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.
