The Triple Threat Facing Car Dealers Today

I’ve spent a good portion of my life working in or with the automotive industry. My father owned a repair shop when I was growing up, so my first experience in the business was repairing cars and dealing with customers.

In the early 1980s, I went to work at a dealership as a mechanic. Then, in 1987, I started working at a Ford dealership in the Chicago area as a service writer. I didn’t stay in that position long before realizing that sales was where I wanted to be. Eventually, I worked my way into a general manager position at a Lincoln-Mercury dealership.

Other than the body shop and parts department, there isn’t a position inside a car dealership that I haven’t worked in. As a manager, one of my responsibilities was working with advertising agencies to market the dealership. Over the years, I gained a great deal of experience working with some of the larger automotive advertising agencies in the Chicago area.

At that time, automotive advertising had remained mostly unchanged for decades. Weekend newspaper ads were the biggest draw, followed by radio, television, billboards and bus-stop benches. Every so often, a new advertising gimmick would come along, but most of them eventually faded away. For the most part, automotive advertising was still built around the weekend newspaper ad.

The First Major Change in the Automotive Industry

I always enjoyed tinkering with computers and trying to find ways to use them to increase sales. One of the first things we did was incorporate a CRM system to track leads and customers. I later developed a program that allowed us to import customer databases and print coupons for direct-mail campaigns.

I never spent much time playing games on a computer. I believed a computer could make a lot of money if I learned how to use it correctly.

In the early 1990s, online services began gaining popularity. AOL and Prodigy were two of the better-known systems. I looked at both of them, but they didn’t impress me. They appeared to be more about socializing than conducting business.

Then, in 1994, everything changed. I connected to the real Internet for the first time and immediately realized that it was going to change the world. I knew it would have a major effect on the automotive industry, and I wanted to be part of it.

Back then, websites were built using simple HTML. With my basic knowledge of programming, I quickly learned how to build a website. My first website was for the dealership where I worked, and before long, we were selling cars from it. Recognizing what the Internet could do for the automotive industry, I decided to leave the retail car business and start a website development company.

Building a website was only half the job. If I wanted to keep my customers, I also needed to make sure people could find their websites through the search engines. Search engine optimization was much easier in those days, but it was already becoming an important part of marketing a dealership online. Eventually, I signed more than 150 Chicago-area car dealers as clients before teaming up with another company. Between the two companies, we worked with more than 450 of the approximately 600 dealerships in the Chicagoland market. We eventually sold the company, and I moved into other industries.

For years, car dealers relied heavily on third-party websites such as AutoTrader and Cars.com to generate leads. These websites were used primarily to market used vehicles. Most dealers placed little emphasis on marketing their own websites beyond printing the website address in newspaper advertisements or putting it on license plate frames.

I saw another opportunity. Dealers had websites, but many weren’t doing enough to make sure customers could find them. That brought me back to the automotive industry, this time to provide search engine optimization and digital marketing. I have been helping dealers improve their online visibility ever since.

The Industry Is Changing Again

The Internet completely changed the way car dealers advertised and sold vehicles. Today, I believe the industry is facing another major change—one that could be even more challenging.

Car dealers are being squeezed from three different directions:

There are more manufacturers and more competition in the U.S. automotive market.
Cars are lasting longer, giving consumers fewer reasons to replace them.
Vehicle prices have increased much faster than many household incomes.

Individually, each of these challenges would put pressure on the industry. Together, they are creating a triple threat that could permanently change the number of vehicles dealers sell, the customers they compete for and the size of the market each dealership needs to reach.

The old way of doing business may no longer be enough.

Threat #1: The Industry Is Overcrowded

The number of automotive manufacturers competing in the United States has grown substantially. Established American, European, Japanese and South Korean manufacturers are now competing with newer companies, electric-vehicle manufacturers and additional brands entering the U.S. market.

The problem isn’t simply that consumers have more choices. All of these manufacturers and their dealers are competing for a limited number of buyers.

More brands do not automatically create more customers.

As additional manufacturers enter the market, the same pool of buyers is divided among more brands, dealerships and vehicle models. This makes it harder for an individual dealership to maintain the same sales volume and market share it may have enjoyed in the past.

Threat #2: Cars Are Lasting Longer

In the 1980s, by the time a car approached 100,000 miles, it usually wasn’t worth much money. The engine often didn’t run very well, and if you lived in an area with snow and road salt, there was a good chance the body was rusted out. The primary buyers for these vehicles were young people who had just gotten their driver’s licenses and couldn’t afford anything better. We called them “beaters with heaters.”

That isn’t the case today. Improvements in engines, transmissions, manufacturing and corrosion protection have dramatically increased the useful life of a vehicle. Today, it isn’t unusual to see a car with 200,000 or even 250,000 miles that still looks good and runs well. A vehicle with 100,000 miles is no longer automatically considered an inexpensive car worth only a few hundred dollars. Depending on the year, make, model and condition, it can still sell for well over $10,000.

What Has This Done to the Automotive Industry?

In the early 1980s, the average passenger car on the road was approximately six to seven years old. Today, the average vehicle on the road is nearly 13 years old. From my experience working in automotive retail during the 1980s, many new-car buyers traded their vehicles every three or four years. Some traded even sooner. Today, the average trade-in vehicle is approximately seven years old. That means dealers are waiting nearly twice as long for many customers to return to the market.

A customer who traded every three or four years might have purchased five or six vehicles over a 20-year period. If that same customer now trades every seven years, the dealer may have only two or three opportunities to sell them a vehicle during the same period.

The improvements that made vehicles better for consumers have created a major challenge for dealers: even if a dealership keeps every customer, the number of potential sales from those customers has been cut nearly in half.

Threat #3: Vehicle Prices Are Outpacing Incomes

In 1986, I was working at a Ford dealership. At that time, we had new cars that sold for as little as $7,000. A customer could purchase a nicely equipped four-door sedan for approximately $12,000.

A productive mechanic working at the dealership could earn around $40,000 per year. Many skilled trades people earned similar incomes. This meant someone could purchase a nice new car for approximately 30% of their annual income. Today, many of those same positions pay between $60,000 and $70,000 per year. However, a comparable new family vehicle can easily cost between $40,000 and $50,000. Using the middle of those ranges, a $45,000 vehicle represents approximately 69% of a person’s $65,000 annual income. The percentage of income required to purchase the vehicle is now more than twice what it was in 1986.

It’s a good thing today’s vehicles can last nearly twice as long. They need to—because relative to income, consumers are paying more than twice as much for them.

Where Does This Leave the Car Dealer?

What can dealers do to survive?

It may come down to the old saying: only the strong will survive.

A car dealership has an enormous amount of overhead. There is the cost of the property, inventory financing, payroll, insurance, utilities, advertising, technology, equipment and manufacturer requirements. Many of these expenses continue whether the dealership sells 100 vehicles that month or 300.

That business model becomes much harder to maintain when customers are keeping their vehicles longer, fewer people can afford new vehicles and more manufacturers and dealerships are competing for the same buyers.

Dealers cannot continue doing business the same way and expect the same results. They need to become more efficient, protect the customers they already have and find new opportunities beyond the traditional new-car buyer.

The first step is to identify the competition and overcome it.

Step One: Identify Your Competition and Overcome It

There are two types of competition every dealer must consider: same-brand competition and off-brand competition.

Same-Brand Competition

A Ford dealer isn’t only competing against Chevrolet, Toyota, Honda and other manufacturers. It is also competing against every other Ford dealer that is willing to market to customers in its area.

The Internet allows an individual dealership to reach much farther than it could through traditional advertising. That creates new opportunities, but it also allows competing dealers to reach into your market. The first step is making sure you own your own market area.

Is another dealer marketing to customers in your backyard? Are competing dealerships appearing ahead of you in local searches? Are customers in parts of your market seeing their offers before they see yours?

You need to test for this. Our “Test Your Website 101” article provides information about how to evaluate your website and online visibility.

If competitors are capturing attention inside your market, determine what they are doing and take the necessary steps to protect your customer base.

These steps should include:

Make sure your digital marketing is competitive.
Compare your advertised prices and offers with your competition.
Give customers a clear reason to buy from your dealership.
Make sure your website has a clean, clear and attractive call to action.
Review and test your calls to action at least every two weeks.
Measure your visibility throughout your entire market—not only from inside the dealership.

Before trying to expand into someone else’s market, make sure another dealer isn’t taking business from yours.

Off-Brand Competition

A Cadillac dealer isn’t only competing against another Cadillac dealer. It is also competing against Lexus, Lincoln, BMW, Mercedes-Benz, Genesis and other luxury manufacturers.

Dealers need to identify which competing brands and models are taking customers from them.

One way to address this is by developing comparison pages for your vehicles. These pages can compare your vehicle with a competing model while placing a positive and honest emphasis on the advantages of your product.

The comparison might include:

Price and available incentives
Standard and optional equipment
Warranty coverage
Fuel economy
Performance
Passenger and cargo space
Technology and safety features
Cost of ownership

These pages should be optimized so shoppers researching the competing vehicle have an opportunity to find your comparison. Each page should also contain a strong call to action that gives the shopper a reason to take the next step.

You may not win every comparison, but you cannot change the customer’s mind if your vehicle is never included in their research.

Step Two: Increase Your Market-Area Visibility

Once you have maximized your visibility within your primary market, look for opportunities to extend your reach.

The Internet allows a dealer to market beyond its immediate area much more affordably than traditional television, radio or newspaper advertising. However, expanding your market shouldn’t mean randomly advertising to people farther away.

Identify the cities where you already have some visibility, where competition is weak and where customers have a practical reason to travel to your dealership. Then build individual campaigns for those markets.

This may include:

Location-specific landing pages
Search engine optimization
Paid search campaigns
Vehicle and service offers targeted to individual cities
Model-specific comparison pages
Original content created around the needs of customers in each market

You can visit the “Learn” section of the BeingSeen360 website for more information about measuring local visibility and expanding your digital market area.

Step Three: Increase Your Customer Pool

If fewer customers can afford new vehicles, dealers need to reach buyers who may not fit their traditional new-car customer profile.

Develop a Strong Used-Car Program

With the price of new vehicles today, more people are looking for dependable used cars.

Don’t treat used vehicles as a secondary part of the dealership. Build a recognizable program around them. Become known as the dealership that sells clean, inspected and dependable used vehicles.

Give customers a reason to trust your used cars. That could include a detailed inspection, limited warranty, vehicle-history report, reconditioning standards or an exchange policy.

A strong used-car program also gives the dealership an opportunity to serve customers who cannot comfortably afford a new vehicle.

Offer Financing for More Types of Buyers

Another way to increase the customer pool is by working with buyers who have lower credit scores.

The secondary-financing market is growing as vehicle prices rise and household budgets become tighter. Dealers that develop relationships with the right lenders and create a fair, well-managed financing program can reach customers who may otherwise believe they cannot purchase a vehicle.

Step Four: Develop a Better Trade-In Campaign

The automotive industry may be able to learn something from the cell-phone industry.

The price of cell phones has increased dramatically. To keep customers replacing them, wireless companies developed aggressive trade-in and upgrade programs. Instead of waiting for a phone to stop working, they give the customer a reason to trade it while it still has value.

Car dealers should consider a similar approach.

Dealers already have information about their customers’ vehicles, including the original purchase date, service history and estimated mileage. This information can help identify customers who may be approaching the right trade-in window.

Instead of sending everyone the same “We want your car” message, dealers could contact customers with useful information:

The vehicle’s estimated current trade value
How much value it may lose during the next year
Whether the factory warranty is about to expire
Upcoming maintenance or repair expenses
Current incentives on a replacement vehicle
The difference between keeping the vehicle and trading it now

The message needs to be honest and specific. Customers have seen too many generic letters claiming that a dealer urgently needs their vehicle.

Give them a real reason to consider trading.

Dealers Must Change With the Market

The automotive industry has changed before, and it will continue to change.

Dealers cannot control how many manufacturers enter the market. They cannot prevent vehicles from lasting longer, and they cannot independently solve the problem of rising vehicle prices.

They can control how well they understand their market, how effectively they compete, how far their marketing reaches and how many different types of customers they are prepared to serve.

There may be fewer sales opportunities than there were in the past. The dealers that survive will be the ones that recognize those opportunities sooner—and do more with every one of them.

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David Apps

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(708) 675-4402