by Peter A. Arthur-Smith, Leadership Solutions, Inc.®

“There are the Premium Buyers, Value-Added Buyers and Commodity Buyers:” an important organizational feature of LSI’s Enlightened Leadership

    Danny Meyer, the highly successful restaurant impresario, headquartered out of Union Square Café, New York, showed us the way again in a recent Wall Street Journal article with his name as the title – August 2015. He defines the three tiers in his world as “chains,” “fine-casual,” and “fine-dining.” We can quickly determine that chains are for commodity eaters; fine-casual for value-added diners; and fine-dining for premium diners.

He has deliberately pitched  his latest, growing group of restaurants – Shake Shack – toward the fine-casual market. His Union Square Café, Gramercy Tavern and other top restaurants are firmly established with fine-dining customers. He started Shake Shack some years later as a hot-dog cart to support efforts in promoting  Union and Madison Square Parks in their “River-to-River” business improvement districts. That Shake Shack cart has now burst into 70 restaurants in nine countries.

Potentially, of course, he could initiate some other basic commodity chain of restaurants to serve the casual marketplace. That would create another challenge, since, done right, he would need to introduce another tier of restaurant staff and executives who enjoy serving very affordable meals with customers to match. The typical chain is good at pursuing that formula.

    This writer’s wife is a veterinarian and he often talks with her about the three-tier market that has emerged within veterinary medicine. More recently there has been the emergence of veterinary chains like VCA  and Banfield, who have bought up hundreds of practices and converted them into catering to commodity-minded clients: animal owners who just seek basic veterinary services, like shots, flea and tick treatments, basic care, and animal food and goodies.

On the other hand, there are small practice owners and animal hospitals that provide good quality animal medicine along  with the personalized attention of  veterinarians and  technicians. These portray the value-added tier. Ultimately there’s a fast growing tier of specialized emergency clinics and animal hospitals, which provide sophisticated and more expensive treatments for those premium clients who can afford them.

You can turn to other consumer driven industries like cruise lines, where again they distinguish between mass-market  cruise packages at one end and premium cruises, like National Geographic, catering to the fine-cruising travelers, at the other.  Gasoline firms pursue regular, super and premium customers at the pump. Food firms do something similar.

Such well proven practices can easily be followed in many manufacturing and service industries, but their executives don’t make these distinctions: much to their cost both in terms of potential lost opportunity and profitability. Probably their biggest conundrum is coming to terms with needing different tiers of staff to deal with associated tiers of customers. Serious restaurateurs, like Danny Meyer, would never consider using “chain” staff with “fine-dining” customers. They would go out of business very quickly.

A recent New York Times article, written by a former table-captain at New York fine-dining restaurant, wrote about a four-person service team – captain, sommelier, server and assistant server –  for each small group of tables. He also mentioned six food runners along with three managers to cover the restaurant. You just wouldn’t find that level of staffing in a chain-restaurant.

Equally he informed us about the high level  of training invested in his team at its three-star Michelin restaurant. He also related the climb from kitchen worker through assistant server, server and eventually table captain; with the likely high investment in both time and money to reach that point. Each level has its own exacting standards, which brings substantial returns to the owners when clientele are satisfied with both food and service.

Owners like Danny Meyer wouldn’t pursue such staffing and standards unless there were good returns on capital. Again, the New York Times author wrote about a ‘Chinese businessman at Table 43, who ordered a bottle of 1990 Krug and paid $1000, just like that,’ and  ‘…spending many nights delivering four or five-figure checks on silver trays.’ So there’s clearly lots of money to be made in fine-dining, if it’s done right.

As such restaurant’s show time and again, there are discerning customers out there, who are willing to pay top $  for quality service, food, drinks, attention and ambiance. This is where so many manufacturers and service providers can expand. However, they have to properly set out their stall to take full advantage of it. You can either expand vertically, by covering all three tiers, or horizontally by aiming to gobble up all customer possibilities within your given market tier.

But you are asking for trouble and limited gains if you try to mix the two… it’s not like having your cake and eating it, too. It’s unwise to pursue vertical and horizontal markets with the same teams – apples and oranges require different treatment. By mixing the two, the watering-down effect just waters down your returns. If you go to higher education colleges, you have different levels of faculty teaching undergrads, graduates and doctoral students. Universities have to go through tremendous vetting scenarios to prove they have the quality lecturers required for handling each level of students.

So, if companies or institutions decide to go vertically, they have to make three important moves:

» Customer definition – Make clear, sharp distinctions between your three tiers of customers; commodity-oriented, value-added and premium purchasers. Know who these people are in practical terms.

» Product-Service Value – You have to package three different categories of products-services to cater for the tastes and needs of these three tiers. Just as the gasoline, cigarette and wine companies do.

» Staff Development – You have to recruit and educate people who are simpatico – through personal values, interests and background – with their appointed customer tier. While there’s absolutely nothing wrong with servers who are happy to service McDonald’s customers, those same servers would be like a fishes-out-of-water with clients in a three-star Michelin restaurant. You have to be prepared to match like-with-like.

Many manufacturers and service companies would baulk at such distinctions, but they do at their own short-sighted loss. They could make far bigger returns by handling, say, premium and value-added customers, than pursuing hundreds or thousands of commodity buyers. The latter often requires tremendous energy, sweat and tears to take care of them.

To be fair, this can also be true of premium buyers, but, done right, the returns for the effort are significantly higher. The scale and scope of such an operation can also be  much more manageable, too, for the same amount of effort.

So, the choice is yours. Danny Meyers has proven what so many other clever marketers have proven; and he started out with a single quality restaurant 30 years ago. He’s obviously decided to stick with the fine-diners and fine-casual eaters for now, and has just completed a public offering for the latter…so expect to see a lot more Shake Shacks out there to meet the larger client group that goes with the middle-marketplace.

Furthermore, he’s capitalized on the most lucrative two parts of his market’s three-tier principle. But he has also done it through executives who match up with those market distinctions, rather than trying to unadvisedly kill more than one bird with one-stone…the latter being the short-sighted approach. We can tell you more.

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