Which Customer Is Always Right?
It's the lament of small manufacturers everywhere. We make a wonderful product and consumers love it, but we don't sell to consumers. We sell to wholesalers or retailers, and they don't always have consumers' best interests at heart. Talk all you want about features and service, but these intermediaries focus most on margins and prices. What's more, we don't have the resources to try to reach consumers, so we have no choice but to fall into line and compete on price.
In many ways, it's a convincing argument. Just don't give it to Van Carlisle, the soft-spoken chief executive officer of FireKing International Inc., in New Albany, Ind., across the Ohio River from Louisville. If Carlisle had accepted it 13 years ago, when FireKing was the number-six producer of fireproof filing cabinets in a field of six, he would still be there, instead of where he is today: number one, with annual sales of $16 million.
The story of how FireKing got out of its sixth-place rut is instructive for any company that has to sell through retailers, distributors, and other middlemen -- and, these days, that includes almost any company with a product. It has become so expensive, and so inefficient, to maintain a direct-sales force that even the likes of Procter & Gamble Co. have turned to third-party sales organizations. But whereas the giants can run massive advertising campaigns to influence consumer choices, that's seldom an option for smaller companies. Instead, most of them feel compelled to bend to the realities of the marketplace and to cater to distributors by competing on price.
FireKing could easily have headed in that direction back in 1974, when Van Carlisle took over. His grandfather had started the company in 1948, and it had provided a living for its owners for more than 25 years. But by 1973, the elder Carlisle had died, and the 50-employee business was losing money on its annual revenues of $750,000. Van Carlisle, then 24, decided to leave his job at a small regional elevator company and try his hand at running FireKing.
As he looked at the company, he saw a few strengths but many more weaknesses. Its primary strength was that consumers viewed FireKing's files "as the finest product around," Carlisle recalls. But even that strength created some problems. For one thing, the perception of quality was based largely on the files' weight. Fireproof files are insulated with a plasterlike substance that makes them heavy, and FireKing's, at 750 pounds on average, were the heaviest around. That made the company's freight costs the highest around as well. And even without the freight costs, FireKing's files were about the most expensive on the market.
What especially struck Carlisle, though, was the difference in how consumers and retailers looked at his product. "The fact that our files were the best was of limited value to dealers," he says. "Their reaction was "They're better, so what?" His first task, he decided, was to identify and articulate what quality meant to retailers. And he quickly saw that the most effective way for FireKing to define quality was to compare its products with its competitors'. "A strength is not really a strength unless it hits a weak point of the competition," he says.
From that perspective, Carlisle felt that FireKing's costly process of making separate insulating castings and curing them in drying ovens before placing them in the files was a special strength. Three of his competitors used the more efficient but less expensive method of pouring wet insulating material directly into the existing steel walls of files and letting it air-dry. While that method lowered costs, it created a problem if the files weren't sold quickly. Without the frequent opening and closing of drawers that occurs in offices, the insulation didn't dry completely, and the files rusted in the stores. In humid climates, they even rusted in offices, making for unhappy customers. So FireKing began to define its quality to retailers in terms they could understand: "With us, they didn't have to worry about their inventory rusting."
The tactic had mixed success. It worked against one competitor, Carlisle says. But another company, which had a serious rusting problem because it was using too much water in its insulation, fought back. It recalled 15,000 units and replaced them all, sending a clear message to retailers that the company stood behind its products. Still, FireKing was beginning to establish itself in retailers' minds as a more aggressive competitor.
In 1977 and 1978, Carlisle addressed the nagging problem of weight. To consumers, weight meant quality: the heavier the file, the more fireproof it must be. But to dealers, weight meant freight costs. FireKing's competitors, focused on retailer concerns, constantly tried to lower freight costs by reducing their products' weight. But Darlisle didn't want to make his files lighter, since that would undermine their quality in consumers' minds and force him to lower prices. So he tackled the freight issue head on by organizing his own distribution system using contract trailers. That way, he not only got lower freight costs, but he knew in advance what they were. Then he began offering a prepaid freight program.
"What dealers really wanted was to know their price before the files came to the stores so they could figure out their margins," says Carlisle. "It didn't even matter so much if our files were more expensive." The lesson to Carlisle was fundamental: "Before weight could be a positive, it had to be eliminated as a negative."
The prepaid freight program was an undeniable success, emboldening Carlisle to further enhance FireKing's image of quality in terms retailers could understand and in a way that would make life difficult for the competition. This time, he decided to distinguish FireKing on the basis of its Underwriters Laboratories rating.
At the time, most fireproof files were referred to as either C or D; a C rating meant the file was impact resistant and could withstand a 30-foot fall or a roof cave-in during a fire, while a D rating meant it wasn't impact resistant. In their efforts to lighten their product, many of Carlisle's competitors were turning out mostly D-rated files. Even the majority of FireKing's files were D rated, but Carlisle felt they were such a high-quality D that they could easily, and inexpensively, be upgraded to a C. So he took a gamble. FireKing would stop making D-rated files altogether and would price its C files the same as its old Ds (which were higher quality than the competitors' Ds but of lower quality than FireKing's top-rated files). The company could recover the price sacrifice by improving its volume, he reasoned.
"That was one of the more successful things we did," Carlisle says today. Retailers could improve their profitability and simplify their inventory. And competitors had to spend more than FireKing to bring their D-rated files up to a Crating. Perhaps most important, he says, "We forced a change in the industry. For the first time, we got competitors reacting to us."
It was now 1981, and FireKing's market share had increased from 3% in 1974 to more than 15%. At this point, Carlisle decided that he should use his heightened industry prominence to focus on the kinds of issues that both retailers and consumers associated with quality. "We now had the initiative," he recalls. FireKing also had more resources, so it could take steps to establish itself as the brand of choice for retailers and consumers. The company began giving retailers free files for their own use, "so they saw them every day and could look at the files from the same perspective as the user," says Carlisle.
In 1984, FireKing came up with a new scratch-resistant finish. To show it off at an industry trade show, the company challenged retailers to try to scratch a FireKing file with a nickel. And to counter the executive complaint that fireproof files are ugly, FireKing introduced attractive wooden files (at a price two and a half times the steel files).
Whatever the tactics, the theme was consistent: "From the end-user standpoint, we're the best. From the dealer standpoint, we're the most profitable."
Even now, with a commanding 37% of the fireproof-file market, FireKing continues to look after both the retailer and consumer. Its market research in 1985 indicated that consumers wanted a smaller file cabinet. So FireKing added a new line of files that are 25 inches deep to go with the industry-standard 31 1/2 inches. To ensure that dealers would go with the new cabinets, FireKing began offering them travel bonuses for reaching certain sales levels. That incentive -- rather than price cuts or discounts -- was chosen very deliberately. "The incentive travel program set us apart," says Carlisle. To encourage dealers to display and stock the FireKing files more extensively than they'd likely do on their own, Carlisle offers inventory financing by extending credit to dealers.
In his approach to marketing, Carlisle has shown himself to be a master strategist. He has managed to address the often conflicting needs of distributors and consumers concurrently, and he's done so by exploiting some important facts of marketing life: distributor concerns about margins and prices can be addressed in any number of ways that have nothing to do with cutting prices; quality can have different meanings to distributors and end-users; and establishing a favorable image in the eyes of distributors often means exploiting weaknesses of the competition.
FireKing, with its 24% compound annual growth rate over the 13 years Carlisle has headed it, may look as if it's leading a charmed life. But it's had its crises. Back in 1985, for example, one of Carlisle's suppliers produced 15,000 defective locks, each of which was on a FireKing file that had already been shipped. And the lock is probably the single most important part of the company's files, since its customers are so security minded. Without skipping a beat, Carlisle moved to placate both dealers and end-users. He offered to replace all unsold inventory, and he trained dealers to go out and replace defective locks on files already sold. He sent a new lock -- together with installation instructions -- to all the customers he could identify, offering to have a locksmith install it at FireKing's expense. Each customer received a $25 gift certificate for the trouble as well.
FireKing shared the cost of the massive effort with the lock maker and, in the process, let both dealers and consumers know that the company stood behind its products. In was one of those rare situations in which dealer and consumer interests coincided from the beginning.
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