Competing against giants

Southwest Airlines, probably the best-run airline in history, was born out the idea that they could offer a better alternative to driving for short haul routes. Indeed, Southwest was created not to compete against airlines but against cars, and as a result Southwest did many things differently. Life as a startup wasn’t easy for Southwest – the large airlines took them all the way to the Supreme Court to prevent them from flying. And when that didn’t work every major airline launched a competing service, yet they failed miserably.

The lesson for CEOs is that you can venture successfully into the land of giants as long as you’re not planning to fight on their terms. CPO Commerce is a company that heeded this lesson. Started in 2004 by founder and CEO Rob Tolleson, CPO is an online retailer of power tools (drills, saws, sanders, etc.) that carries all major brands such as DeWALT, Makita and Bosch. CPO’s website has all the expected features of a good e-tailer: product pictures, descriptions and reviews; competitive prices with the promotion du jour; recommendations for add-ons and a streamlined check-out process.

From a business standpoint however, these features hardly make CPO unique. Power tool retailing is very competitive, with gross margins rarely exceeding 20%. So how can CPO succeed against Home Depot, Lowe’s or Amazon’s online stores? In the land of these giants, CPO has been named to Inc. Magazine’s prestigious list of fastest growing companies five years in a row, and they have already exceeded $100M in sales. They have also refused to fight on the giants’ terms.

One unusual aspect of CPO is that they offer not one, but rather 40+ different web stores, one for each brand they carry. Wouldn’t that be too complicated for visitors to figure out? To understand why this makes sense you must first understand what power tool users are really trying to accomplish. For example, let’s look at one large group of CPO’s customers that we may call ‘tool enthusiasts’. What are they trying to get done? Of course, they are value-oriented do-it-yourselfers who save money by building a closet shelf or repairing appliances. Just as importantly though, they are people who take great pride in completing a project and being able to say, “I did that.” They treasure their most expensive tools, and get satisfaction from how their tools help do the job effectively. Enthusiasts are brand-conscious when it comes to power tools and they usually purchase within the same brand, among other reasons because each manufacturer makes the batteries of cordless units interchangeable. Thus it is natural for tool enthusiasts to prefer a web store that is exclusive to their brand. This also makes CPO’s websites more personal and easier to navigate. Needless to say, manufacturers love CPO’s branded web store approach that reinforces their ‘brand integrity’ – and their attempt to lock tool enthusiasts into their brand.

As value-oriented consumers, tool enthusiasts are always looking for a good deal. Yet power tools don’t get heavily discounted since their margins are thin to begin with: retailers such as Home Depot will typically offer just four sales a year with discounts of 15%. CPO comes to the rescue by offering refurbished units, inspected by factory trained technicians and backed by full manufacturers’ warranties, at every day discounts that can exceed 30%. Tool enthusiasts, who will often wait months for the right project to ‘justify’ the expense of a power tool purchase, can get a great deal any day of the year through refurbished equipment. Once again, manufacturers are delighted that CPO satisfies consumers’ craving for a deal without resorting to destructive price wars, and also offers an outlet for their returns inventory. Customer Ryan A. comments, “This is my third purchase from CPO and I have been very satisfied all three times. Excellent delivery time, excellent price & the reconditioned tools looked and worked like new. A true value.” It’s a win-win all around, as CPO enjoys superior margins on refurbished product sales.

The classic manufacturer/retailer relationship is characterized by an ongoing tug-of-war for margin between the manufacturer’s sales organization and the retailer’s purchasing team. CPO has transformed the relationship to one of partnership by offering brand-exclusive websites and outlets for refurbished products. The significant amount of promotions on CPO’s web stores is evidence that manufacturers reciprocate. As CEO Tolleson puts it, “We’re not in the power tools business; we’re in the business of partnering with vendors to sell their distressed inventory.” Sound like Southwest?

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