[Blog] Decade of Disruption

Jeff Williams

March 1, 2020 was the beginning of a decade of disruption for the automotive industry.

First was the Covid-19 pandemic. Not only did the pandemic shut down retail facilities and drive shoppers online, but it also massively affected supply chains. Not the least of which was the production of microchips, along with other key manufacturing components like rubber, foam and wiring harnesses which further handicapped production. As the pandemic continued into 2021, new and used vehicle prices escalated as supply of new vehicles decreased to the lowest levels since the Global Financial Crisis.

Brand loyal customers, frustrated by lack of selection, high prices and a "take it or someone else will" attitude by dealers, defected to new brands at an alarming rate. In a short 24 months brand loyalty dropped industry-wide, from 55.1% to below 49%.

But that was just the beginning.

Today, further disruption to legacy automakers and dealers is coming in the form of the EV revolution. Many of the new EV disruptors like Tesla, Rivian and Lucid have also embraced direct-to-consumer selling, which is challenging the traditional dealer distribution model. It is anticipated that 26 EV new brands and 120 new models, mostly sold through direct-to-consumer or agency retailer models, will arrive in North America in the next three years. Many of these new brands and models will be manufactured in low-cost markets like China, further intensifying market competition.

And did I mention the current economic state where the federal government has raised interest rates 11 times in just over a year, further spiking the cost of new vehicle loans?

All this disruption has created a tsunami of defection industry-wide, and this tsunami is threatening to wipe out market share.

Original equipment manufacturers (OEMs) like GM, Ford, Nissan, BMW and others are waking up to this reality and frantically putting retention programs in place. While a new dealer retention program or an aggressive loyalty incentive may boost some sales in the short term, these tactics are band-aids and not long-term solutions.

Disruptions of any kind, whether they be natural—like an earthquake, financial—like a recession or organizational—like a leadership crisis or failed business, serve a purpose. Disruptions reveal flaws. And with every disruption comes an opportunity.

So, what is the flaw in the retail automotive industry that has made it so susceptible to disruption? I believe that it’s rooted in the highly transactional nature of the business.

The automotive industry operates in a 30-day year. Every 30 days, every dealer completes the equivalent of a full financial year-end, creating intense pressure to perform. On the 31st of each month, the dealer literally goes from “hero” to “zero” overnight. While there are many performance metrics driving this intensity, sales success is primarily measured based on two factors: how many sales are achieved and how much gross profit is earned.

In essence, the more value a dealer or brand can extract from a customer in the shortest period of time, the greater its success.

This short-term focus may appear to have worked well for car dealers in the recent past, at least when competition was predictable, banks and governments were offering ”free money” and consumers were spending like drunken sailors. Today, however, a different business model is needed.

To create a different business model, let’s start by turning the fundamental measure of success upside down. What if a dealer, brand and manufacturer decided to measure its success by how much value it added to its customers, rather than how much value it extracted?

While at first glance this may sound simplistic, let’s dig a little deeper. If adding value was the primary measure of success, what would some of the direct outcomes and key performance metrics look like?

First, we would assume that a focus on adding value would translate to better CSI (Customer Satisfaction). Next, we would assume that customers who are treated well would remain loyal to the dealer and the brand . . . they would return and refer friends and family. Third, we would expect that these loyal customers would spend more money and do it happily.

Let’s translate these three outcomes into real key performance indicators and financial metrics. The first metric would be customer satisfaction. It’s been proven in every industry that customers who have an exceptional shopping experience transact at a higher rate. Additionally, in today’s world of social media and digital applications where everyone has a voice, stories of happy customers can easily be shared. Increased customer satisfaction should be leveraged in marketing as a form of digital currency.

Second would be customer retention. Endless studies have proven over and over that happy customers are five times more likely to return, especially when they are serviced well after the sale. When my team works with sales managers, we tell them that their goals shouldn’t be to sell a customer a vehicle, but rather to sell them three vehicles and to sell their trade-in three times. This retention focus has the potential to be transformational to a car dealer’s business. Think about it. In order to sell a customer more vehicles and to sell or renew them more often, the dealer needs to treat them well and structure the deal so that they can return to the market sooner. There is no place for opportunistic or predatory business practices.

Lastly, there is a measure of success that although not a foreign concept in the automotive industry, has yet to be defined and standardized: Customer Lifetime Value. In simple terms, Customer Lifetime Value is the sum calculation of a customer’s total lifetime spend. When it gets tricky is when you add a $65,000 vehicle purchase with a 5% gross profit to a $179 service package with a 30% gross profit. Which transaction is more valuable? Financially the dealer needs both to be profitable and retain the client.

Ultimately, a handful of proactive dealers that I work with are starting to analyze Customer Lifetime Value by sales transactions and service transactions both separately and in aggregate. They are also starting to look at household Lifetime Value as many families and households have multiple vehicles. This allows them to identify, create loyalty programs and create bespoke offers to high value customers just as companies like Marriott hotels has done with their BonVoy program.

For dealer groups, it is of particular interest to analyze the spend of a customer and household across multiple dealerships within a group, especially if the group has diversified with multiple brands, used car centers, financing and warranty offerings, mobile servicing, daily rentals and EV charging packages. Certainly, for larger groups, the first vehicle sale is just the entry point into their ecosystem of products and services. But none of these “additional” products and services can be realized if a dealer or dealer group can’t keep their customers.

So, what is one actionable step that any automotive dealer or any retailer can take to start to shift their organization from a transactional business model that measures success in a single sale to what I call a portfolio business model that measures its success in both the multiples of ongoing transactions and the statistical probability of future transactions?

Measuring customer satisfaction, retention and Customer Lifetime Value are key, but the one step that “lands” all three into an actionable strategy is to develop a communication strategy to customers AFTER they purchase your product. Analyze the customer life cycle with your product or service. Create touch points of communication that aren’t trying to sell them again, but are about adding value.

For car dealers we look at the typical ownership cycle in thirds. The first third (about 18 months) the communication is all about ensuring that the customer is enjoying their new vehicle. We send them surveys, industry articles about how great their product is (to affirm their purchase decision) and we send them service and accessory offers to protect and add value to their investment.

The second or mid-ownership communication is all about product information. We share what's new with the industry—articles about driving trends and the shift to EV purchasing. We share what’s new with the product—the new models and new technology like autonomous driving. We also reach out and offer to schedule a two-year “no-obligation options review,” a personalized appointment where we analyze their driving habits and discuss any “big life changes” to make sure their current vehicle is still “best for them.”

The last third is focused on renewing their vehicle but the focus is to share new vehicle and ownership options with them. We leverage the customer experience principle that companies like Apple have mastered: Give your customers options they didn't know they had, and you delight them. When your sales team approaches your customer’s renewal or next sale as an opportunity to explore new options, you position your team as trusted advisors and the whole approach from the sales process to the language becomes more conversational and consultative.

Best of all, our clients are proving that this portfolio-focused approach to ownership cycle communication is helping them sell more cars to past customers each month. When you create a predictable deal flow from past customers every month, the hamster wheel of the 30-day year slows down. This allows you to focus on really improving customer experience, implementing proactive retention initiatives and strategically growing Customer Lifetime Value.

Strategies like these are proving to help dealers, brands and OEMs not only survive but even thrive in this decade of disruption.