|
The brand is your customer's belief in what you stand for as a company.
The brand is what allows you to charge a little more or merit a larger market share than companies selling no-name products. That "little bit more" translates into future incremental cash flow. The present value of this stream of future-incremental-cash-flow is brand equity. Building brand equity is the only way I know to create long-term value for shareholders. It is the core of any manager's job. Anything you do that erodes the brand will destroy value. This column is about how to avoid this kind of destruction. I ran into one of these destroyers this week in one of our companies. A customer called wanting to talk with someone about buying scratched and dented units. I told him we do not make products with scratches or dents. He said, "Yes, you do; I buy them that way from you guys all the time." I felt like Bette Midler in Ruthless People. When she learned that her husband had refused her kidnappers' ransom demands and they were offering to discount the price, she complained that she been kidnapped by Kmart. But it was true. Two years ago, when our company was managing for cash rather than long-term value, the managers had begun selling equipment that had been scratched or dented during shipping -- at a steep discount. In the short term it made a lot of sense. It saved the company the cost of shipping the damaged products back to the factory. It saved repairing or reworking the imperfect products. But in the long term it was a bad idea. Discounting grows faster than crabgrass and is even harder to get rid of. Over the years our customers had learned to expect the discounts and started to call and request damaged products. Our sales team had developed price lists that included full prices and scratched-and-dented prices for every model we sold. We had orders in the system for S&D product that we could not fill because the factory didn't make enough mistakes to fill the orders. Our salespeople had 50 sticky notes on their screens about customers waiting for bad units. An employee spoke to a customer who bought only factory seconds because the prices were so attractive. We had succeeded in creating a market for products we were trying hard not to produce. And we had succeeded in becoming our own worst competitor. Every company struggles with this problem to some degree. As long as humans make mistakes, there will always be second-quality products. Managers often try to find places to park bad product far away from their core market, but I have never seen it work. Being a subtle guy, I asked my managers if they knew where I could buy a factory-second Porsche, or a scratched-and-dented Mercedes. Or how I could buy a Tiffany diamond necklace that had suffered shipping damage. Premium companies selling premium products for premium prices don't sell damaged goods -- period. They work very hard to make sure they produce perfect products, and when they slip they throw the damaged product away. Better waste some labor and some sheet metal than damage the brand image. Of course, there's always a market for discounted damaged goods, but I'll let my competitor have that market. We informed every sales and customer service person that we would never again ship a second-quality product. We tore up the old price lists and printed new ones with no scratched-and-dented prices. We reminded the whole company that we were in business to sell premium products and deliver premium service. We called the customers who had placed orders for bad product and explained that the factory outlet was now closed. This may cost us a few dollars in the short term, but in the long term it will make our company more valuable. Protect the brand. Three little words. Those three little words contain all you really need to know to build long-term value in a business.
|
