Jerry McLaughlin restructured into a low-cost leader

How to recognize your competitive advantage and change your organization to fit a new strategy

By Kristy J. O’Hara (Published August 2010)

Posters showing tombstones and the chalk outlines of victims lined the walls of Jerry McLaughlin’s offices at leading up to Feb. 14, 2008, or the Valentine’s Day Massacre as it became known internally.

It wasn’t an anti-Valentine’s Day protest by single employees but rather a goal — kill the competition. In fact, upon closer inspection of the posters, written beside the chalk outlines and on the tombstones were names of competitors. It may seem morbid, but it was a goal three years in the making.

You see, back in 2005, McLaughlin felt beat down and discouraged. The promotional products business that he had co-founded in 1999 amid the hype of online shopping had begun to wear on him and made him question if it was even worth it anymore.

“Things were difficult, and what I mean by that, everything was hard,” he says. “ … Sometimes you looked at friends and other people and people in the media running other companies, and at times, it seemed they had a charmed life, and we didn’t feel the charm. And as someone of Irish descent, I felt a little ripped off because we’re supposed to have leprechauns and that stuff.”

The company was growing by about 20 percent — but also simultaneously losing money — each year. While the loss got increasingly smaller each year, he was still tired of losing money.

“I started to really doubt whether the convenience of online was really as compelling as all of us who drank the Kool-Aid thought it was,” he says.

He started looking at data for both his industry and general U.S. retail sales and was shocked to discover online sales accounted for less than 5 percent of all retail sales.

“We’re five or six times past [ founder Jeff] Bezos being Time’s person of the year, and all of this effort, all together, hasn’t captured 5 percent of retail sales yet?” the chairman and CEO says.

Clearly the world hadn’t drank the online shopping Kool-Aid like he had, so he decided to differentiate Branders from the competition so he could make it profitable. Here’s how he arrived at the Valentine’s Day Massacre solution.

Weigh your options

Knowing he needed to change the company, McLaughlin took a step back to think about and evaluate the business.

“It’s difficult, but you have to try to be objective and sort of put on the mindset of a customer as you consider the different opportunities to differentiate,” he says. “All of us inside a company can get too much into our own thinking and what we think is cool, but, ultimately, if the differentiation isn’t one that customers would agree is truly different and matters, then why work on that?”

But you can’t be different just for the sake of being different either.

“The second thing is to look for a point of differentiation that you believe is sustainable because all good competitors will copy all good ideas if you can,” he says. “If you can’t find a point of sustainable differentiation, then get out of that business.”

Using this as guidance, he explored three concepts — selection, location and customer service. But because of the way Branders was set up as an online business, he knew none of these would work, and that left him with one alternative — price.

“The only thing I thought I could do a lot with was price,” he says. “It looked like it would work, and I didn’t have any better ideas.”

One of his good friends, who was 80 years old and a very bright marketing mind gave him some advice, as well.

“He said, ‘People always think there’s going to be three or four things, and you have to go figure this out, and in my experience, you’re lucky if you can find one — one way out of the darkness that is going to work for you, and if you can find it, be glad and go do that thing,’” McLaughlin says.

Get buy-in

Making the decision was only the beginning for McLaughlin. He next had to get investors, board members and employees to buy in to his thinking.

“There’s a bit of a myth or fiction that if a CEO decides we’re going in a certain direction, we’re going to go there,” he says. “Well, there’s a big difference in leading people in that direction and dragging people.

“You certainly don’t want to drag people because you won’t get the best out of them, and, frankly, who’s got the energy to want to drag hundreds of people in one direction or another?”

He decided to get feedback and do a slow campaign to help people see the logic themselves.

“You have to do your human best to have really thought through the plan and know where the risks are,” he says “You don’t have to foreclose the risks, but you want to acknowledge them. It takes a lot of work upfront to be truly prepared. You don’t really want to go to a meeting to start talking about your doomed plan to have people ask too many questions you didn’t think of, and I think there’s a tendency for that to happen.”

First, he had to make sure he could communicate his idea simply.

“I try not to float too many ideas at work that my 10-year-old daughter wouldn’t understand,” he says. “She’s really bright, and if she doesn’t get it, then I don’t have it right yet or I’m not putting it across the right way.”

After his litmus test, then he started talking to some confidants about his idea.

“I’m not talking about going around internally and talking about it,” McLaughlin says. “I’m talking about looking for people you believe and trust outside that you can check your thinking on things.”

He turned to his brother, who is now VeriSign’s CEO, and his sister, also a successful businessperson, as well as board members and the other founders. It’s critical to talk to outside people first because internal people will bombard you with questions.

“Usually when I talk to other officers, they turn quickly to how to implement that, and I’m still trying to have a conversation called, ‘Should we be doing this at all?’” he says. “CEOs are a little bit limited in their ability to really brainstorm internally. People like to talk about how you’re going to do it. If you want to send a shockwave of terror through the organization, just come in on some given Friday afternoon and start to share your wildest thoughts about what the business might look like in five or 10 years. You’ve just created a wild staff that doesn’t sleep all weekend. It doesn’t matter how you preface it — ‘Oh, I just want to see what this sounds like, or do you think I’m crazy?’ — they have to get back to work on their resume.”

Once he had worked through the arguments and kinks in his idea externally, he started planting seeds internally by posing a question and leaving it unanswered.

“I would ask people, ‘Do you know that it’s only less than 5 percent of retail is going online?’” he says. “So I’d put that out there. The first step was to educate people about the facts that I was aware of that I thought were meaningful that I think they were either unaware of or didn’t ascribe significance to.”

This got the wheels turning in their heads.

“Then I would just ask, ‘What are we going to do about that? What do you think our future looks like? Where do you think this path is going to take us?’” he says. “Try to get them to do their own thinking about it. They may not get excited the first time I asked a question or the first couple of times I asked a question, but, eventually, I was able to engage people in a conversation about where are we going.”

Because he had prepared and thought deeply about these answers, he had an idea of where the conversations would lead, but he was also open to hearing new ideas in case he had missed anything.

“There’s just a lot of groundwork there,” he says. “It was a very big change for us, so we wouldn’t put that kind of energy into picking a new caterer, but for what we were undertaking, that’s what I thought it took.”

Move forward

McLaughlin made the announcement in early 2007 that Branders would now be the low-cost provider but changing the company was a tough gig.

“That turned out to be a very big assignment because if you want to sell success on price, you have to first structure your operation in such a way that you have lower costs than your competitors, or, otherwise, to sell on price, you’ll bleed to death,” McLaughlin says. He decided that instead of relying on third parties to import goods and put the logos on products, Branders would do both. He set up operations in Mexico, the Philippines and China. These big initiatives saved money, but he also implemented small things, like using both sides of every piece of paper — except items sent to customers.

He also had to be diligent about walking the walk because he was constantly questioned on his decisions.

“I don’t think people always do it deliberately, but people want to see what you’re going to say,” he says.

If someone asked to go on a business trip, he would ask a question back.

“You say, ‘We’re the low-cost producer now, so we actually care about everything that costs money here. With that filter in place, should you take that trip?’” he says. “And the answer is, ‘No, I shouldn’t.’”

If an IT person wanted a new laptop, yet there was a working desktop available, he’d tell that person to use the desktop.

“It’s not as convenient, I understand that, but that’s the answer,” he says. “After you do that awhile, in my case awhile took about 18 months, then the managers and everyone else get it. Then it becomes your identity, and it’s not a deprivation of suffering, it’s a coolness of that’s who we are.”

The other initiative in the new strategy was drastically lowering prices — and not just a buck or two cheaper than the competition. For example, a water bottle that would retail at Target for $9.99 was sold for $1.99 — and with a logo on it. So come the evening of Feb. 13, 2008, the computer would reset the prices of every product, thus creating the Valentine’s Day Massacre. People got excited about this and created the posters to get everyone else pumped, too.

“When we lowered our prices, we made no announcement about it and put no verbiage about it on the Web site,” McLaughlin says. “We did no before and after, no cute lines crossing out the old price. All we did was … we told the computer system that when the clocks strikes midnight, reprice to these prices.”

Branders saw instant success. The rate at which visitors called or registered on the site went up 60 percent the first day, and registration is now up 85 percent where it was a couple of years ago. Repeat business is also up about 150 percent over where Branders projected it would be.

“My job became much easier because price is objective,” he says. “You can clearly demonstrate to someone, … you don’t have to work so hard to help someone understand why they want to shop with you. …

“It’s a lot easier to tell your friend, ‘Hey, try this because you’ll save a lot of money,’ versus, ‘Try this because Jerry is a really nice guy.’”

The massacre didn’t just kill the prices. Like the posters insinuated, it killed much of the competition. He started getting hate mail from competitors, saying he was ruining it for everyone. Within two months of the massacre, one competitor called and asked McLaughlin to buy it out so the company could just keep working in the industry — so he did.

Revenue grew — while Branders doesn’t disclose revenue, the industry association estimated its 2009 revenue at $120 million — and the business is finally profitable.

“In the old days, everything felt hard, and today, lots of things feel easy,” McLaughlin says. “Warren Buffett once famously said good businesses give you good decisions to make all the time, present you with choices you’re excited to make, and bad businesses always present you with decisions you hate to make. For us, it was never a bad business, but it’s a much better business now.”

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Source: Smart Business Online

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