• Sam Decker

Marginalizing Quality


Either I remember things tasting better when I was a kid, or their quality has gone down in the last 12-14 years.

Let’s assume the latter. I have two hypothesis why:

1) It’s difficult to sustain chain / franchise quality over time and geography. It requires a high level of excellence to do so (i.e. McDonald’s). 2) Or, competition = lower prices = lower margin = need to lower costs = potential lower quality.

I’m not sure which is the case with Tony Roma’s, but let’s take a closer look at lowering product costs = lowering product quality.

This same thing happened to the closest pizza restaurant to our house. One day the best-tasting pizza tasted like cardboard. End of relationship!

Here’s the scenario:

1) Bob launches Restaurant, focuses on a high quality product at a fair price. 2) Well-capitalized competition comes to town and finds a cheaper way to serve customers or cheaper food costs (volume, supply chain, etc.) They lower costs and prices. 3) Bob needs to lower prices to continue growth. He doesn’t have cheaper business model or capitalization to scale, so he tries to maintain his menu with a lower cost, and lower quality, food supply. Bob hopes the customer doesn’t notice. 4) Customer does notice, and never comes back. Negative word of mouth is 11x. Bob’s brand is unrepairable. Bob’s restaurant will be closed shortly.

It doesn’t need to be this way. Suggestions for businesses faced with this situation:

• Choose what your company and product stands for and don’t waiver. Save costs elsewhere, especially in areas less valued by customers (ex. Costco warehouse model) • Sell customers up to other profit pools of margin. Customers may come in on a base product that requires lower gross margins, but once you have them in the door, sell them up and across (ex: Baseball stadium, Hotmail, Car Wash) • Continuously innovate in two areas: new products/services that have margin and cheaper ways to do business so you don’t sacrifice quality. (ex: Dell, Starbucks)