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David Brown

Why Warren Buffett Places So Much Trust in Emotional Currency — And How Your Store Can Get It

It’s time to create a “moat” around your prices.

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HE’S LONG BEEN CONSIDERED America’s foremost investment guru, and given the returns achieved by his company, Berkshire Hathaway, it’s easy to see why. Understanding what Buffett considers to be a good business can shed light on how to improve your own business strength — to put, as he calls it, “a moat” around it to ward competition away.

Hearing his theory on business value is well worth doing, whether it’s his annual Berkshire Hathaway meeting or other snippets of advice the media shy guru may drop. It’s his take on business value from a commission investigating the financial crisis back in 2009 that recently caught my attention.

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When asked about his investment in the ratings agency Moody’s, Buffett had the following to say:
“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.”

Buffett went on to discuss his belief that good management can’t save a bad business, but a good business can continue no matter what management does.

Moody’s represented a case in point. Because of their duopoly with Standard and Poor’s as the benchmark of rating agencies, they effectively had a business with a moat around it. Even if a competitor came in offering ratings at half the price, both Moody’s and Standard and Poor’s had created a business that would not suffer. Price increases or decreases would make no difference.

In a jewelry industry where pricing competition often seems to be the only thing that customers are concerned about, it raises the question, “Can a jeweler successfully build a pricing moat around what they offer?” Moody’s and Standard and Poor’s perform a task that others can do but no one else can do it with the prestige of having their name attached — and that makes all the difference.

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On the face of it, it may seem difficult to achieve this level of power when selling a commodity that can be purchased elsewhere — yet jewelry is an emotional buy. By definition, you should also be able to achieve an emotional moat around the association of your name to the process. Tiffany has achieved this — however, is what they are offering any different to what you or other jewelers able to provide? Does the customer gain any form of tangible benefit, or is it a feeling based on emotion?

Just because it’s intangible doesn’t mean it’s not real. The ability to increase prices and have your customers accept it because you are the only feasible option is priceless — the number one thing Buffett considers when investing.

If it’s worthwhile for Mr. Buffett to consider it for his major investments, it’s worth you considering for yours.

 

David Brown is president of the Edge Retail Academy, a force in jewelry industry business consulting, sell-through data and vendor solutions. David and his team are dedicated to providing business owners with information and strategies to improve sales and profits. Reach him at [email protected]

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