In this paper we introduce a new diffusion approximation for the steady-state customer count of the Erlang-C system. Unlike previous diffusion approximations, which use the steady-state distribution of a diffusion process with a constant diffusion coefficient, our approximation uses the steady-state distribution of a diffusion process with a \textit{state-dependent} diffusion coefficient. We show, both analytically and numerically, that our new approximation is an order of magnitude better than its counterpart. To obtain the analytical results, we use Stein's to show that a variant of the Wasserstein distance between the normalized customer count distribution and our approximation vanishes at a rate of $1/R$, where $R$ is the offered load to the system. In contrast, the previous approximation only achieved a rate of $1/R$. We hope our results motivate others to consider diffusion approximations with state-dependent diffusion coefficients.