By Rick Spence, Financial Post (Published February 28, 2011)
It’s the first rule of business: don’t sell on price alone. There will always be someone, the pundits warn, willing to cut more corners than you and sell the same products for less.
And yet — what if you’re that someone? In an era when businesses and consumers alike are seeking more value for their money, why can’t you become the low-price leader?
Consider the experience of Jerry McLaughlin, a former U.S. Marine, lawyer and venture capitalist. He is co-founder and chief executive of California-based Branders.com, which claims to be the world’s largest online seller of promotional items. With its 69¢ flashlights, 96¢ backpacks and $2.54 baseball caps, Branders proudly promotes its “lowest price” guarantee: if you can find any advertised prices that are lower than Branders’, it will ship you a free case of 36 coffee mugs, customized with your logo. “We’re serious about giving you the lowest price,” says McLaughlin.
McLaughlin never intended to get into the mug business. After running an advertising company, he attended law school and then went to work for a law firm in Silicon Valley in the booming ’90s. “I got myself to the show,” he says. Venture-funded technology entrepreneurs were rewriting the book on corporate growth, “and I wanted to know what those guys knew.”
McLaughlin lived the dream: he founded his own startup, sold it, and became a venture capitalist himself. Then one day, three entrepreneurs submitted a plan for an online business selling promotional products. McLaughlin found merit in the idea, but his partners thought otherwise. So McLaughlin joined the new startup as CEO, raising $2.5-million to get the venture going.
The company now known as Branders thrived, but McLaughlin worried that too many competitors were selling the same stuff. “The best brands cut through the clutter,” he says. “I knew we had to redefine ourselves in a meaningful way -as defined by the customer.”
Knowing it’s hard to prove you have the best products or service, McLaughlin focused on price. With a few changes, “I thought we could sell our products for a lot less, and that it would be a long time before anyone could match it.” So began his personal campaign to rip costs out of the organization, moving to China, the Philippines and Mexico in his quest to overhaul his supply chain with lower-cost providers. In February, 2008, in what McLaughlin calls the St. Valentine’s Day Massacre, Branders reduced the prices on every product in its inventory by 20% or more.
“We didn’t promote it beforehand,” says McLaughlin. “We wanted to know if people would know value when they see it.” Almost immediately, the percent of website visitors who made purchases shot up to 65% from 15%. McLaughlin says profits on the additional sales more than made up for the lower profit margins: “That means we should have done it anyway, whether it was our long-term strategy or not.”
This doesn’t mean that Branders compromised on product quality or service. The point, says McLaughlin, is that customers can only take in one message per marketer: “I believe that, if you’re lucky, you can be heard in the marketplace on just one point. If you attack on a broad front, you’re not going to be heard.”
Changing Branders’ pricing strategy meant changes throughout the organization. First to go were the field sales staff. “You don’t need expensive U.S./Canadian labour out there talking about mugs,” says McLaughlin. Laying off most of his field staff, he replaced them with telemarketers in the Philippines. Then he realized his business staff needn’t be Made in U.S.A., either. Today, with 90% of Branders’ staff located outside North America, its HR costs are down 78%. “These are not outsourced,” McLaughlin insists. “These are my people. I lived there, I trained them.”
To continue the savings, Branders shifted another activity: imprinting customer names and logos. While most of his competitors do this “decorating” in the United States, McLaughlin transferred that work to two factories in Mexico. “We cut our costs of goods 40%,” he says, “so we turned around and dropped our prices again.”
With all these changes came what McLaughlin candidly calls “massive layoffs.” But he says most workers got seven months’ notice and generous severances; in fact, many workers flew to the Philippines to train their replacements. “It doesn’t have to be brutal,” he says. “We explained the whole business case to people, and they understood it.” Branders even helped its people find new jobs, maintaining a list of those who were unemployed or underemployed: “Name by name, person by person,” McLaughlin says, “we worked with that list until we got it down to zero.”
With annual sales of an estimated US$120-million, Branders has tripled volumes since its pre-discount days. More to the point, its low prices help other companies compete more efficiently. While some may question its methods, the simple truth is that entrepreneurship is about building businesses and brands that increase in value by dominating defensible niches. McLaughlin has accomplished his mission. How about you?
- Rick Spence is a writer, consultant and speaker specializing in entrepreneurship. His column appears weekly in the Financial Post. He can be reached at email@example.com.
Source: Financial Post