Affinitiv CEO & Executive Chairman Scot Eisenfelder shares why dealerships should pay attention to the razor and razor blade models for their stores in part 2 of this series. 

Marketing tech veteran hired to lead Affinitiv’s growth and expansion

Chicago, IL—April 1, 2019— Affinitiv, the retail auto industry's leading marketing technology provider, has appointed Kevin McShane as Chief Revenue Officer (CRO). McShane is a 20-year veteran of the enterprise software and services industry, and brings years of experience deeply rooted in marketing technology.

“We were looking for a revenue leader who had expertise in the marketing tech space, plus the ability to build and accelerate a repeatable revenue engine, with a track record of delivering strong growth results," said Scot Eisenfelder, CEO of Affinitiv. "Kevin is a natural fit for our company and we're pleased to have him join our executive team and organization.”

McShane was most recently CRO of MOBI Wireless Management based in Indianapolis, Indiana. He joined the company in late 2017 and quickly built and scaled a revenue engine that led to a highly successful exit selling the company late in 2018. As an executive and growth strategist with over 20 years in building and scaling Software-as-a-Service (SaaS) companies into leading organizations, his track record has consistently delivered hyper growth and market dominance. During this time, he also led four venture capital/private equity companies through exits and has led large sales teams at a several companies, including HP Software. 

“I am thrilled to join the Affinitiv team and very excited about our future. Our customers are looking for the intersection of innovation, technology and service to drive better outcomes for their customers. The investment Affinitiv has made in these three areas position the company for a bright future," said McShane.

McShane earned his MBA from the Kellogg School of Management at Northwestern University and holds a bachelor’s degree from the University of Notre Dame. He's currently a CEO Mentor at the Junto Institute in Chicago, and for the last nine years has

served on the Notre Dame Monogram Club Board of Directors. McShane and his wife Kate are raising four children and live in the city of Chicago.

For more information, visit www.affinitiv.com

About Affinitiv:

Affinitiv is a leading marketing technology company serving automotive manufacturers (OEMs), dealership groups, and individual dealers. Affinitiv’s Connectiv1 Platform is designed to provide a 360° view of customer, vehicle, dealership and marketing campaign effectiveness all in one place. It makes it easy for auto dealerships to leverage data and target customers with the right message at the right time on the right communication channel.

Affinitiv enables dealerships to produce, manage, measure and optimize omni-channel communications to drive brand loyalty and increase revenue. Affinitiv’s digital and analytic capabilities support a consistent customer experience through the entire ownership lifecycle. Affinitiv was formed in 2016 and is headquartered in Chicago, IL.

Scot Eisenfelder shares his viewpoint of how subscription services will impact the automotive industry in this video blog.

At NADA many exhibitors hyped their digital retailing solutions to support online vehicle transactions. While no one has cracked the code for a complete, seamless online transaction, there are several great solutions that provide enough functionality to meet consumer demands. After all, consumers are not asking for a 100% “digital process."

What consumers rely on most from a digital experience is to cut through the traditional 'shishcamunga' at auto dealerships, and to experience the same transparent, consumer-driven process they are accustomed to elsewhere.

I saw this at AutoNation years ago, where its call-center-enabled AutoNationDirect delivered amazing customer satisfaction, even when the process required pdf contracts and scheduled phone appointments. Most dealers have better technology today, but the question is, do they have the will to be truly transparent?

The major remaining hurdles to Digital Retailing are not technical, they are cultural. Many dealers still believe transparency and profitability are in conflict. So, they resist the business model changes—e.g. transparent pricing across the four-square and pay plan changes—required to enable scale digital retailing.

Without the ability to see real, market-based prices on the vehicle purchased and trade-in, consumers will not transact, regardless of how slick the UI is.

In addition, consumers will need better information about F&I products and pricing to purchase online. They will need unbiased guidance to navigate their many choices in a very complex transaction. What they don't want or need is advice steered by pay plan considerations.

Dealers first need to commit to transparency, then figure out a business model and technology that results in the highest profit from a transparent process. I believe that those dealers who embrace change the fastest, will be rewarded long-term in a new market.

Don’t take my word for it. “The Market” has already issued its initial verdict. What does “The Market” think about how digital retailing will unfold? I think the relative market value of Carvana and the leading public auto retailers tells an interesting story.

At the end of January Carvana’s market cap equaled nearly $6 billion, nearly the same as AutoNation and Penske combined. That suggests two things. First, “The Market” sees tremendous value creation potential from digital retailing—hence Carvana’s valuation. Second, “The Market” does not believe today’s auto sales leaders will lead the way—hence the gap with traditional retailers.

The key to closing that gap is not to focus on technology, but consumer experience. When the bath-robed Millennial from Carvana’s inaugural ads, said “that didn’t suck” he was referring to the overall experience, not solely the digital UI/UX.

Every dealer has the capacity to close the gap, but it starts with a commitment to transparency, because technology-driven opacity will still “suck."

Forget autonomous vehicles; the impact of these trends is being felt today

Chicago, IL- January 14, 2018- Affinitiv CEO Scot Eisenfelder is shining a spotlight on five industry trends that have the potential to negatively impact auto dealership operations in 2019, unless dealers take immediate action. Although disruptors such as autonomous vehicles, ride sharing and alternative powertrain vehicles dominate today's headlines, these trends are several years away from having a direct impact on dealership operations.

Five trends that Eisenfelder has identified as having more immediate impact include declining front-end margins, improved product quality, more onboard technology, aging units-in-operation (UIO) and consumer expectations.

"While the news is full of major disruptors, there are more practical realities shaping auto retail today," said Scot Eisenfelder, CEO of Affinitiv. "Virtually all of these trends will force dealerships to rely more on fixed ops as a source of future profit."

Declining Front-End Margins. New vehicle gross margins have declined significantly in the last seven years, from 4.0% in 2011 to 2.2% in 2018. The same pricing transparency that drove down new-vehicle per vehicle retail (PVR) is likely to drive down F&I PVR in the next few years.

To combat this trend, dealers will be forced to shift their business strategy to a razor and razor-blade model, whereby products are sold cheaply and all the profit is made on the back end.

"This requires a shift in operational mindset," said Eisenfelder. "If you can't make a killing off the first sale, how do you manage the customer relationship going forward?"

Dealers should invest in service marketing designed to increase customer loyalty, and in technologies designed to improve the customer experience in the service department.

Improved Product Quality. Available work per unit is declining as quality improves, service intervals lengthen and work shifts from repair to replace.

"Dealers can no longer count on substantial warranty work and in-warranty customer pay business from new vehicle sales as a way to feed steady business to their service departments," said Eisenfelder. "Additionally, the average service interval length has increased from every 3,000 miles years ago, to nearly 10,000 miles today."

To address this, dealers need to maximize Revenue per Units-in-Operation ($/UIO). Today's franchise dealers only capture 20 to 25 percent of revenue potential from their UIO, and less than half the work needed on vehicles that enter their service lanes. To increase service yield, dealers should focus on providing complete vehicle care to current customers.

This requires the ability to identify, communicate and capture all service needs, which may require modernizations to the write-up, multi-point inspection (MPI) and service recommendation processes.  

More Onboard Technology. This trend favors dealerships, giving them a competitive advantage over independent repair facilities (IRF) based on technician knowledge. To leverage this advantage, dealers need to move beyond an oil change mentality and send relevant, targeted offers based on customer data, vehicle mileage and service history. This requires the ability to leverage data contained in the DMS/CRM.

Aging UIO. Most industry analysts predict a flat to declining new vehicle market through 2021. This means fewer one- to three- year old vehicles to service, with a corresponding increase in four- to six- year old vehicles.

Number of Units-in-Operation Change Since 2017*

*Automotive News: Scrappage not removed; assumes 2018-2020 sales of 305K units.

"In this environment, sales conquest becomes brutally competitive and essentially a zero-sum game," said Eisenfelder. "In fact, it's pretty common to see incremental marketing costs exceed gross margin net of commissions."

Additionally, dealers are facing increased competition from IRFs that have seen a decrease in seven- to ten- year old vehicles to service, which are their traditional bread and butter. As a result, IRFs are aggressively targeting the four- to six- year old market.

To combat this trend, dealers will need to shift marketing spend into service conquest, which delivers better ROI at an average $40 to $80 per customer acquisition, compared to the average $1,200 to $1,600 per customer acquisition in sales. Conquest efforts should focus on finding and servicing second owners of four- to six- year old vehicles. Dealers also need to do better at retaining current customers through post warranty.

Consumer Expectations. Today’s consumers expect a transparent, modern and convenience-driven experience, which traditional dealer processes and systems are ill-equipped to deliver.

"It's truly baffling because a person can track a pizza being made and delivered to them, but they must call your dealership several times to check on the status of their car, then wait in line to pay at a cashier," said Eisenfelder.

Dealers need to improve service pricing transparency and invest in technologies and amenities that modernize the customer experience.

For more information on Affinitiv, visit booth #2139S at the NADA Convention and Expo in San Francisco, CA. Schedule a demo at http://bit.ly/Affinitivdemo

About Affinitiv:

Affinitiv is a leading marketing technology company serving automotive manufacturers (OEMs), dealership groups, and individual dealers. Affinitiv’s Connectiv1 Platform is designed to provide a 360° view of customer, vehicle, dealership and marketing campaign effectiveness all in one place. It makes it easy for auto dealerships to leverage data and target customers with the right message at the right time on the right communication channel.

Affinitiv enables dealerships to produce, manage, measure and optimize omni-channel communications to drive brand loyalty and increase revenue. Affinitiv’s digital and analytic capabilities support a consistent customer experience through the entire ownership lifecycle. Affinitiv was formed in 2016 and is headquartered in Chicago, IL.

When we are no longer able to change a situation, we are challenged to change ourselves – Viktor Frankl

The news is full of major disruptors; if you follow the headlines you might think that a world filled with autonomous vehicles is imminent (it isn't), or that new owner and retail models will soon put dealers out of business (they won't).

However, there are changes happening in the auto industry that do impact retail auto sales, and that dealers should be worried about.

The most significant in my opinion is the long-established trend of eroding front-end margins. New vehicle gross margins have declined significantly in the last seven years, from 4.0% in 2011 to 2.2% in 2018.

In response to this challenge, many dealers have focused on growing F&I revenue to make up for lost profits. This worked for a while, but I don't this trend as sustainable. For one, we have maxed out what we can reasonably charge customers for F&I packages.

Additionally, the same transparency that drove down new-vehicle per vehicle retail (PVR) is likely to drive down F&I PVR. F&I gross margins are also vulnerable to rising interest rates and increased regulation.

These trends all point to a continued decline in front-end margins. Can anything be done? Well, you could take out some costs, but that comes with the risk of negatively impacting customer satisfaction. The second option is to create a more enduring relationship with your customers.

In business this is called a razor and razor-blade model. Manufacturers of razors and printers sell their product cheap, because the real money is made on the back end, by selling razor blades and ink cartridges.

For dealers, this means the majority of profits in the future will be made servicing vehicles. This requires a shift in operational mindset. If you can't make a killing off the first sale, how do you manage the customer relationship going forward?

The traditional dealership model is not well suited to this mindset. Dealerships were set up to optimize each transaction. Even the sale of the vehicle is split into two different transactions: the sale and F&I. On top of that, you try to sell a pre-paid maintenance contract, which three different departments need to get paid on. Additionally, dealerships set up compensation structures to encourage different departments to compete against each other.

The consumer only has one bucket of money. They don't have three buckets of money, and asking them to contribute to all your buckets is pushing the boundaries if your goal is to establish a meaningful and ongoing relationship.

More important, when you try to sell all of these things up front, you have just undermined the effort to maximize the value of that customer on the back end.

To successfully operate in a razor and razor-blade business environment, dealers might want to think about making some operational changes. Here are some recommendations:

Consolidate

For auto groups, consolidate back office functions such as accounting and HR. Stop thinking of your stores as individual entities and treat them as a chain with more consistency. It's easier to maintain brand identity for a single chain than half a dozen stores.

Get to a one-transaction sale

Merge the sales and F&I functions. Have a product presenter and a deal manager. The presenter demos the vehicle and takes customers on test drives. The deal manager coordinates final pricing and takes on the F&I role.

Be more transparent with vehicle and F&I pricing

Increased transparency is inevitable and embracing this fact sooner rather than later will help to cement customer relationships.

Partly due to regulations, the markup on loans is becoming more fixed and less negotiable. Dealers who are transparent on this markup don't have a problem getting a reasonable markup. Have you ever bought a house? The mortgage broker made a point on that loan. That was the fee for helping you find the right mortgage. If you try to get three points, that won't work for consumers. Be happy with one point, and the customer will be happy too.

Also start thinking about what you want your deal manager to sell. If you can make $300 on an etch or $300 on a service contract, which is more valuable to you? Putting etch on a car doesn't bring that car back to you.

Change Pay Plans

The original concept of sales commissions was based on the idea that the gross margin was determined by the strength of the sales manager and salesperson's ability to negotiate. Salespeople today really don't have the opportunity to influence gross margin, so why are we still paying them on that basis?

The same goes for service. An advisor presents the customer with a list of three repairs that need to be made. Instead, they should present one repair as urgent, one as cautionary and one that can be done down the road. But the advisor is afraid the customer won't be back or that if they do come back, they (the advisor) won't be the one to make commission off the sale. Is this putting your customers' best interest first?

Variable pay plans are out of alignment with an optimal customer experience. They encourage the wrong things, period.

Let's develop less mercenary pay plans. Pay someone a minimal salary so they are not dependent on individual transactions in order to put food on the table. Bonus on metrics other than gross sales, such as repeat business and positive reviews.

Shift Spend to Service Marketing

With the razor and razor-blade business model, everything in the dealership is geared towards driving customers to service. So why do auto dealers still place so much emphasis on marketing the sales side of their business? They argue that sales feeds service, but I would argue equally that service feeds sales.

When it comes to service marketing, dealers need to think outside the box. Move away from the oil change mentality and stop going after coupon chasers. You offer an entirely different experience that customers are willing to pay for; including expertise, OEM parts, nice amenities and facilities, loaner cars and peace of mind, especially on more expensive repairs.

If all of these changes seem overwhelming, take baby steps. But start now, because the dealers who learn how to operate a razor and razor-blade business model will still be around when the headline-grabbing disruptors materialize in a few years.

CEO & Executive Chairman Scot Eisenfelder explains how leakage points in the service drive affect revenue in this video blog.

Have you ever noticed how the market values dealerships versus how it values Software as a Service (SaaS) businesses that derive income from the same automotive revenue stream? SaaS businesses such as CDK trade at mid-20x P/E ratios while dealers trade at 4-6x operating profit.

One major reason for this disparity is because SaaS business revenues are predominantly subscription based, while dealers are transaction based.

Subscription revenue is considered more valuable because it’s more secure during downturns. Over time, subscription margins grow as downstream revenue outpaces previous customer acquisition costs, as long as retention remains high.

Could dealers reposition themselves as subscription businesses in order to raise their market values? Absurd? Not really. Every customer acquired has a continuing revenue stream that often extends well beyond any subscription contract. 

What would have to change for dealerships to become subscription companies?

#1 Mindset. Stop selling vehicles and start acquiring customers. It’s the customer that decides where to purchase and service their next vehicle. If you spend money building and employing the best and largest customer and prospect database, market share will follow.

# 2 Accounting. The customer is the profit driver. Stores are merely the means to retain the customer. Tracking and maximizing customer profitability are as important, if not more important, than tracking store profits. See what gymnastics that requires from your DMS.

# 3 Organization. Stop behaving like a collection of individual stores. Groups have a unique opportunity to drive retention by actively and impartially serving customer needs across several brands. This gives the customer a wider range of choices while allowing the group to extend the customer’s subscription beyond the next purchase.

# 4 Pay Plans. Stop paying associates to maximize individual transactions. Maximizing F&I profits is a transactional mindset. Maximizing pre-paid maintenance and extended warranty penetration is creating long-term, valuable subscription revenue.

# 5 Process. Remove barriers that prevent consumers from returning. Eliminate service friction through customer-driven hours, make it easy for customers to set their own appointments and provide flexible transportation support. Make replacing a vehicle as easy and transparent as renewing a subscription.

# 6 Metrics. Stop measuring Per Vehicle Retail (PVR) and service absorption. These are outdated metrics that drive transaction results. Instead, measure dollars per units-in-operation ($ / UIO) and customer retention rates. These metrics create sustaining subscription revenue. You get what you measure.

The fact is, most healthy stores already derive a disproportionate percentage of their profit from subscription revenue, but don’t actively promote their superior business model and hence are not rewarded for it.

Several years ago, we did a study that showed a large dealer group obtained 69 percent of its gross profit from the top 20 percent of its customers. Much of that profit is from service loyalty, adding vehicles to the household fleet and repeat purchases over several years.

Stores should be highlighting owner base quality, service contract penetration and retention. They should also compare their subscription revenues to other dealerships. These are leading indicators of creating superior long-term value.

Dealers that make the above changes and can demonstrate steady subscription revenue that rivals a SaaS business should ultimately be financially rewarded for more attractive revenue streams.

 Imagine 20x bluesky!

CEO & Executive Chairman Scot Eisenfelder discusses whether a dealership's most profitable customers are created or made in this video blog.

Affinitiv CEO & Executive Chairman Scot Eisenfelder shares the 80/20 rules and why it's important for marketing & revenue.