Street Smarts: What Business Are You Really In?

Sometimes you have to think differently about your business in order to find the key to success.

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My friend Mike grew up on the south shore of Long Island, where his father owned a fish restaurant. The fish came from a company owned by a guy named Fred, who supplied numerous restaurants in the region. One day Mike was talking to Fred about his business. "You want to know why I'm successful?" Fred asked.

"Because you sell to a lot of restaurants?" Mike replied.

"No," Fred said, "because I know what business I'm in."

"You're in the fish business," Mike said.

"Not exactly," said Fred. "I'm really in the banking business. I make loans to restaurants in the form of fish. You see, a restaurant is a seasonal business. Like any good banker, I know when my customers are short of cash, and I know when they're busy. I carry them during the slow periods and collect after they've had a big week. They pay me not only for the fish but for the credit I extend to them. I build the cost of extending the credit into my price."

Unconventional as Fred's perspective on his business may seem, his experience is not unique. Companies are often successful for reasons that aren't obvious at first glance, and smart entrepreneurs understand that. They know they have to think differently about their business in order to distinguish themselves from their competitors. It's part of the process you go through to define your niche. Once you've determined what business you're really in, you can use that knowledge to build a solid customer base in even the most competitive markets.

It usually takes time, however, to find your niche. When you start out in business, your first job is to get the attention of customers, and there are a limited number of tools you can work with. Only when those tools fail do you make the necessary leap and figure out what you have to do to survive.

My records-storage business is a good example. When I started it, back in 1991, I thought I was getting into a typical service business. My strategy was to offer competitive prices and to bring customers in by promising great service, state-of-the-art technology, and easy accessibility to our warehouse, which was located in the New York metropolitan area. At the time, there were very few records-storage companies that could provide all three of those benefits.

I thought we had a dynamite pitch, but it turned out to be a dud. We quickly discovered that our technology and location weren't as important to customers as I thought. They cared mainly about getting a box back when they needed it. Where we stored it and how we kept track of it were our concerns, not theirs. As for service, who doesn't promise great service? Until you've been in business for a while, moreover, you can't offer testimonials or any other proof that your service is different from anybody else's.

So we weren't able to move people with the three levers we'd been counting on. On top of that, we found that most potential customers were already signed up to long-term contracts, and those contracts included a standard provision under which the customers would be charged a so-called removal fee for every box they permanently removed from the storage company. In effect, customers agreed up front to pay a substantial bounty if they ever decided to switch suppliers.

I had great confidence in our service, but those were huge obstacles. We couldn't get potential customers to pay attention to us, I realized, unless we could offer them a way out of their contracts and a significantly lower price.

Now, normally I don't like competing on price. It's a dangerous game. For openers, low price can connote poor quality. People wonder whether you can really provide the benefits you're promising and, if so, for how long. Competitors will use your pricing against you, telling customers you're fly-by-night and can't survive. In fact, you may not be able to survive if your gross margins are too thin. By the time you realize that, it may be too late. If customers have come to you only because you're cheap, they're likely to leave when you raise your prices.

On the other hand, I have no qualms about offering a lower price than my competitors do if my costs are lower as well. Not that I'd ever compete strictly on price -- I'd also sell the quality of my service -- but I don't mind using a lower price to get my foot in the door, provided I have the kind of gross margins I need to be successful.

So how could I get better gross margins than my competitors had in the records-storage business? I realized I had to look at the business differently. I had to ask myself, "What business am I really in?"

The answer came to me out of the blue: real estate. We weren't just storing records; we were renting space in our warehouse to boxes. And how do you get more rent out of a building? By fitting more rental spaces into it. If we could accommodate more boxes per square foot than our competitors, we could charge less per box and still have better gross margins. So we found a warehouse with very high ceilings and put up racks that allowed us to make full use of the space.

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