At first glance, it doesn't look like a wise move. In the next two months - in the midst of a recession - Toronto-based entrepreneur Andy Wilkin is opening a coffee roasting company that will supply beans to restaurants and cafes. The goal: bringing premium coffee to his customers.
Over all, Mr. Wilkin's idea doesn't sound original. After all, Toronto is bursting with similar businesses, and the 28-year-old acknowledges competition is stiff.
"There are lots of coffee roasters like us, but I think where we stand out is we're trying to raise the bar for the cafes and restaurants we work with," he says.
Any company that wants to succeed in today's tough economic environment will have to do more than raise the bar, however. Entrepreneurs must strongly demonstrate their uniqueness and prowess in both product and service.
Introducing competition-beating variations into a business can provide a much needed lift, but it is not without risks, says Saibal Ray, co-director of the master in manufacturing management program at Montreal's McGill University. As an example, he cites the McDonald's fast food chain.
MORE CAN BE LESS
McDonald's started out as a focused company with little variety and speedy service, Dr. Ray notes.
As the fast-food market became more crowded, however, it began adding items to its menu. Eventually the number of offerings grew so numerous that the company found itself with new, added costs, while service slowed at the counter as customers grappled with more choices.
"Always, more differentiation is better for revenue, but more differentiation increases your costs," Dr. Ray says. "People don't take that into consideration. They only think about revenue."
He advises weighing those costs against revenue when creating the differences that will make a business stand out. In the coffee-roasting world, for example, a plan to offer premium varieties might create sourcing problems.
Mr. Wilkin seems to have found a balance, however. His company, to be called Te Aro Roasted, after the coffee capital of New Zealand, where Mr. Wilkin is from, will roast beans using a hot-air Sivetz machine instead of a standard drum roaster.
HOT AIR AN ADVANTAGE
Among North American roasters, only about 10 per cent use hot-air machines, which allow for accurate digital readouts of the bean temperature. (Users of standard roasters tend to rely on bean samples and their own judgment.)
The result is a smoother, cleaner tasting cup of coffee. The hot-air machines have also been described as an "affordable investment for the new roaster retailer" in the Tea & Coffee Trade Journal.
Mr. Wilkin is not just selling beans, though.
He plans to back them up with service. His employees will bring expertise in equipment and show restaurateurs how to brew the best possible cup of coffee. They will also supply everything from espresso machines to milk-steaming jugs.
"We'll provide that extra service, where we can help them train their staff and produce the finest coffee," he says.
Mr. Wilkin's strategic differences originate in large part from Tedde van Gelderen, the president of Toronto-based Akendi, which helps launch businesses and fine-tunes their products and services.
Akendi assisted Mr. Wilkin with his brand identity, logo, signage and website, and also helped the coffee roaster understand what he would need to do to differentiate his business.
"Coffee, as we all know, is a very mainstream product, and there's huge competition going on out there," Mr. van Gelderen says. "So what they were looking for was to stand out, not only from a design perspective and getting their packaging right, but also looking for a more integrated experience."
To rise above the rest, entrepreneurs need to ensure that everything in the business works together in a seamless manner, Mr. van Gelderen says. Asking a company who their customer is may be the starting point, but it's also the easy part, he says. He also wants to know what customers will do with the product and how they will interact with the company, its physical space and its website.
All this detailed research led to another difference that Mr. van Gelderen says will set Mr. Wilkin's company apart from the others.
The beans come in large, unwieldy plastic bags. Rather than allow restaurants to throw away the bags - a common practice - Mr. Wilkin's company will recycle them. According to Mr. van Gelderen, that creates another differentiator, because not only does the company look green and responsible, but it also shows the restaurants that Mr. Wilkin's firm cares about their business.
SERVICE IS KEY
Dr. Ray approves of such an approach. Retail especially benefits from differentiation in service rather than product, he says.
That was the idea behind Starbucks, he notes, which made buying a cup of coffee an experience and created an ambience that set it apart from other coffee retailers.
Mr. van Gelderen says it's all in the details. An entrepreneur has hit it right when the customer feels comforted and aided during the "journey" of using the product or service.
He recalls that while renting a car recently, the counter person introduced himself to Mr. van Gelderen.
"That's a little thing, a little detail, but for me, I still remember it. It's been three months ago, but I remember that was different. It would make me go there again."
Be different, but not too different
When coming up with product variations, delay the differences as far down the development line as possible.
For example, in the world of mobile phones, the hardware is essentially the same. At the end point, the software and packaging are what set the products apart, says Saibal Ray, co-director of the master in manufacturing management program at Montreal's McGill University.
"You make a valuable box-type of thing, and at the end you can put whatever bells and whistles you want," he notes.
Product differentiation carries risks because of hidden complexities such as sourcing, inventory management and speed-of-service costs. Dr. Ray points to Starbucks, where counter staff have to ask customers so many questions about product choices that serving speed has dropped, causing some customers at the end of the line to leave.
Businesses should aim to create differences, but they can only go so far, he says. A coffee company, for example, might decide to add a particular exotic blend. But the business has to find a source and might soon find itself trying to control too many factors.
"At certain points the differentiation creates more and more problems," Dr. Ray says. "Most of the companies have seen that a certain level of product differentiation is good, but after that it becomes a drain on their effort and efficiency."
To reduce risks and costs, he advises small businesses to create difference through service offerings rather than through products.
What you can do to make your company stand out:
TALK TO YOUR CUSTOMERS
Find how out how you're doing, and whether what you're providing is fitting their needs. Alan Middleton, professor of marketing at York University's Schulich School of Business, advises examining every aspect of your business, from delivery times to cost.
COME UP WITH A 'BONUS'
Think through the value-added extras you can pass along to customers, things that will be perceived as a bonus.
Try to avoid cutting prices to increase volume. In doing so you risk giving away future, as well as short-term, earnings, Dr. Middleton says. "The whole point of differentiation is that you're providing something your competitors aren't and therefore they cannot directly compare [on]price with you."
FIND A PARTNER
Look for a partner or someone you can co-operate with.
Dr. Middleton gives the example of the Escalator Handrail Co., based in Oshawa, Ont., which supplies parts to large escalator and elevator companies. It offered to manage all the purchases of small items such as handrails and ball bearings for the companies and turned itself into a buying group for five or six items.
GET THE CUSTOMER INVOLVED
Sit down with clients and work on projects together. The earlier this happens in the design process, the better chance you have to create a point of difference while simultaneously strengthening your relationship with the customer.
SET REALISTIC PRIORITIES
Don't ever note 10 things to do because they'll never get done, Dr. Middleton says, invoking what he calls the golden rule of business.
Find the three factors in your company that offer the best opportunity for improving your current position.