descent // death spiral

Profit equals revenue minus expenses. To increase profits you can increase revenue, reduce expenses, or both. Any savvy business strives to be fiscally responsible and keep a close eye on expenses. However, it is possible to cut the wrong expenses and save money right into bankruptcy.

As a regular customer, I have a front row seat watching a formerly solid corner store / gas station implode under the management of new owners. It’s sad, but they are providing a nice case study on how to run a successful business right into the ground. Some things you might want to avoid doing in your own business:

Ask the long-time manager to take a 50% pay cut. Get a new manager willing to accept management responsibility for a shade over minimum wage.  Instead of paying staff well, “save” money by hiring and training new employees who lack the skills, experience, or options to command a living wage. Ignore the cost of excessively high turnover and horrendously poor customer service.

Assume employees are interchangeable and replaceable and treat them poorly. Refuse to realize that in a small community the your customers are friends and family of your employees. Don’t notice how a negative reputation is rapidly spreading throughout the area. Don’t keep shelves stocked, even when the items are clearly sitting in inventory in the back room.

Defer maintenance and repairs. Instead, just hang “out of order” signs on everything that doesn’t work.

Irritate your vendors by not paying them reliably and / or don’t restock key items to save a few dollars. For example: be the only gas station in the area going into the weekend without gas.

Create a noticeable drop in both the number of customers, the number of regular customers, and the sales per customer.

As sales and revenue drop at avalanche speed, accelerate your savings by cutting employee hours so you are perpetually understaffed, allowing more items to be out of stock, and perhaps becoming even slower to pay your vendors.

It’s a neat cycle: the more corners you cut to save money, the lower your customer service drops, the fewer the customers you have and the more corners you need to cut to save money. Repeat until annihilation.

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5 comments

  1. Broc,

    Sorry to hear that this is happening at a place you have been a regular customer. It looks like they are viewing employees as expenses rather than an investment. This is yet another example that shows how the type of employees that are hired and how they are managed (and how much they are paid) can be the difference between success and failure.

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    1. Greg, thanks for commenting. You are spot on. I find it curious that employees are seen as an expense without giving equal consideration to the costs of frustrated and lost customers (particularly in a limited market where you simply aren’t going to increase the potential customer pool). For some reason, some owners/managers (I hesitate to use the term “leaders”) view people as completely equal and interchangeable, despite all evidence to the contrary.

      I suppose the good news is that the businesses that really get the value of their people have a built in and hard to duplicate competitive advantage.

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  2. Wow. When I read this, I immediately thought of a great little hotel that I used to stay at. The hotel was bought out by and everything went downhill from there. Little annoyances crept up more often, the people that used to greet with me with a smile and by name all left and pretty soon, any loyalty I felt to the people that worked there was gone, because … well, they all left before I did.

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    1. Hi Laurie,
      The other day you were pointing out the little differences that lead to great customer service and it seems the opposite is also true: little differences can lead to a negative experience. It doesn’t have to be terrible service that convinces us to go elsewhere. Sometimes all it takes is the “little annoyances” to destroy our loyalty and go elsewhere. Unfortunate.

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