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There is a moment in my life I will never forget...
I was watching 50 Cent, the famous rapper, on an interview on TV. He was wearing a suit and dressed like a businessman - not a rapper or a drug dealer (contrary to his brand). The interviewer was marvelling at 50's business acumen and his successes outside of music. There are two parts of the interview that will stay with me forever:
- 50 Cent made a huge profit selling "Vitamin Water". From what I understood in the interview, he was a Venture Capitalist on the deal and sold the company for around $300 Million dollars to Coca Cola. 50-cent chose Vitamin water because it had the same mark-up as crack cocaine (his first business as a child)
- When the interviewer asked about the economic recession, 50 cent replied "recession? what recession? Where I come from, there is always a recession... The recession is a middle class problem, not one for the rich or the poor."
When 50 cent said those words, they had a striking effect on me that changed the way I thought about business.
I had always known that there were only two places you wanted to be in the market if you want to be successful and sustainable.
- Be at the top, the luxury level, have the highest margins. OR
- Be at the bottom, have the lowest price and win on volume.
Any market is an assortment of prices, values and products. What I look for as an entrepreneur is MARKET PRESSURE.
I want to know where the pressure points are in the market.
For example, I live in Winnipeg right now and we have a shortage of rental units. This shortage is caused by the government who has put such strict regulations on land lords that developers and investors have taken their money elsewhere. Consequently, we have 500 vacant rental units in the whole city with a population between 750,000 and 800,000 people. The average household income is slightly lower than other cities and the purchasing power is usually around $30,000-$50,000 for most renters.
This means that if you have a rental unit under $1,000, you will have a line up of people applying to rent it because there is far too many people at bottom of the market. These people have no purchasing power and are fighting to get in. There are limited options at the bottom and it's EASY to make a sale.
This same principal is why slum lords make so much money. Slum lords set their rents so low that there is always a line of renters and they never repair anything because they know they will always have customers. Their customers are on social assistance or another form of welfare and the revenue comes directly from the government, who is the most stable customer around. This is what it is like to be at the bottom of the market, there is NO SUCH THING AS A RECESSION. Slum lords are at one of the most stable pressure points in the market because they are the bottom. The bottom always has lots of customers because many customers are cheap and just want the basic, bare minimum product. Other examples of recession proof "bottom market" businesses are McDonalds and Wal-Mart. Many customers only go to those two establishments because of the price.
In contrast to the bottom of the market, is the top of the market. The top of the market is often called "luxury" and reserved for those who can pay. Donald Trump, when he built Trump Tower decades ago, chose to build the most luxurious amazing apartments in Manhattan. These units were so stunning that the most wealthy luxury clients in the world would compete just to live in the iconic Trump Tower. In Real Estate, Donald Trump caters to the global elite who do not care what they pay for goods and services as long as they have the best in the world. For Entrepreneurs who sell to the top of the market, money is not an issue for their customers because luxury clients will pay any price just to be the best.
When I used to work at an internet company that sold Luxury Hotel rooms in 2008, we would always have middle class tire-kickers phoning in "trying to get a bargain because there was a recession". I had to remind these people daily that "in luxury products, there is never a recession and that luxury products only ever offer modest discounts (if at all). Customers will pay full price because they want the best. When you are at the top in the market THERE IS NO RECESSION. Luxury clients will always pay premiums to have the best, money is not an issue for these people, as long as the product is the best.
But between the TOP of the market and the BOTTOM of the market is "no man's land"... also known as the MIDDLE.
I absolutely hate being in the middle of the market because this is where recessions destroy businesses and entrepreneurs.
Consumers at the middle of the market are usually middle class people, who have jobs, bills to pay, credit card debts, car loans, mortgages, piano lessons, hockey for the kids, ballet, once a year vacation, savings for retirement, rainy day funds and still like to eat lunch at a restaurant 3-5 times a week.
These people are usually loaded down with so much debt and liability that they are walking a tight rope. If they make a mistake in their budget or lose $100 to an emergency, they suddenly have to cancel their trip to mexico...
If you are the mexican hoping to sell the vacation your middle class friend, you are out of luck and have just lost a price sensitive customer who can no longer afford your product.
The middle market people are extremely price sensitive, every single sway in the economy shakes them and they drop like flies when things get really bad.
What's worse about selling to them is that they have enough purchasing power to be choosey, but not enough to be luxury. It's hard to determine what they want and they are mobile enough to be fickle with you as a customer.
There is lots of loyalty at the top, as long as you are the best.
There is lots of loyalty at the bottom, as long as you are the cheapest.
There is NO loyalty in "no man's land" and it is a savage place to be.
Whenever I look at a business, design one or analyze one, I always want it to be at the TOP or the BOTTOM of the market. The middle is the scariest place to be.
Recessions can wipe out the middle in a heartbeat, especially since the middle class are an endangered species. If your customers are wiped out, so are you.
It's my policy to avoid marketing to the middle, because that is where all the problems are for two reasons:
- They are price sensitive enough to be fickle with the bottom
- Do not have the purchasing power to have luxury at the top
They float between the top and the bottom and land wherever they feel like.
The top of the bottom operates on the emotion of WANT... The bottom of the market operates on the emotion of NEED...
I always want my customer to either NEED or WANT me. In the middle, your clients neither NEED or WANT you and this is a huge threat to your business.
In my mind, there is no such thing as a recession because I always focus on the top or the bottom of the market and let other people take the risk of the middle.
Although I may look like a "risk taking" entrepreneur, I am actually extremely risk adverse and like to bet on "sure things". By focusing on the right pressure points in the market, and executing your businesses properly with attention to detail, there is no reason why your business cannot become recession proof.
Where do you usually choose to play in the market?
Thanks for reading,
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