Two Tiered Memberships Lead to Angry Clients
Everyone is looking to save as much as they can with the bad economic news. Every bit helps and now more than ever your clients are more aware of piece prices and also any charges associated with orders. The same holds true in the regular world as consumers look to save on everything from coffee to cereal. Private label brands continue to outperform more expensive national brands as people try to extend their resources. Memberships in all types of civic organizations are suffering and charities are having some of their worst year in decades. Smart business owners are doubling their efforts to gain customers from weaker competitors but not all of their decisions make sense.
Take for instance the local fitness center that is struggling to increase their membership base as customers have moved to a newer less expensive nearby competitor and others have just decided there was no longer enough money in their personal budgets to pay dues. There are three ways this business could have made an effort to make up for the lost revenues. The first and easiest method would be to increase the per person revenue. In this setting that would be accomplished by extending the services offered such as opening a juice bar or adding equipment or classes that require additional fees. Other opportunities would exist in terms of selling promotional gear to clients but that ship has sailed so to speak and the days of "cool" gym gear are gone. Another option is to simply raise monthly rates which in good times might work but in the recession it would simply result in customers either forfeiting their memberships or going elsewhere. That leaves the third option which is the age old method of increasing sales which is to obtain new customers. This is easier said than done and most gyms have already exhausted potential clients in any given area. After newspaper ads have failed and signage in the streets have blown over the only way to draw people into the gym are special offers. The problem with any second tiered pricing strategy is that it will inevitably alienate the customers that have stayed with you all along.
In this case new customers off the street or those that have been gone for a few months are rewarded with paying one third of what steady clients are required to pay. It may increase sales initially but it will create a significant amount of negativity amongst old members and will cause some to outright leave and go to other facilities. The only way to pull off this type of discounted membership is to offer existing clients something in return which is either a discount on premium classes or at the juice bar. Perhaps giving them a piece of clothing with the gym logo would also help but all too often the gym owners blinded by the influx of what will mostly turn out to be short term customers see the money coming in the door without realizing they have won the battle but lost the war. Newspapers are littered with stories of these types of programs going bad and facilities vanishing. In fact many States have now adopted laws that protect citizens with insurance in the case that a facility were to vanish.
Consider your sales activities closely and weigh the possibility that an existing client may not view it as favorably as new clients. In the end it is customer retention that will keep you profitable not new customers constantly jumping from vendor to vendor shopping only on price. No business will ever survive catering to clients that shop purely on price.
Competitive Bidding Hurts More Than Profits
Day after day the news is littered with instructive pieces describing how all of your daily transactions should be conducted as if you are at an auction. Whether you are at an electronics store or online shopping for some clothes the economy is so bad you are supposed to be able to hammer any seller down on price at your leisure. As a wise person once said it never hurts to ask and as a consumer there is no harm in asking. As a seller and business owner there is harm in obliging bid requests and we will discuss the reasons why in depth.
Studies have repeatedly shown that the least loyal customers are those that shop purely on price. Although times have changed the traditional rule of 80 percent of your business coming from 20 percent of your customers is still consistent to some degree. Knowing that a majority of your business comes from a small portion of your customers typically means your most loyal customers are the basis for your success. The other 80 percent of your customers continually change as customers come and go. Studies have also shown loyal customers are much less sensitive to price so long as they are not being gouged and are instead interested in the business relationship, consistency and meeting of mutual goals. When a new customer calls or emails asking for your business to participate in a time consuming and lengthy bidding process that will come down to the lowest bidder you have to ask yourself is it worth the cost? Do you really want to establish a relationship and tie up financial resources on a customer who values you only for your price and what does that do to the industry you operate in as a whole? Take for instance the story relayed to us today of a customer that asked four different distributors to participate in a sealed bid. One distributor refused to participate probably having previous experience with this organization. Three others submitted bids. Two "finalists" were selected each likely being played off of one another and asked to bid again. The final outcome was a friend of the company President getting the order at between 0 and 5 percent profit not including carrying costs. The customer may think they have "won" in this case but in the end they too lost as there is no way that distributor can continue to effectively service that account at those margins and will either be out of business in a year or will be like the distributor that refused to bid. By the time they reorder that distributor will refuse to take the order or be out of business which means they'll incur new costs associated with acquiring a new distributor and likely expensive setup costs. If the customer saved $500 in real order costs but spent 10 hours of manpower to do it they too had a net loss as those hours should have been spent on revenue producing activities. Meanwhile in this era of decreasing credit the distributor that took the order at 5% is chewing up valuable capital resources to produce an order that they make little money on and are potentially on the hook for a five figure loss if payment is not made.
We will discuss this in more detail tomorrow, meanwhile take a look at earlier entries such as the arrival of custom bpa free sport bottles that we wrote about last spring and our post on retail brands crossing into the corporate channel.
Implosion Continues in the Trinket Industry
Despite the veiled attempts by the various associations and groups to paint the current situation as improving the destruction of the industry continues. Depending on which source the official 2008 sales were down either a little or a lot but there are few suppliers within the industry reporting even mediocre sales. The fact is business was horrible in 2008 and was even worse in 2009 for the majority of suppliers and distributors. There are people that have been in the industry for decades that have never seen it this bad. To find out where the industry is going we have to look at where it has been.
The promotional products industry started decades ago from the concept that there was a market in the corporate arena for branded items. For most of the last few decades that relationship involved three parties, the end user, the distributor and the supplier. Distributors worked to open new accounts by traditional means of cold calling, knocking on doors and networking. They relied on small groups of suppliers to provide product for them and the average distributor historically did well under $200,000 in sales. Along came the associations to act as the de facto referees and central database for the industry. All of these associations would require a membership fee and in turn provide the distributor access to information that would be difficult to obtain elsewhere such as catalogs, pricing, ratings information on the suppliers and credit services for the suppliers. In short they provided a useful service and acted as a go-between greatly reducing acquisition costs for both sides of the aisle. Distributors that did not have entire sourcing departments now had access to hoards of information they would not otherwise be able to gather and suppliers had a targeted and priceless mailing list.
This all began to change in the late 1990's as major online distributors like Branders began to appear. At the same time the use of the internet for sourcing products began to skyrocket circumventing the need for expensive membership services that often did little when subscribers needed them most. Indeed most played a hands off role even in blatant abuses of the system such as suppliers stealing customers directly from distributors. As suppliers began to ramp up their online product listings the ability to jump online and search for the needed product information began to trump the need for expensive and non-eco friendly catalogs. Along came Sage which provided the same basic services as ASI but at a much lower price and the fight was on for the remaining market share. Sadly what the increase in competition did was drive the desire to report success within each association. However the PPAI annual survey has probably summed up the trends most appropriately. Prior to 2000 the industry had experienced consistent and rapid growth. After 2000 the industry has been contracting 50% of the time. Sales are probably still being grossly overestimated as the few companies that reported publicly have taken a huge beating. Several like Norwood and Broder Bros. which occupies the number one spot in the industry for supplier size either threatened bankruptcy or have gone bankrupt. Major suppliers such have Cyrk have also gone off the grid and are no longer in business. Sales for 2008 were atrocious dropping at least 10% and most major suppliers are reporting 20-40% drops in 2009. I am sure the major associations will spin it as just a slight drop but when two of the top 5 suppliers were in danger of or went bankrupt and most of the top 10 had significant staff layoffs the situation is grim. Actual sales will likely be down more than 20% in the promotional products industry in 2009. There will be more failures on both sides of the aisle as distributors collapse under the weight of shrinking credit and increasing delinquencies of customers. Suppliers face the same concerns as distributors are increasingly stressed. Although the data is rarely released it is obvious the credit departments of many suppliers are under strain trying to deal with collections. In general the business credit reporting agencies report the average days beyond terms has extended to 10 up from 2 earlier in 2009. That's a rapid descent and with credit availability scheduled to shrink in the trillions this year and next it will only get worse.
Increased Costs Downfall of Recycled Products
A little more than ten years ago when a major ASI supplier first introduced recycled products made from reclaimed rubber the industry collectively ignored the offerings. Although the brand name was nationally recognized there was very little interest in the products and within three years the offering had vanished from the product line. A couple of years ago recycled promotional items were again introduced into the mainstream corporate channel and almost instantly became a mega success. Several issues have come together to create a perfect storm that is blunting sales.
First consumers and distributors were burned last year with horribly underestimated inventories. With some manufacturers the Spring of 2008 saw entire lines back-ordered for the critical Earth Day celebrations. Other products had serious quality control issues including melted buckles and inferior fabrics. Distributors had to deal with both of these issues in unmet expectations on delivery or worse angry customers when the more expensive recycled products proved to be of lesser quality than their non-recycled counterparts. Adding insult to injury some industry players such as Norwood suffered through inclement weather and flooding at some locations only making the problems worse. Manufacturers rushed to address these issues and the lack of color choices for the 2009 season.
Which leads to the next problem - collapsing sales the result of the ongoing recession. Everyone wants to promote eco friendly options but when budgets are severely cut customers are left with two choices, spend less money or spend no money at all. Although there is nothing official yet released by the major suppliers a quick look at online inventories shows excess quantities and also demonstrated no shortages this year leading up to Earth Day. This is partially the result of the economy but also directly reflects the increased costs associated with these products. Recycled apparel has been a major dud by most accounts with end users not liking the feel of recycled shirts and fleece. Taking a look at second quarter sales from suppliers there is an abundance of recycled and organic items which would again indicate an overstock situation. Higher prices and the recession explain much of the decrease but an overall change in buyer behavior may be behind the shift. It is too early to draw any conclusions but the 2010 "green" season will likely determine the fate of recycled promotional products in general.
Manufacturers need to bring to market some sub $3 items in popular categories to help continue the shift to recycled items. They also need to source some in the USA versus bringing them all in from overseas factories. Given the state of the economy and particularly domestic factories United States sourcing would help sell recycled items.
Broder Bros.appears to have dodged bankruptcy. Although there is no official word as of tonight it would seem they secured the needed percentages to prevent their filing. This is good news for the industry as the recent filing of Norwood already had the industry on edge. Changes are already underway at Broder with Columbia being dumped from the product offering. Once they sell through the remaining inventory it will be the first time in decades that Columbia has no presence in the industry. Meanwhile Callaway has landed at Perry Ellis. Once Ashworth officially exited the business Callaway was left orphaned until the announcement was made last week.
We do have an update to the Major Retailer Provides Lessons in Poor Customer Service but will update that story Monday morning. Suffice to say the demonstration is ongoing.