The Real Cost of Customer Service
As a result of Direct Tire's fanatical attention to customers, its margins are twice the industry average. Here's how owner Barry Steinberg calculates the returnon his investment
If you want to see where business is heading, spend some time over at Direct Tire Sales. It's easy to find. Take the Massachusetts Turnpike west out of Boston for a few miles, get off at the Watertown exit, and then just bear right. In less than a quarter of a mile, the street will become clogged with dozens of parked cars -- Porsches, Mercedeses, Ferraris, BMWs. It will feel as though you're driving through the pack at Le Mans. You're in the right place.
But before you head into the relatively small (10,000-square-foot) store, take a second look at all those cars. You'll notice that the fancy wheels are outnumbered by the likes of Toyota Corollas, aging Honda Civics, and Datsuns built long before their manufacturer ever dreamed of calling them Nissan. Direct Tire's president, Barry Steinberg, who drives a rare Porsche 930 Turbo, is defensive about those older cars sitting outside his 12-by-12-foot office. He calls their owners "Joe and Mary Sixpack, you know, the couple that's living paycheck to paycheck," and makes it clear that they don't represent his target market. Direct Tire, he insists, is a "high-performance shop," one that does brake and alignment work in addition to selling tires.
And yet the older cars -- the most dilapidated one this day is a 1981 Chevy Impala with rust spots -- just keep on coming.
So what's bringing in the Sixpacks? Lord knows, it's not the price. On a typical day recently the Goodyear outlet down the street is selling tires for a Ford Taurus wagon for $50 to $100 apiece, while Direct Tire is charging $60 to $120. "Yeah, that's not surprising," says Steinberg, 45, who's been in the tire business his entire adult life. "On average we are consistently 10% or 12% higher than just about everybody."
No, the Sixpacks, just like everyone else, are responding to Steinberg's service. Need to buy some tires and be in and out in an hour? No problem. Direct Tire will schedule an appointment whenever it's convenient for you. Can't wait? No big deal. Take one of the company's seven loaners to work, and pick up your car on the way home. And what if those new tires blow out after 30,000 miles or you decide after a month that you flat out don't like them? No sweat. Steinberg guarantees the tires, as well as any service work his shop does -- forever.
This kind of customer service, as we all know, is anything but typical in the automotive business. Equally atypical is Direct Tire's 3% net margins -- twice the industry average -- on sales of $4 million for the fiscal year ended March 31. And that's the point: in the coming years, providing atypical customer service is what it's going to take to succeed.
Of course, you've heard that before. We all know that customer service is the business battleground of the 1990s. Nowhere is the competition likely to be sharper or the stakes higher than in retailing. There are simply too many stores that are too much alike. "By the end of this decade more than half of today's retailers will be out of business," concludes a recent study by Management Horizons, a division of Price Waterhouse. Smart shopkeepers like Barry Steinberg have long since reached similar conclusions on their own and have seen that customer service offers a way to survive.
It is, however, one thing to talk about the need for extraordinary customer service and quite another to provide it, especially if you're operating on a tight budget. Sooner or later, customer service comes down to decisions about how to spend money. Should you go all out decorating your waiting room, or would you be wiser to send your employees to a training course? Is it more important to buy a new piece of testing equipment or to carry enough inventory to meet your customers' every need? Can you afford to do it all? How do you know if the investment is paying off? Are we talking about taking a leap of faith here, or are there ways to measure the costs and the returns?
This is the great gray area of customer service, the part you haven't read about in Tom Peters's books -- or in INC. magazine, for that matter. By now you've heard a lot about the virtues of staying close to customers. You may even have bought the argument that service is the best way companies can differentiate themselves. But if customer service is such good business, shouldn't the benefits eventually show up in the numbers? And, if so, which numbers should you be looking at? How, in effect, can you calculate the return on your customer service investment?
The management gurus seldom talk about that. But Barry Steinberg does. He can tell you exactly what his brand of customer service costs him and how the investment pays off for Direct Tire. For Steinberg, service is not just a way to distinguish his shop from other tire stores. It's the most profitable way to run his business.
And he can prove it.* * *
When you enter Direct Tire, you pass under a banner that reads, We'll Fix It So It Brakes. It's a slogan that Steinberg wrote, and loves, though it provides barely a hint of what makes Direct Tire different from other automotive shops. The difference becomes more apparent as soon as you step inside. The waiting room is immaculate. The magazines on the rack are current, with titles ranging from Sports Illustrated and GQ to Vogue. The coffee is freshly brewed. There are windows in every wall, allowing you to watch Direct Tire's technicians as they work. Looking around, you notice that everyone is in uniform. Manager Jeffrey Orlinsky and the salespeople wear shirts and ties with a baseball-style jacket that carries the company logo; everyone else has on dark blue work pants and T-shirts with the company name and slogan. Even the way people address you is different. "I've never heard so many yes ma'ams and no ma'ams in my life," says one 40-year-old customer who has been going to Direct Tire for years.
It's been like this from the beginning. Steinberg says he always intended to have a store that would cater to people who take driving seriously, but he had no interest in owning a typical speed shop, with tires strewn about and pictures of healthy young ladies clad in next to nothing on the walls. Partly that was a matter of personal taste: spending time in a speed shop was not his idea of fun. But he also realized early on that he could use the environment of his shop to differentiate it from competitors. Indeed, he has done just that. The mere fact that women -- and today 40% of his customers are female -- feel comfortable visiting Direct Tire sets it apart.
But the ambience of the store is just one component of a much broader strategy. Simply put, Steinberg's goal is to turn everyone who enters his store into a repeat customer. Virtually everything that happens at Direct Tire is done with that objective in mind.
Now, it is not very difficult to fathom Steinberg's logic here or his motives. Anyone who's ever run a lemonade stand knows that loyal customers are the best kind. To some extent, their value is quantifiable. You don't have to be Albert Einstein to figure out that -- if your average sale is $100 -- a onetime customer represents $100 in revenues for your company, whereas someone who comes back 100 times represents $10,000.
The trick, of course, is to generate the kind of loyalty that keeps customers coming back. This is, in fact, the whole purpose -- and the true meaning -- of customer service. It goes well beyond smile schools, where employees learn to deal with aggrieved customers and to say please and thank you a lot. "Those warm, fuzzy things are certainly part of providing good service, but if customer service were a cake, they'd just be the icing," says Dallas car dealer Carl Sewell, who's been selling through service since 1972. "The real cake would be the systems that allow you to do the job right the first time."
Customers think about service in similar terms, says Leonard L. Berry, professor of retailing and marketing studies at Texas A&M. He has recently completed an exhaustive study of consumer expectations. His conclusion: customers want companies to do what they say they are going to do -- to keep the service promise.
This is something Steinberg has understood all along, and he has built his business accordingly. And, by viewing customer service in this light, Steinberg has found he's able to identify and measure exactly what he's spending on it and what Direct Tire is getting in return. In the process, he often winds up including costs that, on the surface, don't seem to be related to customer service at all.
Consider recruitment. Steinberg knows that -- to keep his service promise -- he needs the best mechanics and alignment specialists around. He doesn't even bother to advertise for them. "Want ads tend to attract people who are unemployed," he says. "I want people who already have a job." To find them, Steinberg does something virtually unheard of in his industry. He uses a headhunter.
His requirements are precise. He tells the recruiter he wants people with a minimum of two to three years' experience, so they know what they're doing, and he expects them to be certified in their specialty. "They can't have had five jobs in the last five years. I want people who are reliable. Ideally, they'll be married with a couple of kids. People with responsibilities are more dependable. And they have to be able to get along with both customers and their fellow employees."
It's not easy to find candidates who meet every condition on the checklist, but then again the headhunters are fairly compensated for their efforts. They earn a commission equal to 10% to 15% of the employee's first-year salary for placing a candidate. In most cases, that salary is substantially higher than it was at the employee's last job. As a rule, Steinberg pays his 27 employees 15% to 25% over scale. Since labor amounts to 28% of sales, Steinberg could cut expenses at least $168,000 just by paying the industry standard. He could also save the money he spends on headhunters' commissions -- about $4,000 per year -- by taking the usual approach to hiring. But he is committed to having reliable, well-qualified technicians, and that commitment costs him more than $172,000 per year.
Steinberg considers the money well spent. For one thing, good people make fewer mistakes, and mistakes cost money. For another, good people are more self-reliant, so he needs fewer supervisors. Beyond that he credits his approach with helping him build a reputation for doing the job right the first time. And besides, he notes, who would you rather have dealing with your customers? Someone who's smart and who understands what he's doing or someone who isn't? From that perspective, the $172,000 represents an investment in customer service, and Steinberg regards it as such.
He has a similar attitude toward equipment. Recently, for example, he bought a $24,000 machine that helps mechanics pinpoint a car's brake problems. Before, they would do a 10-minute visual inspection that could only spot worn brake pads and shoes. The new machine does that, plus it identifies alignment and hydraulic problems and prints out the diagnosis within 90 seconds. Steinberg says he wants the best equipment available. Not only does it allow him to improve the level of service Direct Tire offers, but it helps him attract the best technicians. His customers benefit both ways.
This approach even extends to inventory. Sitting in his office, Steinberg proudly shows off his customized software package that can tell him immediately what's in stock. That $48,000 system is another way of providing good service, he explains. On the one hand, it spares customers from having to wait while someone runs to the warehouse to check for a particular item. On the other, Direct Tire's salespeople use it to print receipts, speeding the checkout process.
The computer system also allows Direct Tire to take full advantage of its large inventory of uncommon tires. "See this," Steinberg says, pointing to the screen, "that's the code for a rear tire on a Porsche 928S. Call around. You'll find nobody has them in stock. I have 12. That one's for a Mercedes 560 SEC. I have 60 in six different brands -- nobody has that many." Steinberg says he could get by with $200,000 worth of inventory, but that would mean occasionally disappointing a customer. By increasing his inventory 20%, he almost always has what customers want. At 11% interest, the annual cost on the extra inventory is $4,400.
That, too, represents an investment in customer service. Like the software system, the testing equipment, the headhunter commissions, and the pay scale, it's part of Steinberg's effort to keep the service promise by making sure customers get what they come for. In Direct Tire's case, the service promise goes beyond tires and beyond brake and alignment work. For Steinberg has also promised customers an extraordinary level of convenience and comfort, and he is determined to keep that promise, too.
It's a little before 8:00 a.m. at Direct Tire and the customer, who works in nearby Waltham, is getting angry. He called ahead of time to make sure there would be no problem getting a ride to work while the store checked his car's alignment. But now, while the car sits on the lift, there is a problem. Bobby Binnall, who ferries passengers to and from work, has just called to say his car won't start -- he'll be there as soon as he can. Steinberg would be happy to give the customer one of his loaners, but all are spoken for. The customer begins to tap his foot.
"I called the local taxi company, and in five minutes they were here and took the guy over to his office. The cab fare was $17, but can you imagine how many people he's going to tell this story to? It was the best $17 I ever spent."
That, in a nutshell, describes Steinberg's approach to the other part of customer service -- the willingness to do whatever it takes to make the customer happy. If the customer had been forced to wait for Binnall, who showed up an hour later, Steinberg still could have said, "Hey, I provide better service than my competition. I offer people rides to work." And he would have been right. But instead of heralding Steinberg's service, the customer would have cursed it. He would have been promised the ride and then forced to wait an hour to get it. By calling the cab, Steinberg kept his promise. Moreover, he did it in a way that the customer will remember and talk about for a long time.
Such opportunities don't arise every day, but -- whether they do or not -- Steinberg goes out of his way to make Direct Tire a pleasant and convenient place to shop, and it costs him a lot more than $17. For example, he wants all his people to look professional, so he buys the clothes they wear at work, to the tune of $21,000 per year. He also spends $900 per year on magazines for the waiting room, and another $2,500 per year on fresh coffee and half-and-half.
Then there are the loaner cars. Direct Tire has seven Chevy compacts. By the time Steinberg adds up the monthly payments, maintenance, insurance, and the like, he figures each car costs him about $400 per month, for a total of $28,800 per year. And that's in addition to the $8 per hour he spends having Binnall drive customers around while their cars are in the shop.
It's a lot of money, but the effort does not go unappreciated. Direct Tire has been recognized by Boston magazine, for example, as one of the best auto repair shops in the area. Steinberg, for his part, does all he can to make sure customers notice. By having windows in his waiting room, for example, he lets customers see how his highly qualified technicians go about their jobs. Similarly, he does more than leave postage-paid customer comment cards in each car on which work has been completed; he personally calls every single person who complains. Nor is he content to have salespeople apologize to a customer who has been kept waiting for a repair that has taken longer than promised. Each of them is also empowered to knock a few bucks off the bill, which makes the apology seem more sincere.
But giving away money is the last thing Steinberg wants to do. This is, after all, a business he's running. The real secret of his success is to make customers pay for the service they receive, and he makes no bones about doing it. Sure, he'll keep that uncommon Porsche tire around, the one no other dealer has in stock, but you'll pay more to get it. On average, Steinberg makes a gross profit of 37.9%. The harder the tire is to find, the greater his profit. So while his gross margin on an everyday tire is 33.3%, it's 47.4% on the one for that high-performance Porsche.
This approach to pricing is consistent. There are few bargains at Direct Tire, but customers don't seem to mind. On the contrary, Steinberg has found that -- if you keep your promises -- customers are more than willing to pay for value, service, and convenience, and he's constantly looking for new ways to let them do just that.
For example, one of the problems common to people who live in apartments is that they have no place to store their snow tires in summer or their regular tires in winter. It was a problem that many customers kept mentioning. "We finally figured out that letting them keep the tires here was a good idea," Steinberg says.
So he rented a trailer and announced that Direct Tire was launching a storage service. "In addition to storing the tires, we'll change them over twice a year and mount and balance them each time. We charge $100 a year for the service. Right now we have about 140 sets of tires in storage. That's $14,000 (the 140 sets of tires times $100) of revenue a year. The trailer costs $75 a month to rent."
While it's easy to see how Steinberg makes money on storing tires, how he generates a return on his other services is less obvious. But the profit is there as well. Take the lifetime guarantee. Its appeal can't be denied. "It tells customers we fully stand behind what we sell," says Steinberg. But can't that get expensive? After all, people get flats and run over curbs all the time. "True, but if you actually sit down and figure out the number of people who damage their tires, it comes to less than 1% of sales. So we build that premium into the price of each tire. That way, the guarantee doesn't cost us anything."
But what about the loaner cars, which -- as we have seen -- cost plenty? "Three years ago, before I had the loaners, I was doing $50,000 to $55,000 a month in service work. Today I'm averaging $120,000 a month, and the gross margins on service work are 30% higher than on tires. People will call up and say, 'I understand you have a free car I can use while you work on mine.' We'll say, 'Yes, that's right,' and they'll schedule an appointment right then. A lot of them don't even bother to ask what the work will cost. I'm going to add more cars."
It is this kind of reasoning that has allowed Steinberg to maintain his high net margin, even as he has increased his investment in customer service. But he measures his return on that investment with another set of numbers -- the ones that show how effective he has been in turning onetime buyers into regular customers.
On any given day, Steinberg notes, Direct Tire handles about 85 transactions. About three-quarters of those purchases are made by people who have done business with him before. What does that mean? Big bucks.
Periodically, Direct Tire does a mailing to people who live nearby, offering them a special deal on, say, shock absorbers -- buy three and get one free. The average revenue from those promotions is $89.60. But a customer who has been to Direct Tire before spends $173 during an average visit, and new customers who have been referred by someone else will spend $224. Steinberg says that these big spenders have usually been putting off a major repair or purchase until they could find a repair shop they could trust. Once they hear about Direct Tire's service, they come in -- and spend.
And so it goes. Steinberg invests in customer service, and that wins over customers, who bring in their friends, who spend even more money and are won over and tell their friends, and on and on. Small wonder that Direct Tire's revenues continue to increase steadily, as they have every year since its founding in 1974, despite generally flat sales for the industry as a whole.* * *
Of course, a skeptic might ask: given the size of his customer service investment, shouldn't Steinberg be making even more money? A 3% net margin may be twice the industry average, but a bottom line of $120,000 is nothing to write home about. Perhaps his prices are still too low. Why not raise them, bit by bit, until sales start to fall? After all, a lot of people are willing to spend money to save time, and good service does save time. Why not determine exactly what the market will bear?
And why not expand? Nordstrom Inc., which sells on service, is now a $2.7-billion-a-year retailer with 59 stores. Carl Sewell has five new car dealerships. And even Stew Leonard, who has etched The Customer Is Always Right... into the 6,000-pound boulder in front of his store, is about to open a second supermarket. There is no apparent reason to suppose Steinberg's approach wouldn't work elsewhere. What about franchising or . . . ?
Steinberg interrupts. "How much money do I need?" he asks. "I have four kids that I can afford to put through college. I'm paying myself a good salary, and I'm contributing to my pension plan at work. Could I bring more money to the bottom line? Sure. But I own 100% of the stock, and the only reason for increasing earnings would be because I wanted to sell the company, and I am not going to sell."
Of course, he is aware that -- if he ever did want to sell -- his customer service practices have done nothing but enhance the value and the liquidity of his business. Accountants are fond of saying that assets minus liabilities equals the true value of a company, and that anybody who pays more than that is buying goodwill. As the line of cars outside his place shows, Steinberg has an awful lot of goodwill. And as the number of repeat customers increases, so does the goodwill.
Still, Steinberg insists that money is not his primary motive in running Direct Tire as he does. "This place is an extension of my ego. I run it in a way that I'm comfortable with. My God, who would want to work in a typical tire business, where people steal from you all the time and you have turnover of more than 100% a year? My turnover is next to zero. I've had tire changers -- tire changers, for God's sake -- who've been with me for six and seven years. Theft averages way under 1% of sales every year. Part of that is because we have pretty strict controls -- we limit the number of people who have keys to the warehouse, and I'm the only one who can void an invoice or a work order. But a lot of it has to be the way we pay and treat people. It may sound complacent, but my life is pretty good right now. I don't want to change anything."
Judging by his numbers, he doesn't have to.
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