Is There A Good Way To Fire Your Customers?

| About: RadioShack Corporation (RSH)
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During the Super Bowl, Radio Shack (NYSE:RSH) ran a (highly praised) 30 second ad about how they're abandoning their 1980s image to unveil a "new" Radio Shack. The ad featured 80s celebrities like Mary Lou Retton, Hulk Hogan, CHiPster Erik Estrada, Alf, the California Raisins and "Cliff" from Cheers. In other words, they spent about $4 million to proudly announce they are firing some of their old customers to better appeal to new ones. And as part of the firing, they'll be closing one store out of every nine.

The company certainly faces major challenges. Their original business of selling parts to hobbyists and tinkerers has gone away. The competition in selling electronics (from Best Buy (NYSE:BBY), Target (NYSE:TGT), Wal-Mart (NYSE:WMT) and others) is fierce. And, perhaps worst of all, the convenience of a neighborhood storefront where you make a quick stop is being destroyed by the depth of inventory and price-cutting of the seemingly unstoppable destroyer of retail, the Bezos Empire (Amazon (NASDAQ:AMZN)).

The intended makeover reminds me of J.C. Penney (NYSE:JCP), whose new CEO fired all their old customers in a (vain) hope to win over new, up-market ones. When it failed, JCP fired him, brought back their old CEO and desperately tried to woo back their (once-loyal) customers.

You're Fired!

This sort of decision has two key points. First, the company feels it needs to attract a type of customer they are currently not reaching. In the JCP case, it seems to be because they are higher margin, whereas for Radio Shack, it's because there are more of them.

But is there every a good time to fire your customers? Usually the firms that do it are desperate and are stuck between two bad choices. In these two examples, I was fired twice. In Radio Shack's case, I get it - the niche of people who own soldering irons is too small to support 4500 (soon 4000) stores. Besides, the company has already eliminated much of the inventory that once attracted us to the store, with only a fraction of the parts that it once had.

For JCP, I thought they made a major mistake, and apparently the board agreed. The value clothing segment is a large one - growing due to declining incomes over the past five years - and JCP held a strong position here. There's a lot to work with and this market segment isn't going away.

My previous favorite clothing retailer was Mervyn's before they died five years ago. Now I use Costco (NASDAQ:COST) when I can - because of convenience, price and quality - but their selection means I rarely can. The selection at Target is limited, the quality at Wal-Mart (WMT) is suspect, and so for most of my clothing I value having a full-service clothing retailer like JCP (particularly given I'm a nonstandard size). The only reason I don't use it more is that (unlike Mervyn's) it's in the larger mall rather than more convenient strip mall.

Death of Freemium?

Finally, this week I was fired a third time. Instead of an iconic 20th century Main Street retailer, this was a (me too) 21st century Silicon Valley internet services company. The cause was also different: instead of declining customers and margins, this was a company with a freemium business model that never worked to begin with.

The company is SugarSync, a DropBox imitator that notified customers December 10 it was terminating the free part of its freemium business model, effective February 8. Although the early software was buggy, I loved the service because it worked with my hard disk organization rather than (as with Dropbox and later Google Drive) forcing me to adapt to its model. Sugar's decision meant that I'll have to use Dropbox or Drive and work around their limitations. Not the end of the world. I forgot about it entirely until I got this week's email, urging (imploring) me to convert to paid membership.

I don't envy them: people are addicted to these services but (like the rest of the Internet) not paying for them. In a recent class of about thirty 21-39 year-old graduate students (at an elite biotech institute), I asked how many of them use Dropbox. Every hand went up. When I asked how many paid, not a single one of them raised their hand.

It appears Sugar is hoping to segment their market and serve those who need more than they (or their competitors) provide free. After having raised $60+M in venture and (now) debt financing, my guess is that the need to get to positive cash flow has become urgent. Given how crowded the segment is - and how little traction they got - I wouldn't be optimistic. The only hope is that other companies give up on free and condition people to pay, but it's hard to imagine either Google (NASDAQ:GOOG) or Microsoft (NASDAQ:MSFT) pulling back from freemium entirely. And with Box recently offering 50gb free (vs. 2gb for Dropbox) the trend seems to be in the other direction.

At the same time, it calls into question the viability of the freemium business model, which always depended on a non-zero upgrade rate. I certainly wouldn't want to start a company nowadays with a business plan that assumed freemium would generate enough revenue to pay the bills (let alone the investors).

Disclosure: No positions