In my first entry, I mentioned certain trends were looming:
- Renewed focus on core competencies; retailers abandoning manufacturing, manufacturers leaving retail
- A return to traditional relationships; relying on partnerships with sales reps and retail
- Accountability: increased responsibility and professionalism (better, not bigger)
I closed the entry with this paragraph, the topic of today’s entry:
Do you know what it all boils down to? It’s trust. Trust and confidence. More worrisome than a reduction in consumer confidence is diminished confidence among business partners… trust is based on credibility. In this tightening market, you may not have money but you must assume the responsibility of developing credibility no matter how unpopular it may make you (me).
The issue of trust will become increasingly important, here’s one example. Competition is going to become fierce. You’ll have to be legal in all respects. If licensing is required in your state (NY NJ CA), you and your contractors must have a license. If not, well, what could happen if you get a little press and a competitor knows you’re not using a licensed contractor or you don’t have a license either? In a manner of speaking, you do have an unfair advantage so a complaint is valid, repugnant though it may be. Do you have an RN number? It’s back to that whole professional means better not bigger thing.
Charles Green says this about making choices amid increasing complexity:
…we give up freedom of choice in return for more efficient use of our time. We do it with trust. Branding is the corporate version of trust. Rather than analyze every brand of bottled water, every version of jeans, or every make and model of HD-TV, we abdicate our freedom to do so in return for the security of a brand name. We trust Sony, or Coke, or Amazon, to make acceptably acceptable selections for us—so are freed to make other decisions.
This is not an argument for branding so don’t get sidetracked. Do you understand the concept of transaction costs? It is exactly as it sounds, the cost of acquisition specific to the transaction itself. A transaction cost could be duty paid on imports or the time it takes you to research which products to buy or the cost of going to get them from the store or market. Transaction costs can be the fees you pay an attorney to draw up a contract for you. Green is saying we save money through lower transaction costs by buying from vendors who have our trust.
Green explains that auto manufacturers (for example) used to make their own tires until the transaction costs of hiring a subcontractor or buying them outright became lower than the cost of making the tires internally. Lowered costs is what drove a lot of outsourcing in all industries including our own. However, manufacturers are still quick to select a contractor based on unit costs when transaction costs have dramatically increased; one estimate says US transaction costs exceed 50% of GDP. Green continues:
The more technically and globally integrated we get, the more freedom of choice we get. But at some point, freedom of choice becomes overwhelming. If I want to make and sell jeans, I probably have dozens (hundreds? thousands?) of ways to contract the work out. Past some point, I don’t want more options—I want someone I can trust to make that decision for me. In other words, I’ll give up freedom in return for lower transaction costs. The currency of that exchange is trust.
Retailers are nothing if not rational and will also give up freedom of choice in return for the lowest (transaction) cost of their time. Increasingly, retailers will not care if you are the best designer to ever draw breath; you’re an unknown quantity. They will make the trade off between innovation to buy boring but tried and true. If you don’t have any way of establishing trust, you must build it. This is the major reason I say that you will not only continue to need sales reps, you will need better ones. You will need reps who have a good reputation themselves, renting their influence for a fee. Complicating matters, more retailers are going out of business themselves meaning they’re not willing to assume risks. With more of them going under, there’s more product for them to pick from than ever. So the question becomes, how do you build trust with a rep? That requires professionalism (better, not bigger). It means making deliveries when you say you will. It means paying commissions on time. And yes, I know a lot of you are selling consumer direct or intend to but unless you’re a veritable lean manufacturer (only one of you that I know of is), that scale won’t play out for long. This stage of your enterprise should be used to learn the ropes and professionalize for the next step of selling wholesale should you chose to take it.
Sadly, many people think that contracts with their partners such as NDAs, production, licensing and the like are effective ways to control the costs of transactions in the event relationships go awry. They are not. Contracts subvert relationships; contracts are actually the antithesis of trust -and that’s the topic for next time.