July 22/29; Volume27/Number 7
By Jim Armstrong
Part 1
FLOOR DEALER: We carry a large selection of well known, high-quality products and we provide great customer service.
JIM: So what’s the problem?
FLOOR DEALER: The only thing our customers care about is cheap prices.
I was in Starbucks with a friend not long ago. I ordered a Trenta black iced tea, unsweetened, and she ordered a frappawhappa-happa-crappaccino (or something like that). The bill came to over eight dollars.
Eight dollars for flavored water.
Apparently we weren’t the only ones anxious to plunk down oodles of boodle for coffee; there was a long line of people happily forking over the green for high-end caffeine.
So how does Starbucks successfully command premium prices for a commodity we can get anywhere? One answer is they are drug dealers and we’re all hooked. But there are plenty of other places we can get our caffeine fix for a lot less money, so that doesn’t explain it. The fact is there isn’t a single answer to this question.
Starbucks employs a constellation of strategies which, working together, enable it to charge five times more than you would pay for coffee elsewhere. Some of the strategies they’ve implemented include making their dining rooms feel like living rooms; changing the vernacular (tall, grande and venti, instead of small, medium and large); positioning their servers as “baristas”; creating total differentiation from other coffee sellers; selling a better-than-average product; a constant rotation of new, fun offerings; complimentary wi-fi; free time-shares in Honolulu when you buy your 10th caramel macchiato with extra whip, and a plethora of other things that I don’t have space to mention. In other words, Starbucks has created a zero-resistance selling environment.
en·vi·ron·ment: the aggregate of surrounding things, conditions, or influences.
Too many floor dealers are looking for that one solution, that one trick, that one ad, that one magic sales phrase that will enable them to escape the cheap-price rat race. I call this the “Myth Of the Silver Bullet,” and it’s totally false.
If Starbucks merely had a high-quality product and none of the other environmental elements I mentioned, they would be unable to command five dollars for a coffee-flavored slushie. In fact, they would either have to lower their prices or go out of business. This is exactly what has happened to many floor dealers over the past six years. Faced with an ever more price resistant buying public, Home Depot and Lowes offering $39 whole house installations, and online retailers proclaiming they are the cheapest, a lot of dealers simply caved in on price.
This loss for dealers is a crying shame because it doesn’t have to be this way. I have members of my Inner Circle Club commanding a minimum of 50% margins on everything they sell, and they’ve done it while other dealers in their market areas curled into a fetal position and slashed their prices. But they will be the first to tell you that there isn’t one strategy that made this possible; it was an entire system of strategies working together to create an environment conducive to selling at premium prices. In part 2 of this series I’ll reveal three of the most powerful strategies.