Starting a new business in any economy is fraught with challenges. While a recession introduces an entrepreneur to a host of risky new hurdles and headaches, Wharton marketing professor Leonard Lodish says that with forethought, discipline and planning, a successful business can take root even in the most difficult times.
According to Lodish, about 60 percent of companies that go out of business owe their failure to poor marketing. “It could be that not enough people want to buy the product or service,” he says. That happened when Global Star and Iridium came up with satellite powered phones about 15 years ago with a price point that was way beyond what consumers were willing to pay. “They lost billions,” says Lodish. “They thought, ‘this is cool. I’d want it.’ They were enamored by their own technology, but they didn’t think about people not being able to pay for it.”
And that was in a strong economy. A recession gives a new business even less wiggle room when it comes to consumers’ disposable income. That’s why today, more than ever, it’s critical to know the market before investing time, money and effort in a new venture.
One example of a successful start-up in a less than stellar economy, says Lodish, is diapers.com. “One of my students started it in 2005. It was recently sold to Amazon for $550 million,” he says. When the company started out, its owners wanted to be certain that the concept was feasible and that people would buy from them. So, after completing an analysis that gave them confidence that they could still turn a profit, they offered free shipping and overnight delivery. “For their first shipments they actually went to Costco and Walmart,” says Lodish. “They bought the diapers retail and manually shipped the orders overnight at a loss so they could satisfy their early customers. When they saw that the model worked, they expanded the operation, began to buy wholesale and struck deals with distribution centers to ensure overnight delivery to most areas. “Now they’re shipping tens of thousands of orders, and a big part of their new customers are referrals from existing customers.”
By talking with prospective customers, the owners of diapers.com got a good handle on consumers’ priorities, such as prompt delivery and personalized service. “They have people who get on the phone if you have a problem,” says Lodish. “The customer service representatives are there for one thing: to delight the customer. They fix the problems. They make things better.
“My daughter-in-law started shopping from them before she knew I was involved, when her first son was six months old,” recalls Lodish. “Then, a month before her second child was due, she ordered diapers for newborns. But she didn't read the product reviews on the diapers.com Web site that said this particular manufacturer’s weren’t good for newborns. She called diapers.com and they recommended another brand that was a better fit for newborns. They accepted her order back even though it wasn't their fault.” She was so happy that she told her friends, says Lodish. Before long, they too became loyal diaper.com customers.
In addition to making sure that people will actually buy what you are selling, and topping that with excellent customer service, Lodish advises selling something that's going to be a source of sustainable competitive advantage so it's difficult for a competitor to imitate you. He says that diapers.com now covers 70 percent of the U.S. overnight. “That's one reason Amazon bought them. That's hard for a competitor to reproduce.”