A Tale of Two Retail Business Models

If you’re an independent retailer, it’s pretty easy these days to be confused about the path you should follow. You’re no different than any other consumer, you’re bombarded by the major retail chains with special offers, promotional incentives, this week’s special, next week’s sale. You hear all the chatter about social media, Facebook, smart phones, mobile apps.

When I start working with a new independent retail client, I often find them confused to some degree about strategic direction and day-to-day tactics. They hear all the noise around them and wonder if they should be following along with all the things the major chains are doing.

If that describes you, if you sometimes wonder if the way you’ve always thought about your business is suddenly out of date, if you wonder if you should be doing more of what the big boys are doing, let me assure you – you shouldn’t. More and more, the business models of the major retail chains and the very best independent retailers are diverging. We’ve reached a point where they have about as much in common as cows and steering wheels.

Let’s consider the major elements of the business model that the major retail chains operate under:

They’re product driven – mass produced goods for the mass-market, low margin, high volume consumer commodities or near commodities. They’re driven to maximize volume and market share, to capture economies of scale.

Technology is employed to lower unit delivered costs – the total cost from acquiring product all the way through making the sale and getting the customer out the door with merchandise in hand.

Value is denominated just about entirely by price – on everything from flat screen TV’s to laundry detergent to jeans. Marketing is targeted to the masses, with a never-ending stream of promotions and sales. The competitive environment means it’s a never-ending race to the bottom – the lowest prices, the slimmest margins.

Compare that to the business model of the very best independent retailers:

They’re customer driven – one customer at a time, one transaction at a time, building long-term personal relationships day after day. The relationships are built around a shared passion between ownership, the staff and the customers. These aren’t the basics of life, these are the things and activities that makes life special for each of us. They feature distinctive, high-quality discretionary specialty products produced specifically for niche markets. They are characterized by craftsmanship and an attention to detail.

Value is denominated by the totality of the customer experience – selection, taste level, product quality, state-of-the-art product knowledge, flawless customer service, a distinctive store, and warm and engaging staff – and not just price.

Given the totality of the customer experience and the relationships that have been built, price is an important but not a determinative factor. This enables these retailers to maintain price integrity and sustainable margins. Technology is viewed primarily as a means of enhancing the relationship with customers. They’ve captured a unique position in their market, as the dominant player in their niche, with little significant competition. The model is sustainable so long as the store maintains its passion, commitment, freshness and relationships with customers.

These are very different business models, with many mutually exclusive characteristics. And, unless they are recognized as two very different business models, those conflicting characteristics are the reason that so many independent retailers feel confused from time to time.

As an independent retailer, immunize yourself from all of the noise from the major retail chains that’s constantly assaulting you. Recognize that you’re in a very different business, one that requires you to focus on your relationships with your customers, in your own unique ways, and not the way you see the major retail chains doing it.

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