Competitor's failure is an opportunity

On the day Roi Parker heard the unexpected news that the Iatria Day Spa chain was closing, he saw an opportunity to do good and possibly benefit his business as well.

Parker started spreading the word that his Raleigh salon would honor Iatria's outstanding gift certificates at full face value.

He had no idea that he was committing to giving away as much as $300,000 in services.

"We don't sell many gift certificates," said Parker, whose R.O.I. Salon is on Oberlin Road in Raleigh. "I wanted to make things right. ... People are asking, 'What are you thinking?'"

Parker was thinking like a survivor.

Only 70 percent of new businesses make it to their two-year anniversary, according to the Small Business Administration. Only half last five years. The past year has been particularly brutal for small businesses. In the third quarter, more than 25million small businesses nationally filed for bankruptcy, according to an analysis by Equifax. More are expected if the holiday shopping season is slow.

Whether large or small, businesses should have a plan for situations in which a competitor goes out of business. The right plan can be an opportunity to gain market share.

But it's a maneuver that must be handled delicately.

"When someone else goes out of business, it certainly is an opportunity, but it doesn't mean it's a slam dunk," said Houston retail analyst Jack Plunkett. "You have to work for their business."

Indeed. Parker said it will take him into 2010 to see all of the Iatria customers with gift certificates - something he is committed to do even though he has no guarantee that any of them will become repeat customers.

"We won't know the outcome - if they come back to us - until the gift cards are worked off," he said. "We have people with $1,300 gift cards. ... A few people have said 'I saw what you did' or 'My friend came, and I want to try you guys out,' but beyond that, we just don't know yet if we will benefit at all."

For businesses that get caught in a similar situation, here's some good advice: Don't dance on your competitor's grave.

Customers may have emotional connections to the now-closed business or the people who worked there, and taking a celebratory tone will turn people away, said Thomas Hollmann, assistant professor of marketing at N.C. State University.

Instead, Hollmann proposes one of two courses of action.

One or the other

First, you could see whether the closing business will sell its mailing list or customer database.

"You could send a letter saying, 'We've acquired the customer database from so and so, and we'd be happy to offer the existing customers something,'" he said. "But it has to be something where it's very up front. Don't be gleeful about it."

Or, business owners can increase their own marketing efforts - but without ever mentioning their closed competitors.

"When a business closes, people go into a search phase," Hollmann said. "Now they are thinking, 'I've got to go somewhere else,' and so they start looking."

But trying to straddle the line between the two strategies is not a smart idea.

"It's just too hard to pull off well," Hollmann said.

Jeff Buck has learned that lesson the hard way during his eight years as a Cold Stone Creamery franchisee.

"Years ago, if an ice cream store closed, I would have probably gone and put a sign up on their door, like 'You can go to Cold Stone Creamery,'" he said. "I think we actually did that in a couple of instances. Nowadays I think the biggest thing we can do is provide a good product and good service ourselves."

So when the Marble Slab Creamery down the street from Buck's Cary store closed earlier this year, he notified fans of the company's Facebook page that his store would take all Marble Slab coupons and gift certificates. And he notified his staff to be extra aware of any customers who came in with those items and to make sure to thank them for coming in.

Buck said his less-aggressive strategy has helped business. Sales at the Cary store rose 10 percent immediately after the Marble Slab closing.

"I gained common sense and professionalism," Buck said. "It's not OK to rejoice about a competitor closing. That's somebody's business. That's somebody's dream. And if I walked up to my business that was closed [and saw a flier from my competitor in the window], it would be like getting hit in the face."

On the macro level

Large chains struggle with the same issues as smaller businesses when a competitor folds.

Earlier this year, when bankrupt electronics retailer Circuit City closed its remaining stores, other companies in the ultra-competitive home electronics business were forced to act quickly.

"We gave it a lot of thought," said Jeff Pearson, spokesman for hhgregg. "The first thing is that we didn't want to assume that just because Circuit City went out of business, automatically people would choose hhgregg. We can't believe that people are just going to show up."

That's the right strategy, Plunkett said.

"You have to give people a compelling reason to come do business with you, or they're going to go buy online or go to the town next door where they can get it cheaper," he said.

For customers who are caught in the middle when a store closes, it is all about the service.

Kelly Lynch of Raleigh was stuck with $150 in gift certificates when Iatria closed and took them to Radiance Med Spa, where she got a facial with her credit. Radiance did a good-enough job on her first visit to woo her back, she said.

"I now know of this place, and if I go for another facial any time soon, I will return to [the same technician]. I definitely would go back to her."

And in the end, it's that kind of reaction that makes Roi Parker's spur-of-the-moment decision to take Iatria's gift certificates a smart business move, Hollmann said.

"Whenever you're trying to acquire customers, it costs you money," he said. "It might cost him $20 out of pocket to honor a $100 gift certificate, but you might have paid $50 to get that customer another way."

For his part, Parker said the opportunity to introduce so many potential customers to his salon already has paid dividends, if not for his bank account yet, then for his heart.

"One lady came in, and she was in tears," he said. "She had a gift certificate for $265. And $265 is a lot of money, but then it's not. This woman was so upset because her husband had saved up for so long to save that $265. And she was not upset about not getting the service. It was about the fact that her husband didn't get to see the benefit of it. We got to give it back to them. That one story alone is worth the $300,000 we've got to pay."

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