It is a point of some pride to Bob Baker and Jim Watson that none of the trucks picking up and delivering air freight around the country bears their company's name. Nor do any airplanes carry the Skyway Freight Systems Inc. logo. Baker and Watson are also pleased to point out that they have never made a sales call on, sent a bill to, or even spoken with most of the nearly 16,000 businesses that ship via Skyway. In fact, Skyway has only about 100 paying clients -- and a marketing strategy that is astonishingly simple in a market that is incredibly complex.
Skyway, a young company in a low-technology business, has hitched its future to the rapidly growing but chaotic world of high-technology industries, which, for all their esoteric glamour, consume prodigious quantities of everyday goods and services like freight transportation. But selling into fast-growing markets by itself doesn't assure profits: Ask the suppliers of bankrupt Osborne Computer Corp. Even identifying potential customers among businesses that quickly emerge (and sometimes just as quickly submerge again) in the volatile high-tech environment can drive a business to distraction. Watson and Baker, however, have evolved a marketing strategy that buffers Skyway from the ups and downs of the high-tech world. Not incidentally, the strategy also gives extraordinary leverage to Skyway's limited selling resources.
Watson, a 1969 graduate of the United States Naval Academy, and Baker, who destroyed his draft card in the '60s, met in Los Angeles in 1976 when both were consultants to an air-freight company that was reorganizing under Chapter XI. Watson knew sales, having spent several years selling IBM computers to transportation companies. Baker knew the operational side of transportation. They became mutual admirers.
"Bob," says Watson, "had a reputation for being able to price a transportation transaction and ensure that there was always something left for the bottom line."
"Jim," says Baker, "can market anything."
In 1977, as soon as the air-freight company had been turned around, they left as partners with an idea they wanted to try. Originally, the idea had nothing in particular to do with fast-growth, high-tech industries.
Frederick W. Smith's Federal Express Corp., then only three years old, had created practically a new industry -- overnight air-freight delivery -- and competitors were popping up everywhere. Skyway wasn't going to be one of them, not directly anyway. Instead, Skyway would offer shippers an alternative: two-, three-, or five-day service in exchange for prices as much as 75% lower than the overnight rates. "We figured," says Watson, "that in the majority of cases, people don't really need things overnight."
Skyway could charge less by taking advantage of changes occurring in the air-passenger business. Airlines, which experience their heaviest traffic during the daylight hours, had begun using wide-bodies -- 747s, L-1011s, DC-10s -- with huge, and often unfilled, cargo bays beneath the passenger cabins. "Here you had all this new freight capacity flying during the daytime, and nobody wanted to use it," Baker says, "because everybody was convinced they needed overnight [freight] service. So we could go to the airlines and say, 'Hey, give us a reason to put freight on these airplanes.' They would have to give us a rate. That was our original concept."
On the strength of this idea, embodied in a 300-page business plan, Watson and Baker easily raised $100,000 from seven private investors in exchange for 35% of Skyway's stock. That was all the capital theyy thought they would need. Then they hit the road selling and . . . nothing happened. In four months, Skyway lost $200,000 -- twice its capital -- and survived only on trade credit.
Two things, they found, were wrong with their approach. One they figured out almost immediately.
"Customers," Watson says, "were still convinced that they needed everything overnight. We were selling a totally new concept, and I was spending all my time educating people in three-hour sales calls."
But Skyway had to sell something, soon. So the partners changed their pitch. Never mind the concept, they decided, sell price. "We'd tell a guy paying $1 a pound that we'll do it for 25 cents. He had to listen to us. If he didn't, his boss would."
The shift in sales tactics worked. Within a few months, Skyway was in the black, surviving if not thriving. Still, every new shipper that signed on for the service had to be sold, and Skyway's marketing strategy consisted simply of keeping Watson on the road as much as possible.
During one two-week East Coast trip, he made cold calls in New York City's garment district, climbing the stairs to Seventh Avenue lofts. There, as he recalls, guys smoking short, unattractive cigars asked how much he would kick back to them if they put in a word for him with the apparel manufacturers who bought the buttons, collars, and laces the loft factories made. "I didn't sell anything," says Watson, "but I learned something. I learned that it was the buyer, not the guy in the loft, who made the decision. So I flew home and called on apparel manufacturers in Los Angeles, and the light bulb came on." The second problem with Skyway's sales approach had suddenly become clear. "The whole [air freight] industry is doing it wrong," Watson concluded."They're selling to the wrong people."
The right people were buyers, not vendors. Buyers, usually, pay the freight charges on shipments inbound to them, so buyers have a greater interest than their vendors in controlling freight costs. Consequently, Skyway discovered a receptive market among Los Angeles apparel makers. After hearing Watson's pitch, a fair number instructed their suppliers -- primarily textile mills in the Northeast and in North Carolina -- to call Skyway when they had a shipment ready. Business picked up modestly, and Skyway developed something of a specialty as an apparel freight service.
The discovery that it was the buyers who were the appropriate sales contacts was an important development in the evolution of Skyway's marketing strategy. But the most important changes were yet to come. First, Skyway needed a distinctive product. It was still selling the same thing -- air freight service -- that everyone else was selling, just a slower and cheaper model. Second, Skyway needed another market, one that offered more growth potential than the rag trade. "We had a very bad receivables problem," Baker says, "because when things get bad in that industry, companies don't slow down, they go out of business. We knew we couldn't grow with these people, that we had to branch out." But the new market had to wait for the new product to take shape.
Now that they had found the right people to sell to, Watson and Baker began to learn that price wasn't the only thing these customers wanted to buy. "They would listen to price. If you had a lower price, you could get an appointment every time. But," says Watson, "they were also people who lived and died with delivery of product -- bolts of cloth from the mill. If the material didn't get in and they couldn't do the run and make the skirt, then they didn't make the ad at Macy's or Bloomingdale's, and they didn't sell."
In short, it wasn't overnight delivery that mattered so much as the ability to schedule the delivery, to know that the material would reach the factory when it was needed. And that meant knowing when it was shipped from the mill, how it was shipped, and where it was at any given time. Because Skyway was managing all inbound air freight for its customers, it could easily collect and pass on this information as part of its service. A conventional air-freight carrier, which might have only one shipment for a Los Angeles manufacturer, would have no way of knowing where that manufacturer's other shipments, consigned to other carriers, might be. At Skyway, an employee kept the status of each shipment up-to-date on a clipboard, and buyers could use a toll-free line to find out where their freight was and when it would arrive. The phone line and clipboard were the first components of a now fully computerized in-bound freight-management system that has finally given Skyway a distinctive service product.
One last bell had yet to ring. After nearly two years of modest revenue growth, largely from customers in the apparel industry, Watson and Baker still spent most of their time selling. Once Delta Air Lines Inc. ran a promotional special: For $369 each, two passengers could fly in one week to any city Delta served. The only stipulation was that they couldn't visit the same city twice, except to make a connection. Baker and Watson made five calls a day in five cities, and, because so many of Delta's flights originate in Atlanta, they found themselves every night in Atlanta's Hartsfield International Airport waiting to make their next connection. "I've never been that tired," Watson says. "We came home and said to each other, 'We're not doing something right."
Then they learned that Motorola Inc., a major maker of semiconductors and electronics products, was inviting bids on its inbound air-freight business. "Bob and I went in there and asked, 'Like, how many vendors do you buy from?' Honest to God, we didn't know. This was our first visit to an electronics business. They said, 'Well, we have about 2,000 vendors.' Boy, the bells went off. If we close this sale, we get 2,000 new accounts. Two thousand new companies will one day start shipping with us, and we have invested one sales effort."
They did close the Motorola sale, and finally, all the essential elements of their marketing concept had become clear: Skyway could acquire the air-freight business of tens of thousands of small-but-growing shippers by selling its service to a few hundred major high-tech corporations.
After the Motorola sale, Skyway grew, and grew up, quickly. From $1.5 million in 1978, the year before the Motorola contract, the company's revenues rose to $3.4 million in 1980, the first full year of the contract, and to $13 mfllion last year. The pretax profit margin, according to Baker, is about 10% of sales. Aside from its $100,000 initial capitalization and a bank loan to finance the purchase of its first computer in 1979, Skyway has financed its growth internally. The nature of its business, and the hardheadedness of its founders, have kept Sky'way's capital-expansion costs low.
When the partners started the company, their only corporate asset was an overcoat. "It was our East Coast coat," says Watson. "Whoever was taking the trip wore the coat." Keeping capital expenses and fixed costs at a minimum continues to be part of the business strategy. They can control costs because Skyway, unlike most transportation companies, manages only inbound, not outbound, freight. The distinction is important.
Conventional freight companies serving the national market must be prepared to pick up and deliver anywhere in the country, anytime. Skyway picks up only where its customers have suppliers, and it delivers only to its customers' plants. And it does this, for the most part, with someone else's capital-equipment. "If," says Baker, "Jim doesn't get me one ounce of freight in Birmingham, Alabama, tonight, it isn't going to cost me anything. If he does, I call my contract trucker, and he picks it up. Now I've got an expense, but I've also got the revenue."
On the other end, Skyway knows that all its deliveries are going to customers easily served from one of its five leased terminals. It knows that because Watson won't sell a new customer that can't be served from an existing terminal, and Baker opens a new terminal only when a market (Denver, for example, which is now under consideration) promises to provide enough new business to support the added expense. "Bob has a sermon," Watson says, "which goes, 'Goddamn it, let's not incur costs until we've incurred revenues." Eventually, the company may have as many as 12 terminals, from which it can serve 80% of the market. The other 20%, Baker says, he doesn't want: too expensive. Sorry, North Dakota.
This philosophy helps to keep the company's fixed costs at a low 30% to 35% of the total, and it helps keep the business simple. "In Chicago," says Baker, "we have a trucker who started out with two trucks, and he was one of the drivers. Now he's got a big terminal and maybe 14 trucks. . . . We were a big part of his growth, and obviously he was part of ours. . . . We've spawned quite a few successful trucking operations. We put a guy in our San Jose terminal and said, 'Go to it. We'll be your customer, your base to start out with. Go get yourself some financing.' He did, and now his customers include United Air Lines, Delta, and Skyway. . . . We did not want to make that capital investment but saw nothing wrong with providing the room for his growth, letting him live in-house with us."
"We can be creative," Baker adds, "because we're not spending management time and energy worrying about, Are the trucks ready to go? Do they have fuel? Has the driver been arrested? Did we get heisted in Manhattan?"
The operational guts of the company is Skyway Central, a 24-hour-a-day control center in Santa Cruz, Calif., a beach resort midway between San Francisco and Monterey. When a customer's vendor has materials to ship, he calls Skyway's toll-free number. From that point on, Skyway Central personnel direct and track the shipment, building a computerized record as the material is picked up by the local trucker, held temporarily in his warehouse or delivered immediately to the airline, loaded aboard the plane, unloaded, and delivered. A truck driver, airline-freight handler, or dispatcher anywhere along the line who goes out of his way to solve a problem or meet a deadline gets a 10-pound tin of chocolate-chip cookies and a thank-you note from someone at Skyway Central within a couple of days.
Baker and Watson no longer think of the company as being in the air-freight business. Rather, they see Skyway becoming part of its customers' inventory management systems, providing just-in-time delivery of production materials.
Traffic managers at customer plants can get computer printouts each morning listing incoming material and delivery times for the day. Later, another printout lists what has been delivered and to whom, so that "lost" shipments aren't eventually discovered on some branch-plant loading dock.
Customers can give Skyway Central standing or ad hoc instructions for handling specific materials -- for example, always ship blue widgets at the five-day economy rate -- thus giving the buyer, not the vendor, control over shipping mode and cost. Customers can tell Skyway when they want material, thereby preventing vendors from shipping (and billing) early. It is a flexible system that can be shape and changed easily. Skyway is firmly imbedded in the materials-handling systems of such companies as Apple Computer, Pratt & Whitney Group, and Diablo Systems.
Cunningly included in the service is a powerful protective device for Skyway itself. Its customers' vendors have instructions to use Skyway exclusively when shipping by air. Skyway will monitor compliance with these instructions by auditing customers' freight invoices for them. Any non-Skyway bills are pulled, and a letter goes out from Skyway (but over the customer's signature) chastising the guilty vendor and informing him that his account will be debited by the difference between the freight charge he incurred on behalf of the buyer and Skyway's (usually) lower fee. "We average 90% compliance," says Baker. "If they don't do it they pay, and people get tired of paying."
Skyway's next step will be the obvious one. Baker and Watson will apply the same marketing principles to surface freight that have made Skyway a success in the air. Their customers will be the same -- large manufacturers with many small suppliers. "If you're buying something and you're our customer," says Baker, "we want to be the service company to see that it gets from the vendor to you. Don't tell me what mode to use. Just tell me when you want it."
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