How did the car business become so concerned with cost per sale that it makes full profit available?

There used to be some wisdom in the old axiom of measuring the cost of advertising per vehicle sold. However, do we keep the same scorecard in our newspaper, print or electronic (TV/Radio) media? Nowadays, with some of the tools that track phone numbers, it’s possible to reduce some of this, but how often do you base your numbers on the seller’s report after asking the question? “How did you hear about us?”

Until recently this would have been accepted as ‘normal practice’, however after recent internal discussions and with some dealers there has been a paradigm shift.

Observation I: Putting all the advertising eggs available on the Internet may not be the best move. According to the 2007 Cobalt Dealership Study, while 83% of car buyers used the Internet to search for vehicles and 79% used search engines to research dealerships, just over half (55%) of potential customers who a dealer receives are converted into sales. The study went on to say that 90% of these customers made a deal at a different dealership than the one originally submitted, and 30% of the leads went unanswered!

Action Step: Have you ever “Googled” your dealer? Does the dealer’s name appear on consumer websites like the Ripoff Report? If a dealership relies on the Internet to fill the showroom with customers who intend to purchase a vehicle from that dealership, this may be giving rise to a false sense of reality.

Observation II: Is the information from the sales force accurate with respect to the marketing questions they are asking? For example, unless the only marketing done is the newspaper or the customer brings the newspaper to the door, is it possible to know if they arrived as a result of the newspaper? Sellers are interested in selling cars and cashing checks, so perhaps next month’s ad budget shouldn’t be based on their answers.

Action Step: Review dealership advertising and see how you can add accountability to marketing efforts that are conducted through separate 800 numbers, use of live operator call centers, etc. Obtain verifiable email addresses of potential buyers and customers and find them regularly about dealership announcements and deals. Consider the use of blind advertising as a method of increasing special financial efforts.

Observation III: “Car Think” mathematics does not always produce the correct answer. Take a look at a dealership that used two types of lead sources with what appeared to be very mixed results:

Wire type 1 Wire type 2

Amount spent $3,000 $17,000

# of units sold 7 12

Average Gross per sale $2700 $4700

Cost per vehicle $428 $1400

Gross profit $18,900 $56,400

Net income after $15,900 $39,400

Cost of leads

Traditional “Car Think” math seems to indicate that $428 vs. The cost of $1400 per vehicle is a no-brainer. However, if a font produces a 58% higher gross profit per unit, despite the higher initial cost, the math may be wrong. An additional net profit of $23,500 would seem to be a more desirable result, especially if this result is constant, month after month. The question that comes to mind is whether the objective here is to increase gross profit or produce a perceived reduction in costs. Is this a quick fix or long term plans?

Is it the cost or price of a marketing effort that a distributor should be concerned about? The price is the rate per lead; cost is something that takes into account time, effort, results, etc. Therefore, to effectively measure the results of any marketing effort a dealership undertakes, measure the total cost and price of each vendor and supplier you deal with. If each month in the car business is independent, then it makes sense to capitalize on the money spent in previous months. Have the results of any marketing efforts carry over from month to month, and the dealership can enjoy the sales generated by the marketing dollars spent in previous months.

Dealerships that are successful and thriving in these turbulent times do a little more research to find all the information they need to make smart marketing decisions. After all, the car sales business is much more complex than it seems to people outside of our business. Don’t get caught too quickly relying on facts and answers that aren’t complete or accurate.