Can the trend in dealership subscription services affect dealership valuation? Scot Eisenfelder shares his opinion in this video blog.

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."

CEO & Executive Chairman Scot Eisenfelder shares his views on autonomous vehicles and their impact in this short video blog.

As front-end margins continue their decline, dealers are more reliant than ever on fixed ops revenue. Fortunately, the opportunity to maximize service revenue has never been greater for dealerships.

In the last decade auto sales have boomed. Factory maintenance programs are driving more initial service visits. Increased CPO sales are creating more reconditioning and used vehicle service business. High recall rates are driving many customers back to franchise dealers.

So why do dealerships capture less than half of all potential service revenue from the vehicles in their service lanes? It comes down to inconsistent processes and the inability to meet customer expectations.

In a mobile-first world, customers want pricing transparency for standard services and they want to schedule appointments online. The drop-off, communications and pick-up processes are inconsistent at most dealerships. Why is it that a customer can order and track a pizza being made and delivered to them on their phone, but they have to call your dealership several times to check on the status of their vehicle—and then wait in line to pay at a cashier?

To maximize revenue potential, focus on improving these five key service processes with technology and best practices.

Schedule

According to the 2017 JD Power CSI survey, only 13 percent of customers scheduled their vehicle service online. This is despite the fact that nearly all dealerships have an online scheduler and most service reminders are digital.

One issue with online scheduling is that many dealers are afraid of competitive shopping, so they don't post prices online. It's unrealistic to expect a customer to schedule an appointment for a 30,000-mile maintenance when they don't know the price.

A service scheduling platform should be transparent, easy and convenient. Look for a platform that integrates with your DMS so that all customer information, vehicle history and other data is available, whether the customer schedules online, with a BDC or direct with a service advisor.

Write

An efficient, mobile write-up process increases repair order (RO) revenue and improves the customer experience. Start with in-lane tablets to assist with customer reception and conduct a thorough and effective vehicle walk-around.

Look for a system that integrates with both your DMS and your manufacturer, so recall information and other data is easily accessible. Also look for integrations with your other third-party vendors; such as loaner program or tire program partners.

Inspect

An electronic multi-point inspection (MPI) process uncovers new vehicle needs and drives more RO lines. Additionally, it creates a professional and consistent customer presentation. An effective MPI process has four steps:

·        Identify all the work that needs to be done

·        Have a quality conversation with the customer about the recommended services

·        If the customer declines, identify the reason. Is it trust, timing or affordability?

·        Offer a solution for the reason. If it’s trust, show visual proof of the repair with photos or videos, if at all possible. If it’s timing, offer a free loaner car. If it’s affordability, offer a payment solution.

One of the most important reasons to capture MPI data with an electronic tablet is so that you can use that data effectively downstream. This allows you to follow-up with the customer so you can re-capture unsold service recommendations, and also to market to customers shortly after their visits.

Track

The ability to text customers and keep track of conversations is critical if you want to keep customers informed. Look for a compliant texting platform that offers the ability to text throughout the customer's appointment.

Also, make sure your texting platform has a management dashboard that allows you to view all text messages between your employees and customers. To add convenience for the customer, introduce flexible online invoicing and payment options that can be accessed via embedded links within the texts.

Retain

To drive more second and third service appointments, use customer data and technology to build loyalty. Leverage your manufacturer's owner retention program (ORP) and explore options to enhance it with digital marketing.

Adding display ads, search engine marketing (SEM) and social media campaigns to your service marketing program will significantly increase reach, frequency and response rates.

If current trends continue, fixed operations revenue will continue to grow as a percentage of dealership gross profits. Many dealers underinvest in service lane technology and marketing, compared to what they spend in sales. Improving these processes will increase efficiencies and drive more revenue.

Read the headlines and you see it everywhere: online used vehicle sales are booming.

Carvana is expanding into dozens of new markets and although it has yet to turn a profit, its vehicle unit sales more than doubled and gross profit nearly tripled in Q3 2018. The retailer just announced $2 billion in financing from Ally Financial.

Large dealer groups have recognized the opportunity and are jumping on the bandwagon. AutoNation has invested in Vroom and Lithia Motors has invested in Shift.

But assuming you're not a huge dealer group with millions of dollars to invest, how can you compete with online used vehicle retailers? Carvana certainly doesn't offer the lowest prices, so what attracts consumers to their brand, as well as other brands?

The answer is simple. Customer experience. What consumers want more than anything in a shopping experience is information and pricing transparency. When dealers withhold these items, many people choose to shop elsewhere.

In virtually every other industry, retailers post prices online and give information freely. Consumers expect similar transparency in the auto industry but many dealerships are still reluctant to give customers what they want.

But the way consumers shop today is never going to change. The Internet has changed that forever.

Years ago, when my wife and I were looking for a new house, we filled up a Manila envelope with information about desirable neighborhoods, school districts and proximity to venues, restaurants and other places that we thought we might frequent. Ninety percent of the shopping was done before we called a realtor. When it was time, all we had to do was find a house in our price range in the neighborhood we liked.

Of course, today's consumers don't use Manila envelopes to store research. Everything is done online, but it's the same concept. They know what they want and the last step is to call a dealership to get the final pieces of information they need in order to make a decision.

This information includes:

• The real, final price on the vehicle that includes all taxes and fees
• Value of their trade-in
• Financing options and monthly payments
• Aftermarket product options and pricing

When a car shopper has this information on two or three vehicles in consideration, it's easy to make a final decision.

Once that decision is made, the consumer is more than willing to visit the dealership to see the vehicle, do a test drive, validate the trade-in and finalize paperwork. Ideally this final part of the process should take no more than one hour.

So, back to the original question. How can individual franchises and smaller dealer groups compete with online used vehicle retailers?

Be transparent. Invest in technology that gets your customers 90 percent of the way through the purchase transaction. Several affordable technology options exist so it doesn't require a huge up-front investment.

And don't forget what you can offer these pre-owned customers that Carvana and other online used vehicle retailers can't. Service. In fact, the four- to six- year old vehicle market is a prime target for dealerships looking to grow service revenue.

If you're worried whether pricing transparency will erode your used-vehicle margins in the same way that it has affected new vehicle margins, you're worrying about the wrong thing.

When you create a transparent and customer-friendly used-vehicle purchasing process, you create more opportunities to service those vehicles and build lasting customer relationships. That's where the real, long-term profit potential lies.

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.

CEO & Executive Chairman Scot Eisenfelder shares how data can increase revenue in the service drive in this video blog.

After an unprecedented period of sales volume growth, the prediction for a flat Seasonally Adjusted Annual Rate (SAAR) in the coming years has significant implications for dealerships. As competition for new vehicles heats up, front-end margins will continue to decline, forcing more dealers to focus on back end profitability.

One of the biggest obstacles dealers face in boosting service profitability is increased competition from independent repair facilities (IRFs).

Traditionally the 7- to 12-year-old vehicle market has been the bread and butter for IRFs. Due to recent sales trends, the number of units in operation in this vehicle segment has dropped in the last couple years. As a result, IRFs looking for growth have become more aggressive in their search for new customers, primarily in the 4- to 6- year old vehicle market.

Meanwhile the same sales trends indicate that for dealers, service opportunities in the 1- to 3-year-old segment are declining. In order to grow revenue, dealers must also set their sights on servicing the 4- to 6-year-old vehicle market.

In the next few years, the battle for this lucrative vehicle segment promises to be intense. To successfully conquest these 4- to 6-year old vehicles, dealers need to be proactive in the following areas:

Find Active Owners

Most 1- to 3-year-old vehicles are in the hands of the first owner, thus contact information is still in the DMS and easy to find. As vehicles age, more vehicles are in the hands of second owners. Third-party lists vary in quality, and increasing marketing spend to reach all potential customers in your primary market area can prohibitively raise the cost per RO.

Before paying for outside data, mine your lost souls and CRM “no sales” to find new service prospects. These customers considered doing business with you in the past and might be willing to give you another try. Messaging should address why they need to defect from your local competitor; in particular, issues of trust, convenience and service quality are more successful motivators than purely price.

Social media channels, in particular Facebook and Instagram, are also very cost-effective channels to address these consumers.

If your store is part of an auto group, sharing customer data is a critical part of this equation. Most automotive groups fail to effectively cross-sell service. Customers who buy a pre-owned Honda at a Toyota store are unlikely to take that vehicle back for service. However, they might be looking for a Honda dealership. Is there a Honda store in your group? Is the CPO Honda buyer data from other stores shared with that Honda store? Is that Honda store able to target those customers with offers based on individual vehicle service history and current needs?

Another source of customers in the 4- to 6-year-old market is recalls. Recalls offer a tremendous opportunity to create loyal customers. An effective MPI process is integral to this process and must be carefully managed so as not to alienate the customer. Transparency and communication are key to building relationships with recall customers that will translate to future revenue.

Nurture Relationships

Most dealers have room for improvement when it comes to maintaining customer relationships, especially through the transition from warranty to post-warranty. Extended warranty and other attractive loyalty offers can help.

What really needs to change however, is the mindset of most service personnel. Variable pay plans in service reward transactions rather than relationships. Service personnel should be rewarded when customers return for service, rather than on gross sold. The latter incents employees to favor immediate gratification, which risks alienating customers.  

The Right Offer

Dealers need to move beyond the “oil change” mentality. From a consumer perspective, there is little value incentive to having oil changed at a dealership versus an independent repair shop. However, when it comes to post-warranty end services and major repair items, the dealerships’ value proposition strengthens. Technician certifications, genuine OEM parts, loaner vehicles and other amenities are all strategies that dealers can use to attract new service customers.

Additionally, pre-paid maintenance programs and extended warranty offers are attractive to a percentage of the 4- to 6-year-old vehicle owners.

Currently dealers face a number of headwinds when it comes to growing service revenue. One of the greatest opportunities for growth lies in servicing the lucrative 4- to 6-year-old vehicle segment. However, to attract and retain these customers will require a new mindset and new best practices until the wind shifts again to our backs.