I think there are different kinds of bike shops that appeal to different clientele. You have the recreational rider (adult), kids, mountain bikers, roadies, hard core roadies, etc. You have to offer things that will appeal to the different groups and you have to be able to talk on different levels.
There are 3 shops I frequent the most, and I go to them for different reasons. The shop I bought my bike from is a high-end only bike shop. They'll do work on any bike, but they only sell high-end gear. Calfee, Serotta, Chris King, Orbea, etc. Think lots of carbon-fiber and titanium. The two guys that run it are older, and experienced road cyclists (at the national level). You can ask them advice about training, performance, and parts, and you’ll get exceptionally good information. I had a guy in Santa Barbara tell me once that no one could fit me to a bike better than one of the guys at this shop which directly contributed to me purchasing from them. Their clothing selection sucks (I’m fairly certain that cycling clothing is a bitch to have on hand because it doesn’t sell a lot), and their prices are a bit higher. These are the guys I take my bike to for maintenance though, and I never worry about the work they’ll do on my Calfee. Most important is that these guys run a group ride every Saturday morning. 3 rides actually. 1 is for beginners, and two are for more experienced riders with a short ride and long ride that mostly just differs in the amount of time you’ll be on the bike. Basically if you give them your email address, they email you the ride profile on Thursday and you can ride with them if you like. The ride starts and ends at the shop, and from what I’ve seen, it’s brilliant business. They get to know their customers, and should any kind of mechanical issue occur on the ride, they’re there to help, and when the customer gets back to the shop, they might just buy something.

They also attend (and race in) a lot of the local bike races, so they’re fairly well known. They’re happy to order you almost anything you want, but… at a higher price than I can find elsewhere. So basically I bought my bike there, and I get service there, but I generally don’t shop there otherwise.
The second shop I go to is a more general shop, with a better all around selection. They sell Trek and Specialized as well as a few other brands, and at the high-end they have the Trek high-end stuff and Colnagos. This shop has a great selection of clothes, water bottles, sunglasses, bike lighting, and many other accessories. You can probably figure out why I shop here… The owner is a nice guy who’s reasonably knowledgable about cycling in general but the rest of his staff frankly sucks. I’ve never taken a bike there to get service, and I probably wouldn’t. I like the shop for the selection, but I don’t know that I’d want to buy a bike there. (I might if I were picking up a Trek and was going to do the sizing myself based on my sizing on my Calfee).
The third shop I go to is the K-mart of bike shops… Supergo. They’re in Santa Monica and they do most of their business on their low prices and high volume sales. They have some high-end stuff, but generally it’s the same price as anything else. They seem to have a lot of clothes, but none I really like. I generally go there for two things. Endurox R4 (my recovery drink) and Accelerade (my on the bike drink).
Quick answers to your other questions:
* What do you look for in a bike shop?
See above.
* What are your expectations when it comes to sales? selection? service?
Knowledge, experience, and someone who's tried more than just one type of bike, grupo, wheel, etc.
* Why do you like your favorite shop?
Don't have specifically a favorite, but see above.
* What do you dislike about other shops you've visited but don't generally return to (unless it's an emergency)?
Shitty, piss poor selection. Arrogant staff, incompetent staff. In other words, if you hire a 16-22 year old, teach him to say, "I don't know, but I'll find out." when a customer asks a question. The ones you keep working for you are the ones that only have to ask you a given question once.
* Do you generally buy mail order or at a shop?
Mostly dependent upon the item. If it's something I can't install myself, I'll buy it in a store for sure. Almost all clothes I buy in the store. If I find a ridiculously lower price online, I'll consider it.
* Do you work on your own bike? If so what is the limit to what you can do without assistance (e.g., installing headsets / cranksets / derailleurs, truing wheels, etc)?
I only do basic maintenance and cleaning on my bike, and that's about it. I'll clean my chain myself, and adjust my front derailleur. I've done bartape, of course changing tires and tubes, seats, seatposts and brake adjustment. Anything more than that and the bike generally goes in the shop.
Regarding Mplor/Siji's comments on the level of attentiveness they want from a bike shop owner, I'd say that comes from establishing and getting to know your customer base. Try to learn your customer's names and faces and get to know them a bit. Until you have a customer base, a lot of people who wander in the store are just looking and probably don't realize a bike shop sells more than just bikes.
