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Profit Erosion & Low Margins - Part 1

Furniture World Magazine


Vigorous price cutting can have far reaching consequences on customer satisfaction, customer retention and profitability.


Too many storeowners drive store traffic with price promotion advertising. Many delight in describing increased sales volumes that result from these costly campaigns. When asked about bottom lines, however, these owners tend to report poor performance compared to previous years. A quick look at the price tags on their sales floors often makes the reason for these results crystal clear.

Do you believe that margin reductions are unavoidable? Is vigorous price-cutting the only effective survival strategy… the best way to “fight back” and close sales? Are you convinced that you will make up for lost margin by increasing sales volume?

The problem with trying to position your store as a low price leader is the fact that you will always have a competitor willing to go lower. When a store gets into a price war for low price bragging rights, it loses profit margin, forcing cut backs in other business areas. These cut backs, in turn, invariably produce dissatisfied customers. When margins are squeezed, most stores reduce the level of customer service they provide. Price cutting is, therefore, a leading cause of bad customer experiences in furniture stores.

One store, when faced with declining margins, quit prepping furniture for delivery. If customers found products to be defective, the factory was blamed and another delivery scheduled. Of course, any imagined savings achieved through the elimination of the deluxing department were wiped out by increased delivery costs.

More damaging to the profitability of this business was the destruction of “good will.” There is an old axiom in sales: “One happy customer will bring you one more. One unhappy customer will lose you twenty.”

Examples of Good & Bad Service

Research studies suggest that it costs seven times more to attract a new customer than to retain an existing one. Existing customers, therefore, generate more profit than new customers attracted through expensive advertising campaigns. Here are two examples that illustrate how easy it is to either lose or retain these more valuable customers.

Good Service: I recently took my dog Johann to a new veterinary clinic. The next day, Johann’s veterinarian left this message on my answering machine: “Hi, this is Dr. Erickson, from the Acme Animal Hospital. I just wanted to see how Johann is doing. If he is still having trouble over the weekend bring him back in and have the receptionist call me.” Two days later, a similar message from a technician was left stating that, “Dr. Erickson asked us to call and see how Johann is doing.”

Will I go there again? Yes! Will they have to spend a lot of money on marketing or use some kind of pricing promotion to get me to come back? No! Will I tell my friends about my experiences? Yes! Will they have to spend money to attract my friends to their business? No!

Bad Service: I recently made dinner reservations at a restaurant that had attracted my attention with a consistent program of television ads. Our party arrived 10 minutes ahead of time. A woman escorted us into the bar. Thirty minutes later I asked about our reservation and was told that since I didn’t respond to my name when called, she seated the next party. I pointed out I had checked in with her. She suddenly recalled the event and promised us the next available table. I watched as she seated three more parties over the next 15 minutes, and when I asked her why she was seating them ahead of us, she replied, “they had reservations.”

Did we leave and go to another restaurant? Yes! Will any kind of marketing or pricing promotion lure me back? No! Will I tell my friends my experiences? Yes! Will any money they spend on advertising attract my friends to the restaurant? Probably not.

The results of a survey of furniture storeowners were presented in the August/September 2002 issue of FURNITURE WORLD (posted to furninfo.com in the Marketing Management article index). The last question on the survey was “Do you know the open number of customer service cases?” Only 11.0% knew that number.

Do you track the number of customer service issues? In other words, do you know how many unhappy people are out there sharing their negative experiences with your store to anyone who will listen?

Do you track customer service resolution times? In other words, do you know how long unhappy people are telling their story to others?

Ask yourself this question, “Do we deliver superior customer service?” If you answer yes, what is your proof?

Your customers have the opportunity to shop in many more stores within and outside of your local trading area than ever before. Contrary to what many in the industry believe, for most people the deciding factor is not price. If price alone were the key factor, Levitz would have ruled the retail furniture world instead of declaring bankruptcy.

The way today’s customers buy home furnishings is different from the way they bought years ago. They are stressed out and overwhelmed by our 24/7 multitasking world; have more money and less time. They want and need service. Stores that capitalize on this subtle distinction are growing their bottom lines at a very healthy rate. These are the same stores that develop customers for life.

Today’s consumer is tired of the shopping experience. The 800 Number and Internet retailers are capitalizing on this feeling of weariness. You can cater to this need by delivering superior customer service. All you need to do is exceed customer expectations. This isn’t too difficult since most customers have low expectations for their home furnishings shopping experience.

In developing customers for life, storeowners need to look beyond the first sale, which is often the smallest sale, and start looking at the potential for lifetime sales. The only way to develop customers for life is to focus less on developing “the sale” and more on developing “the relationship.” You do that with customer service.

To develop a one-time customer into a lifetime client, you must earn their trust. You can’t earn trust by offering cheap furniture. You earn trust by delivering superior service… little touches and levels of personal attention that make customers feel appreciated. Genuine customer service creates relationships.

Next Issue
The second part of this series will appear in the April/May issue of FURNITURE WORLD. It will look at reasons why customers stop patronizing stores, and also discuss a number of strategies home furnishings retailers can use to ensure customer loyalty.

John Egger, CEO of Profitability, Inc., helps retailers refocus their marketing strategies from the current M.A.D. (Mutually Assured profit Destruction) policy trend, to compete against other industries and stores based on value. Inquires can be sent to John care of FURNITURE WORLD at jegger@furninfo.com.