Area Codes and Inventory Turns

Customer service and satisfaction initiatives cost money right? Going above and beyond to satisfy your customer is an investment that has to be budgeted like any other key line item like R&D or employee benefits, right?

Well, what if someone told you that you could not only improve customer service and satisfaction but also simultaneously cut costs and actually improve your bottom line?

You can do it if you truly understand your customer, your customer's behaviors and your own operating metrics. Here are 2 relevant examples:

Area Codes:

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Area codes were introduced in 1951 when the mayor of Englewood, NJ made the first direct-dial, long-distance call to the mayor of Alameda, CA. Before that, most long-distance calls required an operator at both the calling and receiving end. In 1951, it appears that AT&T actually understood their customer and their customer's behavior when they started doling out over 100 area codes around the United States. Unlike USPS zip codes, these area codes were NOT designated systematically by region (i.e. - all zip codes for New York started with a "1" while all CA zip codes started with a "9")

Instead, AT&T's area code designations were a keen example of how a company can not only provide a superior customer experience but also save money while doing it. In 1951, all phones were rotary dial. Moreover, the "time on the line" was the driving force behind both AT&T's costs as well as their pricing (cost per minute still lives today though it's experiencing a swift death with VOIP). Therefore, AT&T's goals with area codes were to not only eliminate any live operator interaction (big cost savings) but to make it as easy as possible to dial these new 3 digits. Therefore, the easiest area code numbers to dial were the digits 1, 2, and 3 on a rotary phone. Easiest meant fastest. Easiest meant lowest cost. Easiest meant highest usage. So, who received the easiest area codes to dial? That's right, the biggest population centers of 1951 (New York = 212; Los Angeles = 213; New Jersey = 201; Washington DC = 202; Chicago = 312). Critical thinking during the launch of this brand new area code system that required new customer behaviors resulted in not only a much better customer experience (as painless as possible to dial on a rotary phone) but also the lowest cost (fastest to dial and no live operator required).

Inventory Turns

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My second example of superior customer satisfaction coupled with significant cost savings comes from Netflix. Many people don't realize it took Netflix over $100M of cash to get to profitability and a significant portion of that cash was tied up in purchasing DVD inventory in order to satisfy their customers (a.k.a - having the dvd the customer wanted when they wanted it).

Netflix has been in explosive growth mode since its launch. The more customers that joined the more DVD's were needed to satisfy those customers. Additionally, customer satisfaction was directly correlated to how long it took to receive their DVD's in the mail. Delivering in 1-2 days was the sweet spot while anything that took longer than 3 days was the kiss of death resulting in extremely high customer drop out rates. What many people don't realize, however, is the correlation of the # of dvd´s that must be purchased to satisfy customers is directly proportional to how fast you can "turn" your dvd inventory. In fact, the faster you can "turn around" any given DVD, the fewer #'s of that particular DVD title you have to buy. Taken to the extreme, if you could "turn" a DVD title from one customer to the next at the speed of light (and the customer watched the DVD at the speed of light), you would really only need 1 DVD to satisfy all the customers that wanted to rent that DVD on any given night. Obviously an absurd example, but the point is the faster you can "turn" a DVD, the higher the customer satisfaction and the lower the overall cost to the business.

So, what did Netflix do to take advantage of this? Netflix started opening up satellite distribution centers all over the country as quickly as possible (based on customer population densities). Netflix operated for the first 3 years with only 1 distribution center located in San Jose, CA for its entire DVD inventory. By opening up a mini-distribution center in say New York, not only would the New York customers get their DVD's faster but ultimately this move reduced the overall number of DVD's needed to be purchased. Today, Netflix has almost 40 distribution centers around the country. On average each one of these centers is only about 5,000 sq feet and the total cost to operate all 40 centers is significantly lower than trying to ship all the DVD's out of one central location.

So, the next time you think that improving customer satisfaction is going to cost your business more money than you can afford, take time to think creatively and think differently about what the real "drivers" of both your operational costs and your customer's satisfaction. If you can find a linkage between these two, you may have a huge home run on your hands.