Sol Price is a legend in the retail business. Price founded one of the first discount retailers, FedMart, in the 1950s, and then later the pioneer warehouse club Price Club, which he later sold to Costco, a business started by his former protege Jim Sinegal. Price’s innovations would go on to change the retail landscape dramatically and permanently. Costco now does $120 billion in sales and Sam’s Club, owned by Wal-Mart, does about $60 billion. Adding in other smaller operations, warehouse retailing is at least a $200 billion business in the United States alone.
Price innovated in several ways: Membership fees, way fewer product SKUs in stock, much larger sizes, extremely low profit margins bordering on break-even, low employee turnover and a lean labor model. But these were all mere symptoms of his overall stance: Price’s fundamental innovation was his approach to the customer relationship.
Whereas most retailers saw customers as adversaries, bodies to be sold to, Price saw the world differently. He felt he was on the customers’ side. He felt his job as a retailer was to become the customer’s greatest friend and advocate, and in return, the customer would pledge his loyalty back. He understood that trust given is trust earned.
The idea was very simple: See the world through the eyes of the customer. His son Robert, influential in his own right, describes Price’s unusual attitude (which is still uncommon) in a book called Sol Price: Retail Revolutionary & Social Innovator:
Sol’s experience as an attorney representing clients, and his own moral code, became a foundational feature of the FedMart business. Sol described his business approach as “the professional fiduciary relationship between us (the retailer) and the member (the customer). We felt we were representing the customer. You had a duty to be very, very honest and fair with them and so we avoided sales and advertising. We have in effect said that the best advertising is by our members…the unsolicited testimonial of the satisfied customer.”
This fiduciary relationship with the customer was similar to the Golden Rule; the way Sol put it—if you want to be successful in retail, just put yourself in the place of a cranky, demanding customer. In other words, see your business through the eyes of the customer.
Clearly, Sol Price followed Tussman’s dictum to understand the world and act accordingly, and understood the value of a win-win relationship. The success of Costco in his wake, and the continued loyalty of its customers in the face of a rapidly changing retail landscape, is a testimony to the value of his attitude.
Price had a few simple tenets in running FedMart and Price Club, which Sinegal would later adopt at Costco:
- Provide the best possible value to the customers, excellent quality products at the lowest possible prices.
- Pay good wages and provide good benefits, including health insurance to employees.
- Maintain honest business practices.
- Make money for investors.
Regarding the last point, it was clearly important to Price to make money, and if you look at Costco today, the model is obviously profitable. But it’s not that profitable. Costco makes solid returns but not incredible ones. And that is by choice.
Price — and Sinegal by extension — wanted a win-win relationship whereby he made his investors a reasonable return on their capital and the customer got a better deal than they could find elsewhere, while employees were paid well enough and treated well enough that they wouldn’t want to leave. In his words, “If you recognize you’re really a fiduciary for the customer, you shouldn’t make too much money.” This model has been tough to beat.
Price was so hardcore about his fairness philosophy that he wouldn’t even engage in loss-leader pricing, which is common in retail. Have you ever found yourself saying How can they make any money at this price? Well, they may not be — products are frequently priced below cost to induce you to buy other products at a more inflated profit margin. But Price wouldn’t do this: It meant he was selling some portion of his goods at inflated prices to make up for the loss leaders, and that he would not abide.
His customer advocacy went so far that if Price’s competitors were selling a competing product below cost, Price did one of the most unusual things I’ve ever heard: He put up signs telling his customers to go shop there.
In this way and many others, the life of Sol Price reinforces the truth of Munger’s philosophy for living a more effective life: “Take a simple idea, and take it seriously.”
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Still Interested? Check out the book in its entirety.