One of the most significant trends that auto dealers are grappling with is the erosion of front-end margins. New vehicle gross margins have declined significantly in the last seven years, from 4% 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 unfortunately this strategy is unsustainable. 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.
This means that front-end margins will continue to decline, and could be all but wiped out by 2025. Can anything be done? You could cut costs, but that comes with the risk of negatively impacting customer satisfaction. The second — and virtually only 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, 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 opportunity to create loyal customers lies in the dealership’s service department. According to a 2017 IHS Markit study, the average length of vehicle ownership is nearly seven years. That’s a long time to maintain a relationship with someone until the next sales cycle.
The focus must then be to keep the customer coming back for service. How is this best accomplished?
Technology
You’ve probably heard that a digitized service check-in and write-up process increases efficiency and streamlines processes. That’s all true, but the main reason to implement technology in the service lane is to improve customer satisfaction.
Your customers are truly baffled why they can order a pizza and track its delivery to them on their cell phones, but must call your dealership several times to check on the status of their vehicle, then wait in line to pay at a cashier.
Technology also builds customer trust, a key component of loyalty. Customers trust a service recommendation from a “computer” that knows about their car more than they trust a service recommendation from a service advisor they don’t know.
The use of mobile tablets in the data collection process is critical. If your advisors complain that tablets take too much time, their write-up process is not as thorough as it should be. Instead of measuring the process as fast vs. slow, measure it as informed vs. uninformed.
Customer Data
Technology in the service lane delivers another huge benefit that dealers often overlook: data. At every step of customer interaction, the data you collect should be integrated into a marketing strategy designed to drive the customer to the next stage.
From needs notification, you should have the ability to track how many customers scheduled an appointment. During the scheduling, write-up and in-service notification processes, customer interactions and preferences are also gathered.
The ability to collect, analyze and use data from every customer interaction allows you to deliver highly targeted and relevant messages and offers.
The more targeted the offer, the better the response rate. Blasting out oil change coupons to your entire primary market area (PMA) is not a strategy that builds loyalty.
Predictive Analytics
Leveraging your customers’ online behavior with predictive analytics is perhaps the most underutilized and most effective way for you to build customer loyalty. Right now, there are piles of money sitting in your DMS, in the form of customers who currently need service.
To identify these opportunities requires more than simple search queries and segmentation. Messages and offers must be personalized for every customer based on a number of variables. Literally hundreds of variables can be built into a single search algorithm; everything from year and model to mileage and diesel/non-diesel, as well as information from your OEM feeds, such as current incentives or recall opportunities.
In addition to pinpointing opportunities within your DMS, a predictive analytics tool identifies opportunities from other sources, such as telematics and your customers’ online behavior. Facebook and Google properties provide your dealership with very sophisticated tools that allow you to identify current and potential customers, predict their needs based on their actions, and connect with them to raise your brand awareness and deliver your offers.
As front-end gross margins continue their decline, savvy dealers must rely on fixed ops for future revenue growth. But you can’t expect growth doing business the same old way. The ability to leverage technology, customer data and predictive analytics is key to improving the customer experience with your brand and ultimately to building long-term loyalty.
Jennifer Lee
