I received a curious email from one of the founders of eBags the other day. In it, he said that by bringing customer service back to the US and away from an offshore vendor, the company actually reduced customer service costs by 34% (yes, reduced!) while still growing sales by double digits in Q4. It reminded me of another article not too long ago from the Wall Street Journal that cited Qantas as having one of the world’s best check-in experiences because the airline invested in RFID tags for passengers, a decision that the article pointed out no other airline has yet copied. These examples stood out to me because these companies managed to pull off a very difficult trick: to make contrarian investments that industry peers would consider hogwash that nonetheless pay off in spades. It’s more likely that such investments would backfire, but when they work, they succeed beautifully. Three cases in point:
- Amazon.com. One of the most onerous costs of any web retailer is managing shipping costs. Retailers spend an awful lot of time trying to figure out how to reduce expenses from shipping as much as possible, usually by passing those costs on to shoppers or by sending packages more slowly. Amazon, however, for years has pursued a bold and iconoclastic approach: heavily subsidize shipping, liberally offer free shipping and frequently upgrade package shipments to overdeliver on customer expectations of when packages would arrive. These actions have not only built trust in Amazon but have helped the company win market share from nearly every big-box retailer in the country. But to this day, most retailers are reluctant to follow in the footsteps of Amazon, unable to figure out how to make the economics of such lavish shipping policies work for their own businesses.
- Trader Joe's. In the commoditized grocery industry, Trader Joe’s stands out because of the extraordinary business it does (often more than $40MM) in small stores that have limited assortment. I’ve spent some time trying to figure out some of the secret sauce of the company. There are a number of unique components to Trader Joe’s business but the one that I think is probably the most critical is that TJ’s pays most of its store associates on average $16 per hour, significantly higher than any other grocer. Yes, this helps them retain their employees longer, but more importantly well-paid employees help to keep the store shelves constantly stocked, a critical factor in the success of any Trader Joe’s as the company turns much of its inventory daily (yup, 365 times a year). In a nutshell, higher payroll helps the company benefit from higher inventory turns. Of course, the well-paid store associates also have smiles on their faces and the ability to answer any and all questions of shoppers but the success they created is unique: small stores with lots of revenue from low-ticket items.
- Westin Hotels. This is of course the legendary example that is frequently cited in presentations and case studies of marketing success stories. In 1999, Westin took the unprecedented step of investing more in its beds, heresy at the time because the move was considered expensive, high-maintenance, and risky. Then-CEO Barry Sternlicht described why the introduction of the Heavenly Bed was such a hit: “The motive in the hotel business was to cut corners on the beds.” By investing in the bed, the place where most hotel guests spent most of their time, it not only resonated for the hotel chain but it compelled other chains like Marriott to follow suit. It also launched a completely new line of products where the Heavenly Bed itself was sold to consumers.
I certainly don’t want to overstate the ease of making these contrarian investments; they’re darn hard to execute. The change needs to matter to customers. And it needs to be executed well. The announcement last week by Ron Johnson, the new CEO of JCPenney to revamp the stores, falls into a decision that is certainly bold and gutsy. The questions that remain are, will customers care, especially since most of the stores are not situated in great malls worth visiting, and will they execute well. Brands like Apple, Williams-Sonoma or even Abercrombie have an advantage in that they have products that attract passionate store associates.
Do you have an example of a company that executed an expensive change really well, or that executed the wrong change and bombed? Share with us your thoughts.