How Can a Customer-Centric Auto Mechanic Achieve Profitable Growth?

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In this inaugural edition of Gurus on the Case, an automotive service/repair shop owner seeks help to grow his customer-centric business more profitably. Read how four gurus would meet the challenge and join the discussion to offer your own opinion.

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Business owner’s reaction

When you think of auto shops, you might not necessarily think of CRM and customer-centricity. But Mitchell Harmatz does. In 2001, after 16 years of selling commercial real estate, Harmatz bought Park Plaza Automotive (www.parkplazaautomotive.com), a Shell gas station and automotive service/repair shop serving the affluent Southern California community of San Pedro on the Palos Verdes Peninsula (per capita income is $80,000).

Since then, he has used CRM principles to improve service, build a loyal customer base and increase revenue more than 260 percent. Annual profits have been hit and miss, however. Harmatz runs his business with 10 employees.

The fact that his business includes a gas station is a bit of a red herring; profit on gas sales is negligible. Harmatz’s main business is a three-bay auto shop that competes with dealers for more complex repairs and service. Unlike the average independent service/repair shops, his does no smog checks nor cheap brake jobs. Harmatz’s main competitors are the car dealers who are also aggressively courting service business, both during and after the warranty period.

A key element of Harmatz’s strategy from the beginning has been top-drawer customer service. He offers full-service gas pumping at self-service prices; free loaner cars and a shuttle service; Internet access in the waiting room; and bathrooms so clean that they’ve been written up in local newspapers.

"Our market focus is not the guys looking for the cheapest brake job," Harmatz says. Instead, because he found that 63 percent of the automotive decision-makers are female (his typical buyer is a mother of two kids), Harmatz made his shop "woman-friendly," annually remodeling the interior and repositioning his food mart into a waiting area.

This game plan worked for four years running, with annual revenue growing from about $300,000 in 2001 to $800,000 in 2004. In 2005, he upped his services and marketing investments and projected average monthly revenue to grow from $67,000 to $75,000. To his surprise, revenue actually declined to $62,000 a month, not enough to earn a profit.

Marketing efforts that have paid off to some degree include TV commercials, referrals, direct mail and walk-in business because of a convenient location. But it’s difficult to track which marketing programs are doing the best job attracting new and potentially frequent customers. Harmatz thinks that his typical new client either a) has an aging car with an expired manufacturer’s warranty or b) is dissatisfied with the service provided by another independent service shop.

Because he believes that outstanding service will win the day, Harmatz has concentrated on improving the caliber of his mechanics and pays a bit more, accordingly. To that end, he recently wooed an "A" level technician from a dealership. Harmatz has also purchased diagnostic equipment to provide more proactive service, instead of waiting for failures. And his mechanics use the Internet to increase their knowledge of auto repair. To keep tabs on his customers, he give surveys to new and returning clients (see samples for new and returning clients) and makes follow-up calls within two weeks after all service jobs.

Harmatz thinks he has 650 to 700 "core" clients, which make up about 70 percent of his business. By contrast, the other 30 percent are constantly turning over, roughly three times per year. A customer is considered to have "defected" if a return visit is not booked within six months. It’s been nearly impossible for Harmatz to get any feedback from non-returning customers, so it’s not clear why they left; although, he doesn’t think it’s for service-related reasons, because feedback has been very positive from everyone else.

Over all, customers have responded well to Harmatz’s high-service business model. However, he does not currently analyze survey response trends month-to-month. Employees are generally not compensated based on customer measurements. Recently, Harmatz implemented Protractor Software, auto repair shop management software from Toronto, Canada-based Forefront Business Solutions. He expects this solution will a) help him provide service recommendations tailored to his clients and their cars and b) provide a more systematic process for capturing information.

The challenge: How can Harmatz get his business back on a profitable growth track in the highly competitive auto service/repair business, where 30 percent of customers are churning each year?



Guru recommendations

Jim Barnes: Find out how to wow! your customers
Naras Eechambadi: Focus on customer referrals
Dick Lee: Analyze your costs and the value of their returns
Michael Lowenstein: Find out what your advocates have to say


Jim Barnes, Barnes Marketing Associates: Find out how to wow! your customers

We have to get at why Mitch’s revenues are falling. It may be that we’re not getting existing customers back as often or we’re not seeing enough new customers come through the doors—most likely, a combination of both. Let’s tackle existing customers first. It is likely that we can improve the likelihood that customers will return more often.

My perception is that Harmatz does a very good job on making sure the car is repaired properly: the core of his business. He has put in place a number of supports to this core service: loaner cars, shuttle service, etc, all in a very welcoming environment but maybe also very predictable. His definition of service seems to be focused mainly on the car repair and making it easy for customers. Both are essential but maybe not enough to really differentiate him from the other shops in town.

Most people don’t really know much about what goes on under the hood when they take their car in for service. They need to feel they can trust the shop to do the repairs properly, and they need to be treated very well. Harmatz has the quality repair service side covered. But he also has to focus on how his employees treat customers and how they surprise them with "nice touches." Customers go back to places where they are "wowed," often by things that have nothing at all to do with the core service. He needs to get people in San Pedro talking about Park Plaza Automotive.

I’m not sure how valuable the information Harmatz obtains from his customer survey is. It needs some redesign; but more importantly, surveys like this are becoming predictable and are really too short to deliver much real value. I’d suggest that Harmatz try to find out why his regular customers continue to come to him. Harmatz, himself, should phone one customer every day and have a five-minute conversation about why he or she keeps coming back, what each really likes about dealing with Park Plaza; the "irritants" the customer would like to see changed; and what makes his different from other shops in town.

Despite the fact that Harmatz offers quality service, his marketing (at least on his web site) screams price and discounts. His online newsletter contains no news, just more specials. New customers attracted by such offers are unlikely to stay. He needs to build an image of being different and of being a shop customers can rely on and one where they are treated as special. This comes from doing things that customers will talk about with their friends, not from spending money on mass TV advertising, most of which is wasted on neighborhoods many miles away.

I’d recommend concentrating on those neighborhoods that are closest to San Pedro and where there are many two-car families. His target is the second car, most likely out of warranty and most likely used to ferry kids around. Being seen to be part of those communities is important, suggesting sponsorship activities in the local area, involvement in the things that these families consider important.

Over all, it sounds to me that Harmatz needs a strategy that will more accurately define who his target customers are, not by the type of car they have but by what they need from an auto repair shop. He also has to decide what kind of company he wants to be and what he will be known for in the minds of his customers. There are lots of repair shops around; why should I go to Harmatz? The answer has to be obvious.


Naras Eechambadi, Quaero: Focus on customer referrals

Mitchell Harmatz’s performance over the past few years, not withstanding the current decline, is remarkable and is testament to the power of a focused business model that is very customer-centric. Harmatz already seems to have in place many of the elements that will help him turn this situation around.

What should he do to understand why some of his customers are leaving, so he can reduce churn?

First, he needs to determine if, in fact, those customers actually did leave. For example, is six months really the right cut-off to define attrition of customers? Perhaps, some of his customers show up only when they have a problem, and that may not happen within a six-month period.

Some of the churn may be "natural." Given that his business is in an upscale community, these folks may be trading in their old cars once the warranty expires and, by definition, no longer be in his target market. He can figure this out by looking into the registration data for a sampling of his "lost" customers to see if they still own the car that they had serviced.

If either of these situations happens to be true, then he would be wasting money by trying to reduce this kind of churn, because he cannot really influence it. If, however, this is not the case, then he needs to induce some of his "lost" customers to share their reasons for not coming back, perhaps by offering them some inducement to talk—a free oil change, perhaps?

How can he figure out what really creates customer loyalty, so he can invest in the right service improvements?

Harmatz may want to actually focus on a measure that is more important than loyalty: commitment. He already gathers data on customers who refer his services to others. These customers are, perhaps, his most valuable, even more so than his most loyal customers. How does he thank these referrers?

Rather than asking an open-ended question about additional services in his questionnaire, Harmatz may want to list a few specific services. Customers often have a hard time providing new ideas but can be good at reacting to ideas when they are presented to them. His questionnaire could also be improved by asking for more specifics rather than general satisfaction levels. For instance, ask for the one thing the customer liked most about the service and the one thing the customer liked the least.

How can he optimize his marketing mix to attract new clients that have the best potential to become long-term customers?

Although he uses advertising and direct mail—in addition to references and walk-in business—his questionnaire does not ask customers which of these, specifically, was instrumental in their choosing his station. Adding this question to the questionnaire may help him figure out whether the advertising and direct mail (which presumably cost money) are actually worth it. He may be better off taking that money and spending it on thank- you gifts for customer referrals or employees who delight customers or are effective at up-selling them.

How can he determine how his business performance compares with his local and national competitors?

The best source of data is usually a trade association. Given the uniqueness of his business model (service shops attached to gas stations are a vanishing breed), it may be hard to get comparables, though.


Dick Lee, High-Yield Methods: Analyze your costs and the value of their returns

Reading the Park Plaza Automotive case study calls up the core CRM business proposition that we at High-Yield Methods remind our clients about frequently: CRM should create new value for customers in ways that deliver new value back to the company.

Mitch Harmatz has fulfilled the first half of this equation. Yet, his customers aren’t delivering sufficient value back to the company. And this disparity suggests that Harmatz has "overdone it" by indiscriminately delivering customer value without qualifying the returns.

Accordingly, the first step for Harmatz might be an activity-based-costing analysis of his business. Harmatz should identify the costs of delivering each value-added service (such as pumping gas, free loaner cars and free inspections) and match each cost with the perceived return. Then, he should think hard about cutting back on the costs he perceives deliver the least return (and a quickie customer survey would help make that determination).

Not sounding very CRM-like? Well, think back to the core CRM equation, especially the "deliver new value back to the company" part. Among the fastest ways to fail at CRM is to give but not receive. Harmatz has to make some hard decisions to get his core business proposition in order.

Regarding his churn rate, another "should do" is to put someone on the phones during the evening to call 50 or so "lost" customers. Actually, the responses received may be consistent enough to stop at 25 to 30. Having worked in this business sector before, my intuition tells me that what Harmatz calls "churn" is attributable to two factors: 1) customers moving or changing jobs, so Park Plaza is no longer convenient and 2) customers trading in older cars for new cars under warranty.

Harmatz can’t do anything about the first factor. But the second does offer opportunity. Fortunately, only a minority of car makes roll all the warranty period service costs into the purchase price. That leaves fluid and filter changes, lube, tire service, inspections and other required service on most makes as competitive areas—if Harmatz can educate customers on the fact that manufacturers can’t require these services to be provided by them and that he will perform these services at a substantially lower price than will new car dealers.

Very importantly, the time for so educating customers is before, not after they buy the new car. I would recommend that Harmatz hand out fliers to every customer explaining that cars must be brought back to the dealer only for certain services. And he should drive home his competitive advantage by estimating what every service he performs would cost at a dealership, showing the difference on every service invoice, along with reminding customers of value-added services that dealers don’t offer.


Michael Lowenstein, Loyalty Research Associates: Find out what your advocates have to say

This strikes me as very much an "understanding the value proposition" issue, particularly around the customer experience at his facility, relative to others. As much as budget and time will permit, benefits can be personalized and optimized for each customer.

First, and key, a better job has to be done with gathering customer insight. Even with surveys (which, on review, leave much to be desired in terms of useful and actionable information), what Harmatz knows and what he assumes (such as belief in "outstanding service" and new customers’ car specifics and needs) aren’t enough to be actionable. That type of information doesn’t help in building such things as wallet share and/or sustained frequency, cross-sell and up-sell. What he doesn’t know, or track, about his customers is impairing growth—and will continue to do so if the research isn’t more thorough.

For purposes of learning, analysis and planning, Harmatz should segment the customer base as finitely as possible by such factors as purchase recency, frequency, amount and type of service. As a way to begin understanding met and unmet customer needs, he’ll want to assess the reasons frequent customers use his services more than other facilities. What do they value? (And what are they saying to others about Park Plaza?) Where do less frequent customers go for auto services and why? And why have the 30 percent who are "constantly turning over" abstained from using his facility?

A key learning goal in research is to identify, and then understand, each customer’s perception of value and resulting behavior in the auto service marketplace. In our work with clients, this calls for segmentation by degree of kinship with the supplier, ranging from, at the high end, active advocates—those who speak positively and often about his services and use them with great frequency—down to those customers who are indifferent, occasional users and who have a passive relationship with Park Plaza and might go anywhere for similar services.

"Dialing up" those aspects of the value proposition that make for stronger, more frequent behavior among key customers, and bootstrapping those value aspects that could be enhanced for the occasional or former customers, will have a fairly quick and positive impact on the bottom line. We’ve seen this result again and again; and it doesn’t require rocket science, so any company of any size, in any industry can do it.

A couple of other points to consider. Employees should definitely be part of value creation, and should be compensated accordingly. It’s been well-documented that staff who are incented around increased customer loyalty behavior and actively know what customer retention and spend levels are period to period will go the extra step in terms of helping realize this important, ongoing objective.

As an example, MBNA, the country’s second largest credit card issuer, gives customer retention bonuses to all employees once a quarter if goal levels are met. Everyone in the company knows the key performance metrics and offers suggestions to make the organization more successful, and each MBNA building has TV monitors in the halls so each employee can be up to date on how the organization is doing each day.

Of course, a company of Mitch’s size doesn’t need anything so elaborate, but his employees should be kept informed about Park Plaza’s current performance from the research. And they should be encouraged to suggest, and implement, ways of creating more customer value. ScrubaDub, a small chain of car washes in New England, learned through its research that customers wanted to make the car wash experience more of a destination. So, based on a series of employee suggestions, the company began to offer attractive added services at each location, such as a quick auto lubrication, then a snack and coffee bar and eventually even convenience stores. As revenue and profitability went up, all employees got incentive compensation.

Additionally, marketing expenditures should be prioritized for effectiveness. TV commercials are probably the costliest part of his marketing budget—and the least effective. The most successful auto dealerships in the United States, for instance, use almost no electronic or traditional broad scale print advertising. Instead, they do a great job of seeking referrals, micro-segmenting the customer file for better targeting and providing almost customized and personalized direct response offers. They get incredibly high referral levels, shorten the marketing cycle, and get tremendous budget efficiencies.

And, because Harmatz has a fairly tight retail trading area, instead of using traditional electronic or print media, he’d likely be much better off pursuing some of the neural, viral approaches to building word of mouth in the community and of leveraging his best customers’ demographics by applying them to area household data files for some pilot promotion.



Business owner’s reaction: I’m implementing some of the best suggestions

Harmatz was realistic about what it meant to sign on to a project like Gurus on the Case. He knew it meant revealing private information to the public and, more than that, opening himself up to criticism from people who weren’t in the automotive business and hadn’t invested the sweat equity he had in his shop. "It was difficult to see people critique your business in 500 words or less," he said about the process. "I thought we work very hard at distinguishing ourselves as well as fighting off the offers based on discount and price." He also rejected the notion put forth by Barnes and Lowenstein that he was allocating too many dollars to television. TV advertising rates are reasonable, he maintains.

But Harmatz came to CRMGuru—and agreed to put his business challenge out for anyone to see—because he was open to new ideas. And, he says, after he got over the initial defensiveness over some of the criticism, he got busy. He analyzed the guru input, entering it into a table laying out the customer insight, actionable information, marketing and image enhancement involved in the different recommendations. Now he is working to implement many of the recommendations.

Already, Harmatz has acted on Barnes’ recommendation to make his newsletter more upscale. The first mailer went out in early December 2005 and elicited "great feedback from our clients. This will definitely build an image of being different," Harmatz said. On another suggestion from Barnes to spruce up the web site, Harmatz has worked to eliminate references to discounts and "offerings" in favor of focusing on services.

In response to Lee’s recommendation to address the allure of dealerships—which Harmatz considers his competition—he is concentrating on branding his shop as the place to go for expert workmanship. To that end, he is changing his business’ tagline to "We know your car" and running a campaign at the gas pumps with the following copy:

Would you let your teenager …

    run your business?

    deliver your baby?

    do your taxes?

Who is riding in your car? We are the experts.

The hardest area to implement, Harmatz says, is the actionable survey, which Barnes, Lee and Lowenstein all touched on. He is constantly getting new customers from every arm of his marketing campaign: television, referral and location.

His six-month plan right now is to:

  • Experiment with a five-day work week rotation for his technicians to help improve quality of life and to see if this will increase billed hours. (The shop will remain open Monday through Saturday.)
  • Tighten up expenses
  • Improve next quarter’s newsletter with a separate automotive section educating customers on how competitive his shop is compared to dealerships
  • Change the business name

We’ll check back in with Harmatz and see everything works out.

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