Remember Lehman Brothers?
I can remember the day Lehman Brothers filed for Bankruptcy, September 15, 2008. Remember what started around that time? After years over 16 MM units, auto sales fell to 13.2MM in 2008 and 10.4MM in 2009. While this is an extreme example, remember what happens when volume slows? Inventory rises and so does floor plan cost. Grosses decline as OEM’s increase stair step programs to drive higher volumes and those that don’t manage production flood the market. Sales slow, and this is quickly followed by ad credits, PDI credits, Dealer Ad Association budgets and the like. Revenues fall and costs do not unless we do something about it. We find out which variable costs are truly variable.
So where are we today? The industry is coming off sales of over 17MM. Wow! Some dealers, like AutoNation’s Mike Jackson, are calling for a flattening of volume. Dealers like Jackson are pointing to declining grosses, increased stair steps, and announcing cuts in marketing spend. Sound familiar? It’s not 2007 or 2008, but we can learn a lot from the actions we took during those years to rationalize our marketing spend and take what’s left and make it work harder.
I was responsible for a nearly $300MM marketing spend in 2007. By 2009, we had cut it by $100MM and increased market share and customer retention. For what it is worth, I would like to offer my thoughts and my experience on how to rationalize your spend and make it work harder when budgets tighten and sales slow or flatten out.
I offer the following general themes, which I will expand upon later:
- Marketing that doesn’t produce an acceptable incremental return in sales or gross profit that you can measure is not worth doing, period.
- Your brand is important to customers to the extent that if offers them some value, either through a better experience or tangible benefits. If they can’t see it, touch it, or feel it and if it is not known nor differentiated, your customer doesn’t care and you are wasting your money on brand.
- Sexy or new may sound cool and be all the rage, but the tried and true, boring but effective is the better way to drive today’s volume, gross and retain customers. That stuff that you read about or heard in a 20 group or conference but you can’t see results from? Get rid of it.
Here are some more details on what I mean:
- In-Market Customers – I believe in third-party leads and finding customers who are in market, no matter where you find them. Customers trust third-party sites and go there half the time. Those same customers close at a rate just like other sites. Most importantly, you only pay when you get an in-market customer, whose sale, gross, and F&I you can measure. Think you will get those customers anyway? Try cutting it out and see. Feel you should get those customers to your site? Why would you spend 3X more to drive customers to a site that converts at a third the rate? Because they value your brand? Quit kidding yourself. You are worried about helping to build someone else’s brand? Brand only matter when they solve a need for a customer or offer value more than cost. Seems to me that you want to be associated with brands like that. Think you can build your own brand to compete with the big online brands? Unless you are dominant regionally or have a large collection of stores, you don’t have much of a chance. At times like these, pay for action. Keep buying them until the incremental cost is more than the incremental gross. Stop worrying about where it comes from and worry about the return. Take money from your branding display ads and move it to third-party leads. That is spend that produces.
- SEM is Direct Response – I also believe in SEM and suggest you do it until the return is less than the spend. At slower times, you want more down funnel customers that you can measure and convert to a sale within 90 days. You can get more of those on Google and Bing. They way you get those most effectively at times like this is with tangible, specific offers – inventory, real price, payment, and incentive offers. SEM ads that feature specific offers and specific inventory convert at 3X the rate. Still advertising your brand and not the specific answer to the question the customer entered into Google or Bing? Why? Send that traffic to landing pages designed around the keyword. Want that traffic to go to your site so the customer can experience your brand How much lower are you trying to get your conversion rate? SEM traffic to landing pages convert at 75% higher rates than same traffic to dealer sites. At times like this, you should increase your SEM spend, broaden it to Bing and other sites in addition to Google and drive it to landing pages. Take the money from your brand spend and move it to direct response, where you can measure the return.
- Retention Drives Current and Future Service – Your service volume should be up. As sales rise, service 1-3 years later rises because those customers visit dealerships more often. But you pay the piper later because in years 3-5 they move to the aftermarket. When sales fall, service 1-3 years later fall. Are you continuing to drive an increase in your service and warranty retention rate or just riding the wave? What % of your sales return for service in year 1? If they don’t come back in year 1, odds are not good for year 2 or 3 and beyond. What % come back when the warranty expires? How many buy their tires from you? These ratios and retention rates are measures of healthy service. You can’t afford to be a victim of the cycles. Make sure you are spending money on proven retention tools like email newsletters, tire and brake campaigns, retention offers, lost customer offers whether through email or Direct mail. Is it sexy? Nope. But, you can measure the incremental return and it still works. Take your conquest money trying to find customers who might own your brand, might need service and might be unhappy with their current provider and spend it on customers you know. No more needles in haystacks. Spend your money on the names and faces of people you already know and those who data shows will spend with you.
- Read Every Marketing Invoice – When was the last time you took every invoice charged to Marketing, or Outside Services, or IT or Other and read it with your management team.? In 2008, we took every marketing invoice for each of 300 stores for 90 days and put it in Excel and reviewed it with the entire management team. You are probably better than we were, but here is what we found we spent money on:
- Balloons (Think it is not much? Add it up for 90 days)
- Bottled water (Who drinks that – customers or employees?)
- Window painting
- Contractors to write your merchandising copy on used cars, or put on stickers, or input equipment or take picture
- Sponsorships for the General Manager’s bike team (or similar)
- Contractors to cook hot dogs or decorate the lot on Saturday
- CRM systems you no longer use
- Direct mail through the OEM you never monitor or look at
- Conquest direct mail that goes to your owners and duplicates other programs
- Pilot programs for the idea that won the last three 20 groups – that no one measures
- Spotlight ads that you don’t use
- Used car liners or rag ads that haven’t changed in two weeks on cars you already sold
I am certainly not here to suggest you don’t manage your business. Instead, I’m saying that it is natural for things to creep into budgets over the year. It is also natural for a few small spends to add up to big spend and take money away from spend that produces. Get rid of that stuff and make sure it doesn’t reappear in outside services, IT or other. I bet you can find $50 per vehicle per sold in some of this stuff. We sure did.
In summary, in times of slower volume and flat or declining gross, the winners can keep their spend-per-vehicle-sold flat – or even a little lower – while driving higher share if they stay on top of their marketing spend. Spend more on things that work (i.e., drive sales and gross) and get rid of what doesn’t. Those who retain – even increase – profit, are those who don’t just increase service and used volume but redirect their marketing spend into proven down funnel marketing initiatives like leads, SEM, and retention campaigns. These are proven, albeit boring strategies and tactics. Eliminate those things that are more speculative. Or, at a minimum, allocate a few dollars per vehicle sold to experimental or brand spend and limit it.
Spend on what works and produces measurable incremental return and you will gain market share, retain profits, and emerge into the next growth cycle stronger, more efficient and more profitable.