A Blockbuster Discovery: It's Costly to Keep Customers WaitingPublished: February 27, 2002 in Knowledge@Emory
As 2001 came to a close, many of the nation’s major retailers showed signs of serious trouble. In January, management at Kmart announced that the discount chain, one of the largest in the country, would seek Chapter 11 bankruptcy protection. Toys "R" Us, the top toy retailer, revealed it would close 64 stores and lay off 1,900 employees.
However merchants in the home entertainment sector found profits growing at a healthy pace. Retailers hawking everything from electronics to video movie rentals fared better than most in 2001. In particular, outlets such as Blockbuster posted strong sales increases. According to the Video Software Dealers Association, total U.S. video rental transactions hit 2.79 billion in 2001, a 7.2% gain over the prior year.
The phenomenon generally known as the "cocooning of America" may have much to do with the rise in sales of home video rentals. But, more importantly, in a recession, inexpensive and convenient items, like videotape/DVD rentals, tend to appeal more to shoppers. And after the recent U.S. terrorist attacks, there may be little wonder why many Americans are retreating to the familiar and warm confines of the family TV room.
But even profitable stores like Blockbuster need not take the customer dollar for granted. Richard Metters, a professor of decision and information analysis at Emory University’s Goizueta Business School, says, "In good times, when everyone’s making money, you can make some mistakes and still do okay. When people are getting a little more choosy in where they are spending their money, then you have to respond to customers a little better to get a piece of their wallets."
While researching the impact of changing marketing initiatives on operations, Metters and colleagues discovered that the perceived waiting time to make a purchase is not only a big factor with customers, but it also impacts the bottom line.
In the research paper titled Linking Marketing and Operations at Blockbuster, Inc., Metters and his co-authors take a critical look at the impact of Blockbuster’s changing marketing initiatives on operations. The co-authors include Shane Evangelist from the strategic planning division of Blockbuster, Badger Godwin from the store operations management division of Blockbuster, Joey Johnson of the global services division at IBM, Vincent Conzola from the human factors division of IBM, Robert Kizer from the client services division of Walker Information, and Stephanie Young-Helou of the marketing sciences division of Walker Information, a marketing research firm with offices in Indianapolis, Ind, and Ontario, Canada.
At the heart of this study is a relatively simple idea. In an attempt to increase revenues, marketing executives often increase the number of items that customers can buy when they are in retail stores such as Blockbuster. As the number of such offerings increases – often this number creeps up without top management consciously realizing this is happening – it leads to more complex transactions at the check-out point and increases the waiting period for customers who may be waiting in line. The longer waiting period results in annoyed customers and consequent loss of business. In other words, marketing initiatives that are intended to increase revenues actually end up costing the company money in lost sales.
The research paper comes up with a model to analyze these factors. While the research data remain specific to Blockbuster, the results provide an interesting study of the complexities involved in shifting marketing efforts. The model created uses "operational process analysis, waiting line simulation, real versus perceived waiting times, a customer loyalty model, and a financial model to find bottom-line impact from operational changes of new marketing programs." Adds Metters: "The model, in general theoretic terms, is entirely applicable to other retail establishments."
The diversity of product offerings (including videotape/DVD rentals and sales, gift cards and snack items) and the various forms of payment (including debit and credit cards, cash, gift certificates, coupons, membership benefit programs, and "rain checks" on out-of-stock merchandise) serve to lengthen the checkout process. "Further, complications often arise due to account holds for extended viewing fees or unreturned merchandise, out of date credit cards, unavailable customer identification, and other matters," the authors note.
The researchers used on-site interviewers for a portion of the data collection. Metters and the co-authors also viewed four-hour long videotapes of store operations at nine locations. From these tapes, the researchers determined "actual process times and the percentage of customers requiring a particular process." In all, 921 transactions were studied to determine the many factors involved in the register process. Surprisingly, the time it took to handle a customer ranged from a mean of just under two minutes to a maximum of a little above 12 minutes.
Similar to other retail stores, Blockbuster’s checkout process grew in difficulty as new marketing efforts began. According to the paper, "the process was not designed in this manner up-front, but incrementally gained complexity as new marketing initiatives were introduced." Metters says that while it may appear so, most retail-marketing executives "are not out of touch with operations." However, they are often unaware of just "how complex the operational processes have become. The resulting process diagram of a seemingly simple process – customer checkout- included well over 100 steps." The end result shows in the merchant’s bottom line.
As the retailer’s operational systems become more complex, unskilled minimum wage workers may find it difficult to quickly and effectively process sales. "If you are going with fairly low paid employees in the stores, as many service businesses have to have because of the competition, then you have to have processes to go along with that," says Metters. "Otherwise, you’ll have a lot of mistakes made." In addition, he adds, once a retailer implements these new services, "it is very difficult to rollback those same services that customers have come to expect."
A critical part of the study required developing a link between forecasted actual waiting times and customers’ perceived waiting times in line, "to determine the ultimate relationship of process changes to customer waiting." This information was compiled from the observations of the wait times for 261 customers. These same individuals were later asked to estimate the amount of time that they believed they were in line. The authors note: "Of those customers whose actual waits were less than 3 minutes, 70% overestimated their wait time. For those customers who waited from 3 to 5.5 minutes, 47% overestimated their wait time."
Metters admits that he remains surprised by the finding that "customers who waited longer than 5.5 minutes underestimated their time in line 88% of the time." While the authors offer no real explanation for this shift from an overestimation to the underestimation, additional research seems to show similar results. "We have, in other studies in other industries, found that the longer people wait, you tend to get closer to the actual time waited," says Metters.
The authors also establish a model to show the direct and indirect effect of perceived wait times on customer loyalty. The researchers compiled data on customer loyalty from a survey of 383 actual customers, interviewed shortly after a transaction, and a random sample of an additional 1,789 Blockbuster customers, surveyed by telephone. While in-store appearance and quality of sales staff did affect customer loyalty, "perceived" waiting time in line remained a critical factor in repeat visits to Blockbuster. The authors ultimately provide detailed analysis of how changes in checkout times impact the bottom line.
One of the most important findings of the paper came from analyzing the impact of reducing perceived customer wait times. Reducing perceived wait times could be handled by making the environs of the store more appealing, or by reducing the actual wait time to some small degree. "This model forecasts that a 30-second decrease in perceived waiting time can lead to an avoidance of customer attrition and corresponding saved gross margin of $25.9 million over five years," say the researchers.
Notably, Metters adds that the sizeable savings "only takes into account the current customer base and retaining them, and not the pickup of new customers." The findings led Blockbuster executives to use the manager’s workstations in each store as an additional checkout lane during peak customer hours on Fridays and Saturdays.
Blockbuster now uses the model to evaluate the impact of any new marketing program on the company’s checkout process. Of course, management must bridge the political divide that often exists between operations and marketing departments. "Marketing people and operational people are often at loggerheads," says Metters. "Either the operations people say that’s not practical, or money is a constraint." Marketing personnel, on the other hand, may develop sales initiatives that are hard to implement.
Fortunately, Metters notes that the paper "ties together the various mathematical models on divergent issues previously studied" in the field of marketing research. That is where the work sets itself apart from prior papers on the subject, bringing together such complex variables as real and perceived waiting time at a checkout line, implementation of new marketing efforts, and ultimately customer loyalty and repurchase intentions. The authors’ methodology can provide retailers with a new and useful tool to evaluate the many critical issues impacting store operations after the start of a new marketing effort.