Reprinted from the August 31, 2001 Sacramento Business Journal

Background

Jim and Cheryl owned a retail store that sold high-end hi-fi sound systems. It started out as a hobby – they were real audiophiles. They sold sophisticated equipment in the higher price range to knowledgeable buyers, like themselves, who understood the basics. They had a good corner location on a main thoroughfare.

The Problem

A competitor set up a store diagonally across the street with an advertising slogan that scared my clients to the bone — “we will not be undersold.” Jim and Cheryl’s initial impulse to this challenge was to fight fire with fire by dropping their prices. They feared that their established store would be driven out of business by a low priced competitor.

The Solution

My counsel was quite the opposite. Rather than using pricing to compete, why not keep prices high and compete on the knowledge that they acquired over the years, the service they provided from that knowledge and the high quality of their product lines. They agreed and held the higher price line. Together we developed a “compelling value proposition” that included an after-sale guarantee on service as well as an equipment trade-in feature.

The Result

Something quite interesting happened — business boomed for both stores! Customers were attracted to the shared location to comparison shop. To maintain margins and remain the “low price leader,” the new competitor had to carry the low-end equipment. Because they could now shop and see the difference, customers with a preference for high quality and service came to my client. Customers focused on low prices and willing to accept lower quality traded across the street. Both stores thrived because they served different segments of the sound market.

Commentary

One of the hardest things to discover is the difference in customer preferences. Without knowledge of customer preferences, the assumption is that all customers are alike and want the same thing – and the truth is they don’t. Given an opportunity, they will show you their preferences. Test the customer’s preferences by offering different levels of product quality and service at different prices. Test, test, and test some more. You can’t know too much about your customer. They are different from each other and from you. Discover their differences. It may take time, but know your niche.

Don Morrison, Stanford MBA, CPA, CMA is a Sacramento based specialist at making businesses more profitable—and therefore more valuable. He is the developer of the Morrison Profit Process™, a 12-event sequence designed to enhance the profits and therefore the value of a business. He can be reached at morrison@theprofitprocess.com or at 800-392-5656.