Andrew R. Thomas, Ph.D., is Associate Professor of Marketing and International Business at the University of Akron, a bestselling business author, and a contributing editor to Industry Week. In his book The Distribution Trap he argues that the “mega-customer” – big box stores like Walmart – have taken power away from the innovators of the world – startups and small businesses. His follow- up book The Customer Trap details the long-term consequences of relying solely on these businesses to become profitable. His question to you is…
Are you in the Customer Trap?
See if this sounds like you:
Step 1: You invest blood, sweat, tears, and money to start a new business or to innovate a new product or service.
Step 2: You sell to the biggest customer possible.
Step 3: You maximize the volume of sales to that big customer.
Step 4: You deal with the inevitable customer demands that are sure to follow, such as mandates for better pricing, longer payment terms, etc.
Step 5: You try to keep quality and service at a high level while earning less and less.
Step 6: You ultimately lose money on the customer.
Much of what drives the high failure rates of small businesses, along with the lack of success of so many new products and services, is rooted in this model.
Business owners and managers are lured into selling most of their output to what we call “Mega-Customers” in the vain hope that somehow, someway, the added volume will translate into real profits.
Companies falsely believe that the efficiency gained by having one, or a few, big customers—rather than dozens, hundreds, or even thousands of small ones—will guarantee a positive bottom line. These companies also believe that this combination of higher volume and greater efficiency is the formula for their future success.
Let’s lay it out right here: They couldn’t be more wrong.
The Customer Trap becomes a reality when a company fails to follow “The 10 Percent Rule” by allowing a single customer to become more than 10 percent of its total revenue.
While managing a large customer appears to have many positive benefits, the downside risks ultimately far outweigh any positives.
To buy The Customer Trap find an independent locally-owned bookstore here.
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