Becoming Essential   How marketing really works.

A business owner friend, Carrie (name changed to protect the innocent), asked me about a new business venture she was considering pursuing. She asked me for advice on whether I thought the idea was a good idea.

She was considering creating a business that would seek to be the middle man between customers and a certain type of building contractor. I recommended against it.

Carrie asked: “I want to ask you a clarifying question. You said it wasn’t a good idea for me to pursue. First, I want to thank you for not only saying your true opinion but also giving some meat to it. Is it that you don’t think the business idea itself is bad or that you don’t think it aligns with me?”

Here’s the answer I emailed her:

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Hi Carrie,

It’s not that I dislike your idea. It’s that I don’t like the category it fits into.

There are only two categories of businesses that succeed: “commodity” businesses and “premier” businesses. The main difference between the two: a commodity business’ success is determined by the market while a premier business’ success is determined by the business owner. (An aside; businesses that try to find a midpoint between the two are doomed to fail, the reasons for which I can explain in detail some other time if you like.)

Commodity businesses’ main carrot for customers is low price. Because their margins are low, they can’t afford to differentiate themselves from that competition. This makes commodity businesses easier to copy. This increases the need to spend large portions of the budget seeking market share dominance through quick expansion, which further increases the need to lower prices, which further lowers margins, which further makes it difficult to differentiate, which puts most of the variables of your success OUT of your control. The economy, the behavior of the competition, regulatory issues, low-cost labor availability and tax laws end up having more effect on your chances of success than the way you design your business.

Premier businesses are the opposite. They compete on value and differentiation. They actually benefit more by raising their prices (and the corresponding implication to the customer that their value is high) than by lowering them. They seek to dominate the competition by creating a product/service that is so valuable and so different that it is nearly impossible for the competition to duplicate; they seek to monopolize their market. THEY control their own success through their own creativity and innovation, as you are doing with your business.

Here’s a list of examples of different types of replicated businesses that have multiple locations:

Commodity Businesses vs. Premier Businesses

McDonald’s vs. The Restaurants of Jean-Georges Vongerichten

Sears vs. Barney’s

A Municipal Golf Course vs. Golf Courses Designed by Robert Trent Jones

Supercuts vs. Kim Vo Salons

Super 8 Motel vs. Fairmont Hotels

The difference between the two categories?

All of the businesses on the left have experienced near-bankruptcy and plummeting stock values, whereas the businesses on the right have all experienced enormous profit margins, growing loyal customer bases, and steady, expanding growth.

I like your idea, but, ultimately, I don’t think you are going to be able to control whether it succeeds or not; the market will.

Hope that helps (and wasn’t too preachy).

Ted