite that risky strategy, Audophile has prospered, garnering almost 3,000 regular customers. Other entrepreneurs take even larger risks--risks necessary to show customers the value of their services. Angela Llamas-Butler, 38-year-old founder of Pittsburgh software company Delta System Designs Inc., got a contract from the local police department in 1999. When one of the other firms working on the contract went out of business, Llamas-Butler decided her firm would take on the defunct company's workload--for free. By doing so, she sacrificed hundreds of thousands of dollars in potential fees. The gamble worked: Her dedication to providing service impressed the police department, which ultimately gave her a new, larger contract.

Marketing experts believe entrepreneurs should move away from accepted methods of advertising to promote their value-added services. For one, they say, entrepreneurs should not shy away from comparing their services to those of large chains. "There used to be a bit of accepted wisdom that small businesses should not even mention big retailers," says Sanow. "But in today's incredibly tough retail environment, break that wisdom--emphasize your service by comparing it to big companies' lack of service." To draw these comparisons, many successful entrepreneurs spend much of their time studying large competitors to find their weaknesses. On the road, Judy George often interviews random people as they exit other furniture stores. The Turtons frequently surf eBay to compare the auction site to their operation. John Reid spends hours each week examining Staples' and Office Depot's Web sites, quarterly reports and other public information.

Marketing consultants also suggest that entrepreneurs generally avoid radio and TV advertisements. "If you want to emphasize that you provide a high degree of personal service and, therefore, differentiate yourself on value, you really can't get that message across in a TV ad," says Klein. "To push your personal service, you need a personal style of advertising, like newsletters or face-to-face contact." Armed with information comparing SPC Office Products to Office Depot and Staples, Reid's employees travel through Oklahoma visiting potential customers in person. Sanow suggests entrepreneurs periodically send frequent customers an invoice that says "no charge" on it, thereby offering them a free product or service in an innovative way.

Personalizing service means using technology judiciously. Zipcar, a Boston-based car rental company battling giants like Avis, uses the Web to handle most reservations, but, unlike its competitors, it bans automatically generated confirmations for Web reservations. Instead, a Zipcar customer service representative sends a personal reply to each customer, explaining the car rental and its policies.

In other cases, entrepreneurs convince consumers they are providing value by actually charging more for their products. "Small businesses need to find niches to survive, and often one of the best ways to survive is to move into higher-end versions of what you have been doing," says Klein. "In the higher-end market, it is easier to compete with large companies, and since people have a 'you get what you pay for' mentality, becoming more expensive and specialized creates an idea of value to your consumers."

In the mid-1990s, when it was struggling to break even, Seghesio Family Vineyards, a wine grower in Healdsburg, California, decided it could convince customers of its wines' value and boost revenues by reducing production and raising prices. Seghesio slashed output by nearly 75 percent, abandoned some of its lower-end wines, and boosted its average price to $20 per bottle. Sales have rebounded, and Seghesio has once again become one of the most popular California producers. Similarly, Sanow notes, one of his clients, a travel agency, gave up its general business and focused on making bookings for a few specific Hollywood production companies. In so doing, it became established as a higher-end company that offered more attention and value to its clients. Of course, while taking their business upscale, entrepreneurs must remember to avoid big chains' core products or services.