The Path to the Top
You've probably heard the old adage that there are three types of people in the world: those who make things happen, those who watch things happen, and those who ask "What happened?" In business, there's a comparable rule. Either you're an agent of change, or you're destined to become a victim of change. You simply can't survive over the long term if you insist on standing still.
I was reminded of that rule recently when a friend of mine asked me about my strategy for building companies. "Take the storage business," he said. "The market was already saturated by the time you got into it. How did you start from nothing and build one of the largest independent storage businesses around when you were competing against hundreds of well-established, successful companies?"
The answer is simple: I did it by becoming an agent of change.
Most people think it's hard to start a company when you're going up against a lot of experienced competitors. I actually prefer to be in that situation. For one thing, you know that other people are making money in the market, so there's a good chance you can earn a profit as well. You also know that the market is educated. That means you won't have to spend time and money explaining to customers what you do, what you're selling, and why they should buy it -- always an expensive proposition.
But while customer education isn't usually a problem in a competitive market, you do face another obstacle. Somehow you have to persuade customers to leave their current supplier and sign up with you. Most people will make the switch only if you're charging less or offering more than your competitors, or both.
Figuring out how to do that is easier in some types of business than in others. I prefer industries in which companies have a tried-and-true formula they've been following for years and years. When everybody has been making money the same way for a long time, people tend to get complacent. They assume they know all there is to know about the business. So if someone tries a different approach, they dismiss it. "He doesn't know what he's doing," they say.
When your competitors have that attitude, you have a golden opportunity. With a little imagination, you can come up with innovations that will allow you to start driving the industry. That's exactly how I've built all my businesses -- by driving the industry.
When I went into the messenger business, 25 years ago, for example, I targeted law firms, accounting firms, and advertising agencies, all of which had a lot of pickups and deliveries that were then charged back to clients. The competition was stiff, and I had a tough time until the office manager at one firm told me that what she really wanted was not cheaper service but better invoices. Back then, messenger companies would lump all the pickups and deliveries together on one invoice. Assigning the charges to particular clients was a time-consuming task. The office manager said she'd happily give all her business to any messenger company that could provide invoices showing which deliveries should be charged back to each of her clients, but everybody said it couldn't be done.
It couldn't be done, I realized, because no one had tried. Small businesses were just beginning to use computers back then, and messenger companies didn't realize what you could do with them. I told the office manager we could produce the invoices she wanted, and with the help of a programmer, we did. Thereafter our sales took off. Our competitors eventually caught on and developed the same capability, but by then we were well ahead of the pack.
The records-storage business posed a different type of challenge because customers were tied up in long-term contracts and had to pay substantial fees to permanently remove their boxes. I quickly discovered that I could entice customers to switch only by offering lower rates and agreeing to pay the removal fees. When I began doing both, my competitors thought I was crazy. They dismissed me as a flash in the pan. "Brodsky won't even last as long as your first contract," they would tell prospective customers. "He has no idea what it takes to survive."
But, in fact, I knew exactly what I needed to survive: good gross margins. What's more, I realized I could get them by having a warehouse with ceilings much higher than my competitors'. That way, I'd be storing more boxes per square foot, so I could afford to charge less.
As for paying the removal fees, it was really just a matter of common sense and math. Let's say a customer had 20,000 boxes and the removal fee was $5 per box. I'd give him a check for $100,000. He'd pay the removal fee, and we'd transfer his boxes to our warehouse.
So what would we get in return? Well, we'd have a five-year contract with the customer, which would produce annual revenue of about $5 per box. Over five years, moreover, the number of boxes he was storing would normally double, from 20,000 to 40,000. With an average increase of 5,000 boxes per year, we could thus expect at least $750,000 in sales during the five-year period. Then, if the customer decided to leave us at the end of the contract (which was unlikely), he'd have to pay us the removal fee -- on 40,000 boxes, rather than 20,000. So the total would come to $200,000. We'd get our original $100,000 investment back plus a nice return.
To me, covering the removal fees for customers was a no-brainer, but our competitors didn't get it. Years passed before they finally realized we weren't crazy after all and began adopting most of our practices. Again, we built the company by driving the industry.
Lately, we've been doing the same thing with the document-destruction business I started in 2000 with my friends Bob and Trace. (See " Barriers to Entry," October 2001.) Our sales have skyrocketed because of a new federal law. It's called the Health Insurance Portability and Accountability Act, or HIPAA for short, and it requires medical facilities and practitioners to institute a variety of new mechanisms designed to protect patient privacy. Among other things, doctors and hospitals will have to ensure that patient records and other confidential documents are destroyed in a secure manner. The deadline for compliance is this April.
For the past year, HIPAA has been the focus of almost all the marketing we've done on behalf of the document-destruction company. Early on we brought in specialists to train our salespeople and administrators in the fine points of HIPAA compliance. We had special brochures printed up, and we did numerous mailings.
Other document-destruction companies may have tuned in to HIPAA as early as we did, but I'm not aware of any in our area. We've had the field to ourselves for 12 months. No doubt our competitors will soon wake up to the opportunity, perhaps after reading this column. Meanwhile, we've already established ourselves as the leading provider of HIPAA-compliant document-destruction services in the New York metro area.
The challenge, of course, will be to stay in front. I generally feel more comfortable coming from behind, improving on what other people are doing, but we don't have that luxury in the document-destruction business. Our company will be the one that the newcomers come after.
And who knows? Some of them may turn out to be agents of change in their own right. I can assure you that I'll be watching them closely, and if one of them has a radical new idea that makes sense, I won't dismiss it. On the contrary, I'll make sure we figure out how to incorporate it into our business as soon as possible.
Norm Brodsky is a veteran entrepreneur whose six businesses include a three-time Inc 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available on-line at www.inc.com/keyword/streetsmarts.
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NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.