The Capacity Trap II

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Of course, there are exceptions to every rule, and this one is no different, as I've come to appreciate since I last wrote about the capacity trap (see Street Smarts, August 1996). Back then, I said it was always a bad idea to sell unused capacity at a discount, but I have to admit that the practice does make sense occasionally, as long as two conditions are met: First, you and the customer must agree upfront on the duration of the discount and what will happen when it expires. Second, you must be able to explain the deal to other customers who raise questions about it. They need to feel that you've been fair.

Earlier this year, for example, I used some of my excess capacity to take a 200,000-box account away from my largest competitor. The customer had discovered that it was paying above-market rates, thanks to a series of automatic price increases, and had begun looking for another vendor. We proposed a 10-year contract with the first two years heavily discounted. We could make that offer because we temporarily had a lot of extra space in one of our warehouses. In the third year of the contract--when the customer would start paying normal rates--the new warehouse we plan to build would be finished; we'd replace our construction loan with a mortgage; and the increase in revenue from that one account would cover the monthly mortgage payments.

So the customer knew in advance exactly what the deal was. And if other customers ask me about it, I can point out that we gave all of them discounts in the beginning as well. I can even offer them the same deal we've given our new customer--provided they're willing to sign a new 10-year contract for 200,000 boxes.

That's an unusual situation, however. In general, it's a bad idea to discount excess capacity, as I think Jerry now understands. Recently I bid against him for another contract. He didn't get it--neither did I--but the price he bid would have given him a better return than he could have gotten by renting the place out. So at least he can take comfort knowing that he wouldn't have hurt himself if he'd won.

Ask Norm Redux

I got some great feedback to the October "Ask Norm" column, and I thought I'd share with you two e-mail messages that shed additional light on the issues I addressed. Mike, who owns a business in southern California, said he got a kick out of my advice to the company owner facing competition from an ex-employee. I had told the owner to forget about it and focus on his business. "As an employer of over 350 people in the collection business, I faced a similar situation, except that there were not one but three key employees who quit to compete," Mike wrote. "I had no problem with the quitting part, but they crapped on my bankers and decided to take customer records as well as proprietary software on their way out. Suppressing my urge to crush their new venture with hundreds of thousands of dollars in legal fees, I did nothing and stayed focused. Within two years, they had all sued one another; their business had failed; and--here is the best part--their investor had sued them and turned the judgment over to me for collection. Indeed, revenge is a dish best served cold."

I can understand how sweet that must be for Mike, but revenge isn't always on the menu. Sometimes your ex-employees are going to succeed, as much as you might wish that they would fail. The point is to stay focused on your own business no matter what.

Douglas Bristow of the Project Reports in Marietta, Ga., was interested in the executive who worked for a Fortune 50 company and was looking for a start-up he could donate his time to. "I have had exactly the opposite problem," wrote Doug-las, who had been a big-company executive before leaving to start his business almost 25 years ago. "Because of my lack of sales and marketing skills, I have not been able to grow the company to anywhere near its potential. I would gladly have given partial ownership to a big-company executive who could have provided the expertise I needed. Of course, there's an inherent problem with using big-company executives as small-company advisers: They often have a hard time adjusting their thinking to the small-company level. I remember my own difficulty understanding the value of a penny as opposed to a dollar when I went out on my own. Starting or running a small company can be a humbling experience for people coming from a large corporate environment. On the other hand, I have never been sorry that I took the plunge."

I agree that it can be a challenge for big-company executives to adjust to small-company circumstances. Many of them aren't used to working in an environment in which resources are scarce. That said, it's always worthwhile to get advice from experienced business people. You have to evaluate the advice and decide for yourself what to do with it, but if you have the opportunity to hear the voice of experience, you should listen.

Norm Brodsky (brodsky13@aol.com) is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.

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