Monday, May 7, 2007

FADS 101

Lessons I have learned from fads, starting with the most important.

1.) Never build infrastructure under a fad. You'll be tempted, at the peak of any fad, to expand or to open more outlets. If you have even a suspicion that it might be a bubble, don't do it.

I structure my fixed expenses in such a way that I can survive on the 'base' level of sales -- that irreducible number that any product sells to your regulars. (Or you go out of business.)

The 'base' number of a fad is ZERO.

2.) Don't try to compete with discounters. You can't win. In a game of 'Name that Tune', there will always be the idiot who thinks he can name that tune with one note or none. If you try to compete with idiots, that makes you an idiot, too. Once a fad reaches a suicidally competitive stage, it's time to move on, cut your loses. Lower your orders and raise your prices -- the exact opposite of everyone else.

3.) Diversify, diversify, diversify. Diversify or die. The specialist will beat you in the short run, but the generalist will last longer. Try not to let any product be more than 50% of your sales. Take the profits from a fad and invest in a new product line, or revamping an old product line.

4.) Don't wait for competition to go out of business. (For a perceived market share.) It'll take much, much longer than you expect. By the time it happens, the benefits will be nil. You'll get, at best, 15% of the competitors business, which by that time is usually pretty bad. Besides, it's a bit vulturish for healthy karma.

5.) Don't wait for the next big thing (NBT). Once you've had a taste of cash infusion from a fad, it's easy to get addicted. But fads are completely unpredictable. They're the sort of thing that no one heard of yesterday, and everyone has to have today, and all will forget about tomorrow. Look to your base.

6.) Try not to order too much in advance, or to pay in advance. It's better to miss sales because you run out of product than to have to accept volumes of product you can't sell. Don't get stuck buying a case, when you only need a couple of boxes.

7.) Order through a middle man to shorten that window, and to control the quantities, and to pay upon arrival. You may get a shorter discount, but the flexibility is worth it. (Remember, you're not competing with discounters.)

8.) Don't try to ride the fad to the top of the curve. Don't get suckered into constantly doubling your bets. Take a bit out on the way up. Get out when you've gotten what you need out of the fad. Don't look back if the fad keeps going. You can always get back in, but you can't always get out.

9.) Turnover isn't important to a specialty store. This is the 'non-fad' product that you need when the fad ends. A specialty store relies on the long tail -- selling that one item to that one customer, instead of oodles and oodles of stuff to a bunch of customers. That means you need a full store. In my experience, everything sells eventually. As long as you paid through cash flow, the turnover rate is less important. (On the other hand, you don't want to get stuck with too much 'fad' product. If you think it's a fad, try not to get more than a few months supply. But everything else, your 'base', keep a full selection.)

10.) Fads always die quicker than you think they will, and will sometimes die for a specialty store before they die in the mass market. Once they are dead, they are dead, dead, least for a retailer. They may come back later, but never at fad levels.

11.) There is a 'golden age' for every fad, when you can do no wrong. All you have to do is put the product out, and it sells. Then there is the 'mature' phase where people get a bit more picky, they start buying elsewhere. Then there is the down phase where everyone complains, no one wants to buy at full price. Try to get out during the 'mature' phase.

12.) Selling fad product is never hard. GETTING ENOUGH OF IT IS HARD. That's the part the customers don't see. The hard part is getting sufficient supply. My advice is never do something you wouldn't ordinarily do in order get product. At the height of every fad, you'll get lots of people shoving and pushing and lying their way to the head of the line. Don't join them. Let it go. This fad too shall pass. Eventually, Supply Always Catches Up to Demand.

Don't get so caught up in the fever that you lose sight of your core values. Hopefully, by being honest and steady you will have a number of reliable suppliers who will see to your needs. If they don't, you'll know to start looking for a new distributor. If the customers can't see that what you are doing is honest and steady, then let them go, too.

13.) See a fad for what it is. If you are selling zero, and suddenly you have lines waiting to buy, sales grow exponentially, then it's a fad. Some fads reach the end of their 'fad' phase and become regular product, (though most self-destruct.) Don't get caught up in the idea that this is a 'new' permanent situation. Rule of thumb, anything that grows faster than 20% steady growth is probably a fad, because there usually is no middle ground. It's either 10 to 20% for base product, or 100% growth or more for fad product. (The exception would be when you are adding a new product line, or expanding an old product line, but it's usually pretty easy to see what increases are due to expansion.)

14.) Try not to mistake a fad's success for your own success. Any moron can do it. You're not a genius.

15.) You don't control the timing. You can have it all figured out, when to get out, how much to extract -- but it won't be up to you. Look for more stuff than you need to show up when you least need it. Factor that in.

16). For god's sake, don't listen to the customers about fads. They never think their love for a fad will end. Remember, you have the experience in fads, they don't. Look at what they DO, not what they SAY. Never listen to what the competitors are doing -- there will be a six month information lag. Usually you'll find that if you are slowing, so were they -- despite what your customers tell you.

17.) You're inside a bubble. You have to use your imagination and logic to try to see outside the bubble. Enthusiasm is no substitute for thinking critically.

18.) Don't try to be first in, and/or last out. You'll constantly have the mirage of the 'next big thing' NBT dangling in front of you. But really, a fad is unmistakeable, and you'll usually be able to get into in time. It's seductive to try to get heavy supply of the initial stock -- if you could guess right, you could make a fortune. But by the time it is clearly a fad, that time has passed.

Every manufacturer will try to convince you that they have the NBT. Sometimes, even if they are right, you are like the guy who tramps a trail through the snow almost to the top of the mountain, where you lie gasping, while everyone else romps up the beaten trail and passes you. Let the other guy do the heavy tromping.

At the end of every fad, there's guys who will pass you, laughing at your conservative habits, but you'll usually get the last laugh as they go flying over the cliff.

19.) Don't get caught up emotionally in the thrill of the fad. Some customers will resent you for treating it like any other product, some competitors will gain business because they are fans, but in the end, you need to take a step back. If not, you'll be angry and disappointed when it all comes to an end. At the peak, competitors may even get nasty. You have to ignore it.

20.) Keep a bit of the fad product around until you see where it ends up. You'll be tempted to dump it when it drops 90%, but you have to remember, even the 10% that's left over is more than you had before the fad started. It's easy to get spoiled by a level of sales.

21.) Whatever you do, don't neglect your core business. The fad customers, in their enthusiasm, will clamor for you attention. There will be days when the fad money will make the base product lines look sickly. But don't ignore Joe over there, who buys 10.00 worth of comics a week; you're going to want him around when the fad ends. Try to add a fad product without subtracting from the regular product.

22.) Watch out for special services that fad customers ask for; such as special nights, or reserved rooms, or tournaments, or whatever. These usually work great during the golden age, not so great during the mature phase, and are absolute disasters during the downturn (require time, space and money, without the customers feeling like they need to buy your product for it.) Don't promise anything you can't live with.

23.) Don't try to be all things to all people. You'll be tempted to carry every size, shape and color, all reference books, all accoutrement's -- after all, the chain store are only carrying the best-sellers. You can distinguish yourself by having everything. It is what everyone will tell you to do. DON'T believe it.

Do the opposite. If a service or product isn't making money, drop it. Carry the best sellers at as close to the mass market price as you can, but don't try to match or beat them. Once the mass market enters your fad, you won't win. No amount of service or selection will win out. No amount of appealing to the customers loyalty will work. Be hard headed about it.

This is counter to everything I've ever read about how to compete with Walmart, etc. By all means carry more than Walmart, but don't try to do everything. By your very nature, a smaller store, you'll be able to provide more knowledge and service. But keep your ordering within bounds.

24). I mentioned this above, but it bears fleshing out. When a fad starts to die, don't be tempted to lower prices to bribe your customer into staying. You'd be better off lowering your orders and raising your prices -- at least you'll make money on the smaller level of sales instead of losing money on higher levels of sales.

25.) Every fad is similar in outline, (more or less), but different in the details. I say more or less, because every fad seems to have at least one quirk different from the last, which can negate all experience. It's easy to get caught up in playing out what you think you should have done with the last fad. Still, experience counts.

26.) It isn't a tragedy if you miss a fad completely. Fads almost always end up with as many negatives as positives, money lost and money gained. They often just cancel each other out, so that all that hard work and risk is for basically nothing. If you enter a fad, and don't do it correctly, it could end up costing you your business. All in all, I've enjoyed my none-fad years more, and profited more, than the heady fad years.

I could go on and on. 27 years of ups and downs. I've no doubt lost 90% of readers by this point anyway.

I've kept a business journal through most of that, so I could probably put 100 entries without duplicating too much. Hell, there's probably a book worth of material, if I fleshed it out with examples. Punch it up into once of those useless business aphorism books.

1 comment:

jessefelder said...

"If you try to compete with idiots, that makes you an idiot, too."

Reminds me of a classic Warren Buffett quote (paraphrasing): "in a commodity business, it's hard to be any smarter than your dumbest competitor."

Great minds think alike. ;)