3 Ways To Drive Dealers To Discover Profitability Through Efficiency

July 14, 2015


It’s time for a little truth-telling.

KC427Let’s start with TrueCar. As a matter of principle, dealers don’t like the company. And who’d blame them? TrueCar essentially tells customers, “we’ll set you straight on a vehicle price before you contact the dealer.” Yet, if you take the company’s customer base at face value, roughly half of all franchise dealers have signed on.

What gives? The answer is TrueCar’s relevance to today’s consumers. Their “never overpay” message taps into a chief car-buying emotion for consumers—fear of paying too much. At the same time, TrueCar’s promise of a faster, less frustrating purchase experience addresses another consumer concern—the last time they bought a car it took forever, and who’s got that kind of time?

I know some dealers wish that TrueCar would just go away. A handful of dealer-driven lawsuits this spring suggest this sentiment is alive and well.

But here’s the reality: TrueCar, and other companies that aim to erode or take away the traditional role of dealers in the car-buying process, will remain unless and until dealers credibly capture the mantle of relevance these third-party players have claimed for themselves.

At its most fundamental level, this challenge will require that dealers embrace a higher level of efficiency and transparency than they’re accustomed to providing.

This resistance owes to three factors.

First, dealers’ businesses have seen great success in spite of minimal efficiency and transparency. Like many business owners, past precedent sets practice for dealers. This makes it difficult for dealers to change even if their business practices are less effective than they used to be.

Second, the pain of inefficiency and a lack of transparency isn’t readily apparent to most dealers. Indeed, we’ve all been blessed by ever-better good times the past few years, with rising new/used vehicle sales volumes. But as dealers view their top-line numbers with satisfaction, many miss that the return on their investment in cars, facilities and people is lower than it used to be. Stats from the National Automobile Dealers Association show a steady decline in margins for new/used vehicles (31 percent and 20 percent, respectively) over the past five years

Third, the traditional dealership model’s inherent inefficiency and lack of transparency is a matter of great pride among dealers. The thinking goes like this: Car deals are complicated, and it takes the expertise of a dealer to ensure buyers find the right car and right price. In addition, it’s as American as apple pie for consumers to expect that they will negotiate the vehicle price, trade-in values, loan rates and, to some degree, F&I product purchases.

Unfortunately, all three of these factors have combined to create the current predicament, where industry outsiders, like TrueCar, are capturing consumer attention and carving out a part of the car business for themselves.

But some dealers aren’t taking these circumstances sitting down. They’ve made greater levels of efficiency and transparency operational imperatives for their businesses. Their efforts to transform the way they retail new/used vehicles provide a roadmap for other dealers to become more relevant for car buyers today and tomorrow. Their efforts often focus on three key areas:

  1. Adoption of new technologies. These technologies help dealers identify the new/used vehicles that hold the greatest appeal to potential buyers and to price every unit to meet the current market. The end goal is two-fold: to stock the vehicles that will garner the most consumer attention and to create a clear and transparent value proposition that stands up to competition. As they price new vehicles, dealers account for the transaction price ranges advertised by TrueCar and others and, in fact, use them to enhance credibility with potential buyers.
  2. Faster transaction times. Large dealer groups like AutoNation and Sonic Automotive have made a “one hour or less” transaction time an operational goal. To achieve the benchmark, they’ve reduced, if not eliminated, the traditional back-and-forth negotiation with customers in the showroom. In some cases, negotiations over vehicle prices and trade-in values occur online, with the help of tools that allow buyers to self-direct their deal. In other cases, the dealers stand behind the asking prices they’ve posted online, telling buyers “what you see is what you pay.”
  3. Increased productivity. With the right cars and right prices, and a faster sales process, efficiency- and transparency-focused dealers correctly conclude that sales associates can and should be more productive. It’s not uncommon for these dealers to set 15 deals a month as a minimum performance standard. By creating an environment where increased productivity is the norm, dealers are able to reduce personnel costs, which benefits their bottom lines.

In summary, dealers should at least be aware that our industry is in the midst of a transition to a different way of capturing the hearts and minds of car buyers. Perhaps the key lesson is that in times of transition, tradition is often the biggest impediment to success.