How Lexus Turned its First Loss into its Biggest Win
In the last quarter of 1989 Toyota found itself in an awkward situation. The company had just launched its Lexus line, debuting the LS400 model that September. By December, 8,000 cars had been sold and it seemed that Toyota actually had a chance to penetrate the United States’s luxury car market. Everything was going well until two drivers of LS400s reported a minor issue with their cruise control. Lexus could have waited for more problems to come forward, but because the luxurious line was in its infancy, Lexus made a bold move and voluntarily recalled all 8,000 LS400s it had sold.
As Malcolm Gladwell detailed in his book The Tipping Point, Lexus’s decision to recall the LS400 is inseparable from the success the company has gone on to generate since. Gladwell makes a strong case that the way Lexus handled the recall — calling each LS400 owner on the day of the recall, washing the car and filling its tank up with gas while performing the recall, and sending a mechanic to the homes of owners that lived 100 miles or more from a Lexus dealership — was crucial. Gladwell argues that Lexus’s biggest benefit from the recall came as a result of the type of consumer who owned a Lexus at the time.
“Car Mavens”, as Gladwell calls them, made up Lexus’s consumer-base. Those that bought a Lexus while the company was in its first year of production, likely had an affinity for cars and may have also had friends who liked cars, as much as, if not more than them. By issuing a recall, Lexus signaled that they provide top quality service, something it could not establish nationwide from just selling a few thousand nice shiny cars. In this sense, the recall was as much an investment in Lexus’s brand as it was a factory error.
In hindsight, the recall appears to be a genius overreaction. There is no way to measure the economic benefit the recall had for the Lexus brand, but it’s clear that the typical repercussions of a recall for a car-line’s first year were squashed. It is even worth considering the possibility that Lexus may not of had a problem with their LS400 models at all. If done right, a company can provide ‘excellent’ customer service if they fabricate a fixable issue and then provide first-class service while fixing the issue. Sure, consumers do not like being inconvenienced, but if consumers have a more favorable opinion of a company because of the attention they receive when an inconvenience arises, then it might be beneficial for a company to purposefully act out a defect.
True — such a campaign would cost serious dollars, but it could be worthwhile if the campaign functions not just as a service signal but also as an effective form of advertising. Instead of a potential Lexus buyer seeing an advertisement raving them to buy a model for “The Relentless Pursuit of Perfection”, the potential Lexus owner hears from their co-worker in the coffee room, “Guess what Lexus did when they recalled my car?” Albeit unintentional, the greatest thing to ever happen to Lexus may have been two drivers complaining about the car’s cruise control.
Even if Lexus had faked the recall, it would not be much different than what firms do today in the pursuit of influencing customer product expectations. Just consider an airline adding an extra 20 minutes of expected flight time for each one of its flights. Companies have to be one-step ahead of each other to get a leg up on the competition, and if done right, fabricating a fixable issue might do just that — as long as no one finds out.
