In the last seven years, new vehicle gross margins have declined from four percent to two percent. If that pace continues, profit margins will be wiped out by 2025. It appears that the front-end grosses dealers enjoyed 10 or 15 years ago are never coming back.

F&I profits have made up for some of these lost profits, but this trend is not sustainable for the long-term for three reasons:

1) Dealers have pretty much maxed out what they can reasonably charge customers for F&I packages

2) The same transparency that drove down new-vehicle per vehicle retail (PVR) is likely to drive down F&I PVR

3) F&I gross margins are vulnerable to rising interest rates and increased regulation

Remaining profitable in the future requires learning how to operate a razor and razor-blade business model. With this business model, the manufacturers' strategy is to sell their products (e.g. razors and printers) at zero profit and make all the money on the back end, selling razor blades and ink cartridges.

When applied to dealerships, this strategy necessitates full transparency on the price of the vehicle, with the acceptance that there will be little to no profit. Then, focus all money-making efforts on the back end, in the maintenance and servicing of that vehicle.

For dealers, this business model forces a fundamental shift in mindset and operations. Here are a few recommendations on how to make it work.

View the customer differently
Instead of viewing how much profit you make from each sale, you have to look at what the lifetime value of that customer is. Instead of asking, "How many cars can we sell this month?" you have to ask "How many new customers can I acquire this month, and how can we convince those customers to continue servicing with us?"

In a razor and razor blade model, your goal is to keep every customer through the entire ownership lifecycle.

Move from transaction-based mindset to a relationship-based mindset
Dealerships were set up to optimize individual transactions instead of relationships. This has to change. Even the sale of the vehicle is split into two different transactions: the sale and F&I. Going forward, merge the sales and F&I functions. Have a product presenter and a deal manager.

In service, develop a pre- to post-warranty customer retention strategy. Dealers give up too easily as a car moves out of warranty, ceding valuable business to independent facilities.

As customers move from pre-warranty to post-warranty, buyer values start to shift. Issues of price and value matter more as they pick up more of the bill. This requires a change in the way you market to and communicate with that customer.

Change Pay Plans
The original concept of sales commissions was based on the idea that gross margin was determined by the strength of the salespersons' ability to negotiate. Today salespeople don't have the opportunity to influence gross margins, so why pay them on that basis?

We have to reconsider the traditional approach to 100% variable compensation and move towards a model where we're incenting employees to bring customers back into the dealership. Variable pay plans in both sales and service encourage the wrong behavior and are thus out of alignment with an optimal customer experience.

Develop a less mercenary pay plan. Pay someone a minimal salary so they're not dependent on individual transactions to put food on the table. Bonus your employees on metrics other than gross sales, such as repeat business and positive reviews.

In the next few years, learning how to operate a razor and razor-blade business model will allow dealers to continue growing profits, even as front-end profit margins go the way of the dodo bird.

Scot Eisenfelder shares his opinion on whether third-party leads are worth the expense for dealerships in this video blog.

CEO & Executive Chairman Scot Eisenfelder explains why customers defect in service in this video blog.

Scot Eisenfelder shares why conquesting through service is the key to future profitability.

CEO & Executive Chairman for Affinitiv Scot Eisenfelder shares why recalls aren't going away and why dealers should pay attention to them.

Many dealers struggle with getting customers to bring their vehicles in to take care of recall issues. The fact that the average recall completion rate is around 75 percent, tells us that standard recall marketing campaigns aren't as effective as they could be.

Your customers either aren't getting the message, or they set it aside and forget about it, or they just don't feel a sense of urgency to get the repair done.

Yet it's worth the time and effort to actively pursue recall work. Our data shows that the average recall RO is $695, more than double the average RO of $335.

One way to increase recall response rates is to expand marketing channels from email and mail to include social media, call campaigns and display advertising.

It's also helpful to think outside the box and leverage your data to find more recall work. Try these three strategies to generate more recall ROs.

1) Upsell the recall, not additional services

Most of the time when customers bring in their vehicles for a recall, service advisors attempt to upsell them to additional services. The problem here is, many consumers aren't motivated to bring in their vehicle in the first place.

If you can't convince the customer that a recall issue is urgent, use reverse logic to get them in for a needed repair, then upsell the recall.

First, identify VINs with known recalls and investigate likely issues the customer is having based on their vehicle history and miles driven. For example, if you know that a BMW with 50,000 miles needs new brake pads, create an offer for that customer. If other vehicles in this group are due for 30,000-mile maintenance, create a compelling offer for them.

You can afford to make these offers very competitive because you know that once the customer comes in, they'll likely agree to take care of the recall issue while there. Because the value of these recall customers is so high, consider offering pick-up/drop-off service or a free loaner.

The most cost-effective methods for delivering such highly targeted offers to individuals is via customized social media ads and/or call campaigns.

2) Find VINs in sellers' hands

Many vehicles with open recalls are in the hands of other sellers, such as local independent dealers, Carmax, or sitting on an auction lot.

To find these recall VINs, use screen-scraping tools to extract data (such as VINs) from other sellers' websites. Once you've identified the vehicles with open VINs, approach the seller and offer to pick the vehicles up, do the repairs and return them to be sold at the end of the day.

The sellers should be motivated to get the issue taken care of purely from a liability standpoint. In today's litigious world, sellers should be concerned about selling a vehicle with a known issue to a consumer. If the seller doesn't appear to be motivated, sweeten the deal by paying them $50 per vehicle to allow you to do the recall repair.

3) Use recall as a conquest platform

Many dealers calculate the ROI of a recall marketing campaign as dollars returned from that campaign only. This is short-term thinking. Recalls should be pursued aggressively as a productive means to re-engage customers with far greater long-term value than the profit from one campaign.

Your recall campaign might reach a first owner who has stopped servicing with you, or a second owner who's unfamiliar with your brand. Here is a chance to build or re-build that relationship. What is that opportunity worth to you?

When a recall customer schedules an appointment, think about ways to optimize their experience so that you can win their business for the long-term. It could be with an additional, compelling offer or a free loaner car.

Let's face it, many of these vehicles are older and in the hands of second owners, so the price expectations are different. This may require heavier discounting as dealers are competing directly with aftermarket alternatives.

This requires a shift in mindset from "How much money can I make from this recall?" to "How much am I willing to invest in this opportunity to create a loyal customer?"

When the customer comes in, invest in a thorough multi-point inspection (MPI) to document all the vehicles' needs. Follow up with targeted offers for those repairs, and don't forget to promote your brand's value proposition.

The first two strategies should help you find and obtain more recall repair business, while the third strategy will help to re-frame how you measure ROI from your recall marketing campaigns. Recall repairs can be lucrative, but their real value lies in the opportunity to service these customers for years to come.

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.

Affinitiv CEO & Executive Chairman Scot Eisenfelder shares why dealerships should pay attention to the razor and razor blade models for their stores.

One of the biggest benefits of an omnichannel marketing strategy is the ability to deliver the right message to the right person at the right time. In this blog, I'm going to focus on the "right person" part of this equation.

If your goal is retention marketing and building customer loyalty, of course it's always best to market to the customers in your own database.

But what about conquest marketing?

Marketing vendors talk a lot about strategy and messaging, but as we know that's only part of the equation. To maximize your return on investment, you also need a really good list.

Some vendors will buy lists with thousands of names in your dealership's primary market area (PMA), then blanket the entire area with postcards or coupons. If they have email addresses, they'll send out e-blasts to the entire list hoping for a one- to two- percent response rate. This is an expensive and highly ineffective strategy.

You'll get much better results and ROI with a strong list and sending targeted messages to various segments of the list based on data. What kind of data? Make sure your marketing vendor curates separate sales and service prospect lists using the following information:

Demographic Data

When purchasing a list, you can choose a number of demographic targets such as income, age, marital status, credit score ranges and over 175 lifestyle selections. How do you know which ones to target?

Start by analyzing your current customers. The top 20% of your customers product 69% of your gross profits. Compile demographic data on these customers and look at trends. What is their average income? Which zip codes do they live in? Use this demographic data to set parameters for prospects you want to conquest.

A number of lifestyle factors also help to determine which consumers in your PMA are in-market for a new or used vehicle. These include newly engaged, newlyweds, parents-to-be, new parents, parents with teen drivers, college bound students and parents, new movers, new divorcees and automobile off-lease.

Another strategy that falls into the demographic data category is to purchase vehicle registration data and cross-reference those names to your purchased list. In sales conquest campaigns, this allows you to target competing brand owners, selectable by vehicle make, model and year.

Customer Transactions

Up to 72% of dealership customers choose third-party independent repair facilities (IRFs) for service. Fortunately, it's possible to access credit card transaction records for consumers who frequent Pep Boys, Jiffy Lube, other IRFs and even competitive franchise dealerships. Cross-reference these names to prospects on your purchased list.

These consumers make ideal targets for service conquest campaigns. At an average $40 to $80 per customer acquisition, service conquest campaigns can be far more cost effective than sales conquest campaigns.

Online Behavior

For digital campaigns, it's easy to set up targeting parameters based on consumers' online behavior. This includes websites visited, such as third-party auto shopping sites, or search terms used in Google and other search engines.

Depending on the search terms used, you can easily identify where the prospect is in the buying cycle and deliver messages accordingly. Early in the buying cycle it's best to use a strategy that raises brand awareness. Later in the buying cycle you might want to run PPC campaigns with calls to action designed to convert active shoppers into visiting your website or calling your dealership.

Online behavior is also highly effective for digital service conquest campaigns. Consumers who are actively looking for vehicle repair can be targeted using PPC campaigns and retargeting ads.

Predictive Analytics

Past behavior is the best predictor of future behavior. With advanced data analysis technology, it's possible to use data from multiple sources to generate a complete view of all customer interactions. With a detailed analysis of past transactions, it's possible to predict the likely future transactions that will take place, and when.

Although predictive analytics can be used in conquest campaigns, the technology works best with the customers in your own database, including defectors. Rather than try to entice them back with an oil change coupon or generic service offer, use data points to identify specific opportunities based on past behavior and where they are in the ownership lifecycle. With detailed data analysis, you should be able to target customers who are due for routine maintenance, trade-in value estimation, lease termination, warranty expiration, recalls and more.

Using all of this data together allows you to narrow down a purchased list of potentially thousands of random consumers in your PMA, to hundreds of in-market car shoppers and/or service conquest prospects, segmented for targeted message delivery. The power of a good list significantly reduces marketing costs and increases ROI, so make sure your dealership's marketing partner knows who's on your list.