MIDTOWN BMA MOTORCARS Bob Hernandez has owned and operated the "Midtown BMA Motorcars" dealership in Houston almost since the first BMA was sold in the States many, many years ago. While business of course has been up and down over the years, Bob's dealership has always ranked among the very best. Things have, however, skidded a bit lately and seem to have stabilized around "OK, maybe even quite good, but certainly not great." So financially it could be worse. What is really killing Bob, though, is that some less well established BMA outlets around the country have managed to pass him and achieve higher national profitability rankings. For that reason, Bob decided not to humiliate himself by going to the annual BMA Franchise Meeting this year. Instead he is staying home to work on regaining lost glory. It is in this context we meet Bob in the showroom one Monday morning talking with Johnny, his sales manager. Sales people come and go all the time and good ones are hard to keep. Johnny has stayed with Bob for a few years. Bob has learned to appreciate Johnny's keen insights and, no less importantly, he has learned to live with Johnny's taste in leisure suits as well as with his funny, indeterminate accent. "Listen," Bob says while wiping some doughnut grease off his fingers onto the shiny velour headrest on the nice sandstone colored Owl XP he has been leaning against. "I'd like to pick your brain on why you think we are a losing out to some of these newcomers. I don't quite get it. What is it they have that we don't?" Still waiting for the coffee to dissolve a massive chunk of muffin in his mouth, the only sound Johnny is capable of making is "mplgh." Bob turns his head and stares at some plastic ferns by the entrance to avoid looking at the ensuing spectacle. He goes on. "We have the strongest line-up I can remember. Sure, some have been around for a while, but they still look as good as ever and a lot of our older customers dig those. And we're always fully stocked- every color, every trim. "You know what, Bob, I think the name of the game actually started changing a while ago." Johnny's coffee has finally served its purpose. "We are just starting to see the consequences now." "What are you talking about? Don't you think you ought to cut back on those poppy seed muffins? If this is an old problem, how come I only get to see it now while you apparently knew it all along? What are you talking about?" "It's the satisfaction craze." Johnny pauses for a moment to give Bob a chance to digest. "It is the sign of the times. People have changed. Everybody wants to be satisfied- all the time. The good old days where buying and consuming was good enough are gone. They come in here and think it is a bleeding coffee shop. And they ask questions all the time. They want to know if the wheels are cast or forged. I tell them they are forged. That seems to work the best. But how should I know? Where I come from, we felt lucky if they were round." Johnny stops to breathe. Then he goes for the conclusion. "Sure we could sell cars by catering to their needs. When the smoke clears, though, on any given day we move the most metal using good old fashion pressure and salesmanship!" "Now you've got me totally confused. First you seem to be telling me that that our problem is that we are not paying enough attention to our customers' satisfaction level. Then you tell me that the best way to sell cars is the old fashioned way. To me that sounds like you are talking out of both sides of your mouth." "You know, I do see that you were right before." Says Johnny. "You really Don't get it, do you?! The point is that the problem is YOURS, not ours." He goes on. "See, I'm a car sales man. I sell cars. That's what I do. I work for the dealership that works out the best for me. I have to, you know. I have four kids that I need to put through college and the medical Bobs for my mom....." Bob interrupts: "Hold your horses. I'm not here to buy a car. You don't have any kids that you know of and your mom lives with your sister in Florida. She hasn't spoken to you since you dropped out of law school." "Sorry - got carried away a bit. Old habit. The point is, though, that you can count on me only as long as I don't get short-changed by working here. So far my salary and commission has worked out OK, but if sales start droppin' further, I'll either have to ask for a raise or go work for one of the dealerships up on the north west side. By the way, those guys got some state money so this may happen sooner rather than later." "So if the future looks bleak here, I'll just move on. You, on the other hand, you my friend are married to this outfit. If you want to get out, what you take with you depends on the future prospects of this dealership. So you are the one with the worry." Bob, still looking a bit mystified: "I understand that we are in different positions. I don't see what all of this has to do what you said before. The stuff about satisfaction." "Well" says Johnny "It shouldn't be too hard to see the connection. You give me a bonus for every car I sell. So that's what I care about. I don't really care if the customers feel "good" about the experience so that they recommend us to their neighbors, their mother-in-law or even their dog. I'll just twist their arms 'till they cave in. Of course that means that there will be less customers later than we could have had - we won't grow as fast as we could otherwise. But then we just Don't hire more sales people - maybe we even cut back a bit on those we have--and there will still be more than enough customers to fill my dance card. You, my friend, are the one with the problem since you need to care a lot more about the future of this dealership than I do!" Bob looks as if somebody just spilled coffee on his pants. "I don't think I like what I'm hearing. Sounds like my trust in you has not really been justified. I was counting on you to do what is best for the business." Johnny cuts him off. "Grow up. I'm doing exactly what you have asked me to do. You pay me the same extra $100 for every car I sell no matter how I sell it. Isn't that exactly the same as saying that you don't care how I sell these cars as long as I sell a lot? You know as well as anyone how quickly sales people move. Surely you don't expect that I would forgo a possible bonus just to increase your wealth. But that would be exactly what I was doing if I took a long run perspective and tried to build customer satisfaction and loyalty. I'd certainly be willing to change all of that. But if you want me to care about the long run profitability of this dealership you will have to change how you pay me. You'd have to put your money where your mouth is." Bob responds in a somewhat arrogant tone. "Yeah, that's easy for you to say. You want me to reward you for future profitability? There is just one little problem, isn't there? The future isn't happening until - well - the future. All I have to go by is how much money we make today." "You only pretended that you were listening, didn't you?" says Johnny "The point is that there is a simple leading indicator of future profitability- the current customers' attitudes. How satisfied they feel. We are already collecting lots of data on this. All you would have to do is to start using it!" A customer walks in the door and starts circling a futuristic looking Nobl. The ultimate dream machine. "Well --- time to kick some b..." "Go for it, Johnny. I'd like to talk some more about this satisfaction stuff though. Say my office after closing tonight?" "Overtime?" "Yeah, yeah. Whatever." "So, how did the day go?" Bob says. He is sitting in his leather chair. On his desk is a neat pile of notepads and pencils, topped off by a calculator. "Not bad. Bagged a few," Johnny replies. "Had to work for it though." He takes off the clip-on tie and sticks it in his back pocket. Bob opens the fridge and pulls out a couple of Buds. "Actually," he goes, "I am much more interested in the stuff we discussed this morning. I've been thinking about it all day. There ought to be a way for us to redefine what we view as a successful day so that it aligns better with the real economics here. If we can do that, then we will just have to tie your bonus to those measures and this long vs. short run issue should just go away." "I'm all game. As long as I'm not any worse off, that is." Johnny says. "Absolutely! To make sure that it all works out for both of us I was thinking that we could sit down and try to figure out some little model of how all of this ties together. Then we can take it from there." "Makes sense to me," Johnny says. "Now what is it you want me to do?" "I want you to tell me how you think old fashioned sales pressure and effort to enhance customer satisfaction levels affect, say, monthly sales." "OK, here is kind of a rough picture." Johnny grabs a notepad and a pencil from the little pile. He starts drawing a picture. "Think of the vertical axis here as the attitude of the potential customers that enter our showroom every month. Let's say now that the most positive attitude is a "1". This is someone who likes the car, the dealership, is knowledgeable, thinks that he is getting a good deal and so on." "They would even like your ties?" Bob tries to hide a grin. "Very funny." Johnny makes a strange face, then goes on. " "0" on the other hand is the exact opposite. The "zeros" are basically here to kill time or to reassure themselves in their belief that they don't really like us. They are just negative by nature. We always have a few of those." Johnny, looking happy with his artwork, celebrates his accomplishment by emptying the can. He throws the empty can at the paper basket across the room. It goes in. He feels like he is on a roll. So he confidently continues. "Out here, on the horizontal one is the number of customers. On an average month about 500 people walk in that door." Johnny puts some marks and some numbers on his figure. It seems like we always have some that just gives us a perfect score - about 25 every month. But otherwise, "attitude varies," he goes on. "And it is kind of a crapshoot predicting it. I usually think of it in terms of a best and a worst-case scenario. When you look at all the surveys we have collected from customers over time and extrapolate to the whole poupation, then it looks somewhat like this. Worst-case scenario: as much as 20% are "zeros". The rest of them vary between "0" and "1", pretty much evenly distributed. Best case: only about 10% are "zeros". Again, everybody else is evenly distributed between "0" and "1". And to be honest, the worst case scenario is by far the most likely one. I would say it is 9 times as likely as the best case scenario. If we do nothin' about it, that is. There will always be some uncertainty, but I'd say if we put our minds to it we could change the attitudes so that there is an 90% chance that we have the best case scenario." Bob, fascinated with what he is hearing, cracks open another Bud and hands it to Johnny who refreshes himself; then goes on. "Now think about what type of shoppers actually drive a car out of here." "Generally speaking, I'd think the ones that are the most positive towards the cars and the whole experience." "BINGO!" Johnny's excitement with his own performances seems harder and harder to contain. His hand trembles as he draws two horizontal lines on his figure. "Let's continue to think in terms of best and worst case scenarios," he says. "We do send this questionnaire to those who buy a car and then compile a summary score. Sometimes we are lucky and people that aren't that favorably inclined end up buying a car anyway. The reported satisfaction score in that case ranges from about .3 to 1. That's everyone above the lower of these two lines. But at other times, people feel like they have more choices and aren't really in a rush to buy. That's the worst case scenario. Then only people with satisfaction levels above .7 seems to be buying. This upper line. Here, having looked at a lot of these reports in the past I would again think that the odds are 60/40 in favor of the best-case scenario. That is, of course, partly the result of the serious arm-twisting we do. If we were simply to stand around and not do much in terms of pushing and shoving, it would likely reverse. It would be more like 60% chance of the "worst" case scenario and 40% for the best one." Bob, still looking somewhat impressed, keeps the supply line between the fridge and Johnny moving. At this point, he tries to avoid any verbal interruptions. Johnny clears his throat and leans back in his chair. "Now think about my role in all of this. I - ME - I'm the one that can turn bad scenarios into good ones!!!!! It's a lot of hard and tiresome work though. So why do I do it?" Johnny is not about to wait for an answer: "In the end, it's the money- the bonus check. We can do the calculation now." He starts writing numbers down. The keys on the calculator are glowing. Bob excuses himself. When he returns Johnny has already finished. He pushes the pad over to Bob and points to the numbers as he explains. "See, here is my expected bonus if I just stand around and look cute. Here is my expected monthly bonus if I push the cars as hard as I can. It actually looks pretty much like how it is working out for me. It is not as much as I'd like, but I guess it is enough that I still do the work. Now here is what I could expect to get instead get if I was to sell the cars simply by catering to the customers' satisfaction. As you can see, it is not nearly as good and there simply isn't enough in it for me!" Bob finally decides to say something. " OK. I do see that the way I pay you may lead you to a specific type of behavior. The question still remains, though: what, if anything, could be wrong with all of this?" "Well, if you don't want repeat business or business that comes through word of mouth, or if you want your customers to go elsewhere for service and repairs - you know that's actually where a lot of the money in this business are made - then all is fine. I suspect, though, that the expected value to the business of a car sold the old fashioned way is probably less than half that of a car sold to happy people. And if you look at these numbers, that means that while making the customers happy doesn't make any sense to me, it makes a heck of a lot sense to you." Johnny looks victorious. "I'm sold!" Bob says. "You are right. We have to get the sales bonuses based on those customer satisfaction numbers that we have laying around. There is still the issue of how exactly this should be done. Which specific measure should we use? I can think of a couple of candidates right off the top of my head, but we normally calculate the average of that customer satisfaction score and maybe we could just use that as a basis for the bonuses. I have to think about that a bit. Actually why don't we both think about it and then talk again another night?" "Sounds good with me," Johnny says. "I feel like splitting now anyway." Bob looks at the pile of beer cans that has been growing during the course of the evening. "Seriously Johnny, don't you think we should be calling a couple of cabs. We shouldn't be driving home, you know." "Home?" Johnny replies. "Who said anything about going home? I can't let an evening like this go to waste. I'll just walk over to the pub. Ya know, when you're hot, you're hot!" He walks out the door, his tie hanging like a bright yellow tail from his back pocket. He starts singing as he walks away. Although the lyrics appear somewhat random, Bob recognizes it as an old English sailor song. He smiles and mumbles to himself: "Is this a great business or what!"

Questions:

Read the Midtown Motors case carefully. Then attend to the following:

1. Reproduce Johnny's graph.
2. How is Johnny selling cars currently and why?
3. Assume that Johnny handles about 20% of the potential customers that visit the store each month. Then, what is his expected monthly bonus?
4. How much lower would Johnny's monthly bonus be if he stopped working hard at selling cars?
5. Verify Johnny's claim that all else equal, Bob is better off if cars are sold via promotion of satisfaction as opposed to the application of sales pressure.
6. What is the correlation between customer satisfaction and sales?
7. Calculate the sensitivity of the satisfaction measures Midtown relies on to Johnny's choice of sales strategy (pressure/satisfaction).
8. Suggest a new incentive structure that would make it desirable for Johnny to pick the satisfaction rather than the pressure approach to selling cars.