I Heart Local Businesses, Part 1

Bad economic cycles can be scary times for small businesses. Consumers are spending less, which reverberates throughout the supply chain, especially one that isn’t maximized. When consumers can be persuaded to part with their money, it may only be for very steep discounts (which carries its own problems – more on that in another post) or for something they feel comfortable purchasing either because it is a safe purchase or there is an attractive consumer surplus — i.e., the price paid is less than the value the consumer has for the product. Lab Notes is undertaking a two-part look at how small, local businesses can use these factors to out compete large, national chains during difficult times.

First, the scenario. Times are tough and you’re a small business fiercely competing for a rapidly declining number of consumer dollars. What do you do? For the sake of argument, let’s dismiss discounting because we don’t believe it is appropriate or sustainable. That leaves you appealing to safety and/or consumer surplus. Let’s say a customer is interviewing contractors for a complete master bathroom renovation that will cost $50,000. One estimate is from a national chain that has been around for over 100 years and the other is from a local business that has been around since 1998.

Here are the key factors for evaluating the national chain:

The Supplier of Your Supplier

If you are a business owner, no doubt you are familiar with your suppliers.  But how familiar are you with your supplier’s supplier?  This may seem unrealistic in some cases, because some supply chains can be Biblically long.  Ore begat the mining company begat refiners, and on and on until you get those lovely copper pans in your kitchen pantry.  So, more precisely, what is the link (or links) in your supply chain that have the most significant impact on price and/or availability of key inputs?