Sunday, March 1, 2009

Three Mistakes to Avoid

Circuit City is just about gone. The remaining stores are liquidating as we speak. This once fabulous chain (one of the 11 companies featured in Jim Collins' book Good to Great) made two of the three classic retail blunders so common in a rough economy.

First, they slashed prices. In December 2006, in an effort to gain "market share" (the usual wrong-thinking excuse) Circuit City cut prices on flat-panel TV's so low, there was no way to recoup the lost profits. The result? The worst loss in their history - $16 million.

Price-slashing is a desperate move at best, and usually backfires. Why? Most businesses never do the math. They don't calculate the extra costs involved in selling the many more pieces they have to sell to make up the lost margin. If you make $500 per TV sold and you cut the price by $250, you need to sell twice as many TV's to make the same profit. How much extra staffing and advertising will it take to do that? And how realistic is it that you'll sell that many? Chances are you'll spend more trying to sell the extra units, and also fall well short of your goal of units sold. Net result? Huge losses.

But, you say, Wal-Mart does it. Really? If all Wal-Mart did was slash prices they'd have been long gone years ago. No, Wal-Mart revolutionized operational efficiency. They made it possible to be successful on smaller margins. The volume came later as they gobbled up competitors in their ruthless expansions.

Unfortunately, price-slashing seems to be the retail mantra du jour. Sears & K-Mart have entered the fray, with JC Penney's close on their heels. How's that working out for you guys?

The only price-slashing that works is marking down the dogs as discussed in the previous post. Unless your business strategy is to go after the highly unprofitable Transactional Customers, price-cutting is only a recipe for disaster.

The second blunder Circuit City did followed right on the heels of the first mistake. After realizing such huge losses, in 2007 Circuit City went on an expense-cutting spree. The first to go? The high-priced, experienced sales personnel - the front-line sales staff with knowledge and sales expertise. To save money, Circuit City fired all the highest paid sales associates and replaced them with lower-paid hourly workers. And as anyone could have predicted, customer service dropped just as quickly.

When you're selling commodities, maybe this works. But when you're selling technology that evolves faster than the average mind can keep up, experience counts for something. Knowledge and know-how are your ally.

Unfortunately for Circuit City, this loss of knowledge in the sales staff left them with only one tool to compete in the electronics market - price. And we all know how that worked out.

In tough times, when sales are slow, one of the biggest expenses is payroll. The temptation is to cut payroll to save money. But when cutting payroll means sacrificing customer service, you're just cutting off the nose to spite the face.

When your goal is to be the expert your customers can trust, payroll is no longer an expense, it is an investment. Instead of cutting staff, teach them to service better, to connect stronger, to sell more. Help them become more profitable for your business. Treat them like an asset, like an investment, and leverage that asset to get you the best returns it can.

If you have to make cuts, trim the fat. Cut out the inexperienced, non-productive, non-performing staff. Just as you would drop the stocks that don't perform in your portfolio, drop the staff that don't perform. And don't worry about what they make. There is a reason all those Circuit City employees were making so much - they knew more, they worked more, they sold more. And the same is probably true with your staff, the most productive members make the most (if not, they deserve a raise). Keep the productive ones, give 'em raises, and cut the non-productive staff.

Price-Slashing and Payroll Cutting, two big mistakes you can't afford to make in this economy.

The third? Marketing. We'll save that for next time.

-Phil

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