How Much of Our EOM Behavior is Fear of Loss?

4.75 minute read

Phoenix

As Entrepreneur Owner-Managers (EOMs) build our businesses, one massive uncertainty we face is the number of decisions about the proliferation of marketing and selling channels—wholesale, online, retail, catalogue, big box, boutique, branded, private label, others.  One major driving force in the growth of some businesses over the last ten years has been their decision to sell to—or concentrate in—online customers like Amazon, or in the big box retail channel.

Some otherwise cautious Owner-Managers have been seduced by the sheer volume and attractive growth rates of the dominant online or big box retail channel as customers for their businesses.  We have observed some who, working for years to build volume with small independent customers, become intoxicated at the thought of how easy it is to sell to one customer with millions of website visits or thousands of stores.  The customers often boast of their ability to easily double the volume of your business in six months to a year.

In the beginning, everything is great.  But over time, Owner-Managers find themselves making more and more impactful decisions not on the basis of increasing revenue from the big box customer, but from fear of losing it.  As the big box or dominant online customer becomes an increasing proportion of total sales, EOMs find themselves agreeing to demands that they would never have dreamed of agreeing to from a normal sized customer: line reviews that everyone knows result in never ending price declines, threats of taking the business offshore, “contributions” to advertising, providing selling help in customer stores, providing consignment inventory, and ultimately, extending credit terms far beyond normal industry terms.  And all this just before the big box customer or dominant online retailer (under severe consumer price pressure themselves) hires a consulting firm, undergoes some re-engineering, and decides to downsize the number of suppliers it works with!

As Nobel prize winners Dan Kahneman and separately Dick Thaler so convincingly proved over twenty years ago, we Owner-Managers consistently will take on more risk to avoid an increasingly probable loss than we will in expectation of gain.  And so there is our entrepreneurial business owner, now with one dominant customer who is dictating product, delivery, quality, price, terms, and conditions.  Increasingly fearful of losing that now dominant customer, and  having expanded their capacity and fixed costs to accommodate them, the EOM continues unhappily down that road, trying desperately to increase sales to other customers, only to capitulate to the (increasingly unreasonable) concentrated customer demands again and again.

At that point, the Owner-Manager’s choices have limited their opportunity for an enterprise value capture (capital gain) transaction as both strategic acquirers and private equity groups (and their banks) understand and have scar tissue from the danger of investing in companies with that kind of customer concentration. Our friends/clients experiences have shown us that it is impossible for entrepreneurial companies to overcome the sheer scale differences when dominant online, or big box retailers become your most highly concentrated customer.

What I Am Watching

First Man (2018), a newly released Steven Spielberg film about the 1960’s decade long race to the moon. Neil Armstrong is the protagonist, portrayed as a scholarly, stoic, uber-rational astronaut who, through a combination of good luck, bad luck, and temperament, was chosen to lead the first lunar landing mission.

My take away from this engaging movie:

1. Wow, it is monumentally powerful to set big goals—10X goals not 10% goals.
2. How it is relatively easy to bring about big change in organizations in crisis, compared to bringing about change in “successful” organizations (or people). NASA was shocked, paralyzed by Sputnik, and then again by the Soviets having the first spacewalk. They questioned their own relevance, took every challenge and every setback personally.
3. What a monumental decade the 60’s were. Where were you when Armstrong’s foot touched the surface of the moon?

Energy Creation

I had the fun of participating in the annual get together of The Genius Networkat the Arizona Biltmore in Phoenix last week, an event curated by Joe Polish.Successful business owners from a wide variety of domains got together for acouple of days to thinkabout themes impacting their businesses, their families,and theirlives. I am a huge fan of peer-to-peer networks and this one is noexception.What I took away from this two-day get together—more than the speakers, morethan the venue, more than thethemes, more than anything else—was just howthisself-describedgroup of EOM “outsiders,”independent thinkers, contrarians,were overjoyed with the positive energy of being with each other (otheroutsiders, independent thinkers, contrarians)! It was asif they thirsted for beingwith other Owner-Managers, andactuallygotsome cognitive acceleration fromit. Since who you are as person is determined partly by the group you are with,this group was unique fuel for most of us. This was an environment whereweEOMs could contribute, collaborate, and create.