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The McDonald’s model

Always look for ways to make more sales to more customers.

Losing sight of what business you’re really in has been the undoing of many SOHO operations. A corollary to this business mistake is expanding into new markets prematurely or with inadequate funding, which can cause bankruptcy and liquidation. These kinds of blunders can usually be traced to management or ownership that’s out of touch with customers. Even mature operations that have achieved some level of success can fall victim to this hubris, proving another of Farace’s Laws: Failure is easy; success is hard.

One reason there’s a McDonald’s on every street corner in America and not a Ruth’s Chris Steak House is that Ray Kroc wanted to sell lots of products to lots of buyers. The average diner isn’t going to eat filet mignon for lunch each week, but no matter what the economic climate may be, he or she can afford a hamburger. Many entrepreneurs ignore this reality when they fall prey to “carriage trade” envy. They do this by disregarding one of the oldest business realties: the customer income pyramid. The higher the potential spending by any group of potential clients, the smaller their numbers.

Many operations make this mistake of chasing the big dollars and ignoring smaller sales that are available in greater numbers. When competing for the tip of the pyramid, the competition is small but fierce, and often against entrenched businesses that hold sway in the market because of political and social connections to the buyers. I know of one small business owner who dumped most of her customers because she was embarrassed to admit to her peers that she was serving less prestigious clientele. When her business floundered, she desperately tried to get these customers back, because she was more embarrassed about being broke. It took her three years to rebuild her client base back to the level that she destroyed in a few months by simply cutting these customers loose.

If you’re already catering to the carriage trade, try expanding into the mass market. One of the best ways to test the waters is to create a subsidiary that is separately funded. You can watch it grow and track its profitability. One photography studio I know specialized in Fortune 500 clients, but created a school photography division with a separate staff. It provided recession-proof income. When tight economic times caused cutbacks by corporate clients, the school division boomed and eventually became more successful than its parent. Ray Kroc, it seemed, was right.

Before competing outside your normal area of expertise, however, try to maximize the customer base you already have. Make sure you provide your customers with the products and services they need, and look for complementary sales. Cross-selling is a concept at least as old as when “Professor” Harold Hill, in “The Music Man,” sold trombones and then, of course, band uniforms to the youth of River City, Iowa.

In business, change in inevitable, but whatever changes you make in the product and services you offer, never lose sight of that original client base that helped build your operation in the first place. They are far more loyal than you think.

Contributing Editor Joe Farace, the author of more than 1100 magazine articles and 23 books, enjoys a Big Mac every now and then but has never dined at Ruth’s Chris Steak House.

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