Certainty is the Antidote for an Overdose of Variety

The automotive market offers a phenomenal number of choices to vehicle buyers.  This choice includes the number of makes and models, as well as the number of dealerships to buy from, the financing options and choice of financiers.  Additionally, there are more secondary sellers (brokers) and vast amounts of Internet (mis)information and Internet advertising.

With so many varied choices, most customers simply don’t have time to properly investigate every choice.  They don’t even have time to thoroughly consider every choice that’s relevant to them. Such an excess of choice causes confusion for most customers.  The easiest way out of this confusing information overload is to make a ‘safe’ choice.  In these circumstances, most people tend to go with what gives them a sense of certainty.

Furthermore, as vehicles become so technologically complex as to be beyond the understanding of many customers (and salespeople), the unknown becomes a risk and customers look to reduce their risk.  Manufacturers and dealers could help reduce the risk in many ways, including better trained salespeople, but most defer to the easy short-term focus of reducing price.

An intriguing aspect of the challenge in this for the motor industry is that the definition of certainty is not the same for all customers.

How is the Motor Industry Trying to Deliver Certainty?

Most manufacturers and dealers try the easiest approach to give their customers a greater ‘certainty of value’ by dropping their price.  Ever since supply started exceeding demand, manufacturers have been creating ways to ‘bribe’ customers to buy their cars – discounts, rebates, subsidised finance offers, value-adds, cash-back incentives and others.  Almost every manufacturer engages in this lazy form of marketing.

The problem with this strategy is that now almost every brand is engaging in it, the customers are faced with even more information, causing even greater confusion.  Escalating price wars create more uncertainty, not more certainty, for most customers.  Many customers sensibly delay their buying decision to see how high the discounts and incentives will go.  When so many manufacturers are employing this strategy on such a large scale, it becomes counter-productive to it’s goal of getting customers to make an easy choice of one product.

The luxury vehicle market has not been exempt from this practice, which was historically a strategy in the higher volume, lower quality market segments.

When and How Can a Vehicle Distributor Deliver Certainty?

In terms of a customer’s buying cycle, a manufacturer/distributor can deliver or try to deliver certainty before the sale, during the sale and after the sale.  Some examples of these include:

i)    Before the sale:

• Maintaining or promoting the Company/Brand/Model image
• Advertising & Marketing ( including price, as above ) / PR
• Providing consistently high quality product

ii)    During the Sale:

• Availability of accurate consistent information, e.g., brochures, websites, stock availability
• Establish & Maintain dealer requirements for level of service to customers
• Providing consistently high quality product

iii)    After the Sale

• Providing consistently high quality product
• Timely and accurate provision of parts and service / information
• Established dealer requirements for level of service to customers

In the last few years,  I have several times been invited, as a prelude to training programmes, to address teams of Sales Managers on how to grow their business without simply sacrificing profitability.  This article is a blend of the content of those addresses.

Your Market Pie

For the sake of this discussion, the pie represents the sales market you compete in, i.e., the available new sales every month.

You get your share of the market, and in a well-developed, highly-saturated market it probably doesn’t vary too wildly.  If you averaged 10% of your market last year, you may go up or down a little this year, but it’s highly unlikely that you’ll get 20% or 5% this year.

The natural tendency, (admittedly often driven by manufacturers’ short term focus on sales targets)  is to try and cut a bigger slice.

Let’s say you normally average 10% of the market and you decide to go for 12%.  The fastest way to try and do this is to sell cheaper.  So you start discounting harder but this doesn’t just affect you – it affects the other dealers of your brand as well, who may have to match or beat you on price.   It’s not uncommon for every dealer to have ‘loyal’ customers who will buy from their regular dealer, but will get a comparative price from another dealer, just to check.  As more dealers blindly pursue volume on price, our research shows that they don’t create many more customers, but they give even more money to the customers who were going to buy their product anyway. Commercial lunacy!

Imagine that your market is a ‘money pie’ and, having made the first cut into the money pie each month, you are moving the knife into position to make the second cut that will define your slice of pie.   The further you move your knife, the thinner the pie becomes.  So by trying to simply cut yourself a bigger slice, you get less and less pie ‘filling’ and end up with empty pie crust.

The wider you cut, the flatter the pie gets – but not just for you – for all your brand’s dealers in your market.   This is a compounding problem as you then educate your customers to expect bigger and bigger discounts.  You may even lose your astute customers who are suspicious of this sales desperation and are aware of what this activity does to their resale value.

What to Do?

As a Sales Manager, there are broadly two approaches you can take to get a bigger slice of pie:

1.    Try to Cut Yourself a Bigger Slice as fast as possible

2.    Make the Pie Bigger

Let’s look at these two choices in more detail…..

1. Cutting Yourself a Bigger Slice

This is what you do when you get desperate for numbers or market share.  You just try to grab any deals you can.

Some activities associated with this choice include:

•    Taking a broad ‘shotgun’ approach to marketing.  Examples: Advertising in the major daily Capital City newspapers, advertising on mass-marketing websites, deliberately marketing outside your Prime Market Area.

•    Giving prices other than RRP over the phone or publishing discounted prices on the internet.

•    Letting salespeople sell management instead of the customers.  Example: A customer walks into the showroom and asks for a price and within a minute or two the salesperson is standing in your office with a credit card and a ludicrous price offer, trying to sell you on why you should sell a car at a significant loss.

•    Little or no sales training

1a.Effects of Cutting Yourself a Bigger Slice

•    Detrimental effect on customer service, customer satisfaction.

•    Rewards the customer for shopping around, so encourages them to keep shopping around, not buying.

•    Significantly reduces the profit for yourself and other dealers.

•    Sets new discount benchmark for customers, making future profit even more challenging.

•    Reduced available sales opportunities because there is less profit to invest in creating new business.

•    Less profit to invest in facilities, staff, training, goodwill, stock.

•    Loss of profitable repeat and referral business.

•    Educates and rewards salespeople to be lazy, undisciplined and unprofessional.

•    Detrimental effect on resale values (deterioration of another sales advantage v. your competitors’ products)

•    Reduced ability to attract quality sales staff due to reduced remuneration.

•    The size of the pie (and your sales) are at the mercy of the market / economy.

•    If everyone’s trying to cut the pie thinner, but no one’s growing the pie or baking bigger pies, this has a shrinking effect on your potential market size.

2. Making the Pie Bigger

This is what you do when you stay committed to fulfilling the full array of customer needs, selling value over price, and aiming to retain a fair gross profit and build customer satisfaction.

Some activities associated with this choice include:

•    Targeted marketing:    to your existing client base and to your Prime Market Area.

•    Focus on providing personal service and maintaining enough gross profit to keep the business sustainable long-term.

•    Implementing systems and procedures to ensure customers receive professional, effective service and a better experience.

•    Regular training of your sales staff to develop a higher level of sales and customer service skills.

2a. Effects of Making the Pie Bigger

•    Improves customer satisfaction and customer loyalty levels.

•    Educates the customer that shopping around isn’t necessarily the best way to get true value for money.

•    Buoys the profit for yourself and other dealers.

•   Doesn’t create future unsustainable price expectations in the customer’s mind.

•   Increases available sales opportunities because there is more profit to invest in creating new business.

•    More profit to invest in facilities, staff, training, goodwill, stock, etc.

•    Increase in profitable repeat and referral business from satisfied customers.

•    Educates salespeople to be more service-oriented (instead of price-oriented) and more disciplined.

•    Enhanced resale values (increases sales advantage v. your competitors’ products)

•    Better ability to attract quality sales staff due to better available remuneration.

•    The size of the pie (and your sales) become more insulated against the economy / market.

Some Suggested Actions (for making the Pie Bigger)

Marketing to your existing clients and your Prime Market Area is an extensive topic, so in the limited time we have available today, I’ve chosen some sales enhancement suggestions.

Furthermore, marketing has the potential to be a huge waste of money unless you have the systems and procedures in place to accurately track and convert the resulting enquiry into sales.   Here are some suggestions, or reminders on effective ways to make the pie bigger:

1. Measure the size of your discounts and over-allowances, not your retained gross.

By simply measuring gross, we can congratulate ourselves on the $50,000 gross profit we made for the month, perhaps from delivering 100 units.  Instead of counting how much we kept, if we count how much we gave away and aim to minimise it, we are already taking a perspective that is conducive to better gross (having to then justify the price difference, encourages salespeople to professionally justify pricing, focused on the customers’ needs).

2. Test your salespeople’s knowledge of your USPs (Unique Selling Propositions)

Without warning, call your salespeople into your office one at a time. Ensure you won’t be interrupted.

Ask them what is their best seller in your range (it may vary for different salespeople).

Then ask them what is the most common competitor they are up against on that model.

Then ask them what are the top 5 benefits of their top seller v. its No. 1 competitor.  If they don’t know, or give you fluffy answers like ‘styling’, ‘finish’ or ‘design’ then they are losing you tens of thousands of dollars.

Note: A salesperson knowing the answers to this is not even the ideal situation, as an effective sales professional will be far more advanced from this, but them not knowing is very damaging to your business.

3. Test your salespeople on BEST PRICE demands

Separately from the previous exercise, call your salespeople into your office one at a time.  Ensure you won’t be interrupted.

Tell them you are going to role play a customer and you want them to respond as they would to a customer.

Tell them you’ve just walked into the showroom, and then ask them: “What’s your best price for a (Model X) in silver, on road with private registration and no accessories?”

You can be as blunt as you like in answering any questions they may ask you, but observe their responses.

They get this Best Price question in different versions every day.  This is one of the most basic challenges your salespeople get.  A salesperson not being able to effectively handle best price request in the first five seconds is a bit like a professional boxer not knowing how to avoid being punched.

If they stammer and stutter, or say “aaaaaaaaaah, ummmmmm”, they are leaving thousands of dollars on the table.  They should be able to handle this confidently in their sleep, it is so fundamental to our business.

Salespeople who do poorly in this exercise may say that this is not a “real-world” situation and tell you all the reasons why they would do better with a “real” customer, but when put on the spot, salespeople don’t become wildly creative and imaginative.  They default to habit.

Do not ask them how they would handle it – they can probably know and describe what to do without necessarily doing it with a customer.  Make sure it’s a role-play.

As a guideline on how Best Price can be handled more effectively, ask about our ‘best price’ training courses.

4. Customer Needs before Negotiation

Our company offers over 20 negotiation strategies in training, but if you don’t know anything about your customer other than that he/she wants a particular car for a ridiculous price, then effective negotiation strategies (as opposed to rubbish like “let’s meet half way” and “if I could, would you?”) are rendered useless.

To negotiate effectively, we must have accurate information about the client’s needs.

Without information, we are neglecting our customer service duty and most salespeople in our industry put their business into these neglectful situations with customers every day.

Train your salespeople to get more relevant information and better information to get you the right customer focus for completing a sale.

Don’t let your salespeople walk into your office unless they have a list of the customer’s needs (including, but not limited to price).

5. Track your enquiry

Measure every enquiry, even the ‘tyre-kickers’.

At one dealership I work with in the first month of tracking, the Sales Manager had just accepted that one salesperson was having a particularly quiet month.

He finally analysed his tracking and found that the salesperson had spoken to 71 customers to make one sale,  and had dismissed 70 ‘tyre-kickers’.

Focus on improving your closing ratios, not finding more people from other PMAs to talk to.

I have noticed that several car brands in Australia have been offering free service with the purchase of a new car.  Other brands have done it before and I am not surprised that they no longer do.

We have mostly seen free service introduced as an emergency solution to try and automatically overcome the perceived objection of ‘service costs’.  Generally ‘free service’ promotions end up creating more work than they aim to save.

In training programmes, we show salespeople how to address customer objections about service costs without throwing money away or playing Three Card Monte with whatever ‘discount’ they have for customers.

Some manufacturers we have worked with have needed convincing as to why free service is such a bad idea for their business and the business of their dealers.  Here’s a summary of the Top 20 problems we have identified with promoting periods of ‘free service’ to try and sell new cars.

1. There’s a Pretty Good Chance That Your Customers May Not be That Ignorant

Most customers know that when a car manufacturer offers something ‘free’ that the cost of it is simply hidden elsewhere.  They know that the reason you offered them $3,000 less on their trade-in than they were offered on competitors’ cars is because that $3,000 is subsidising their ‘free’ service costs for the next three years.  Most of us know there’s plenty of free cheese in a mousetrap.  In the main, manufacturers aren’t fooling customers.  Are they fooling themselves?

2. Free Servicing Teaches Customers that Service is Worth Nothing

Including a significant period (e.g., a year or more) of free service conditions customers to believe that servicing is worth nothing.  The longer the free service period, the more damage is done to the customer’s perception of the dollar value of service provision.

3. Free Servicing Sets a Dangerous Precedent

After sustained periods of free service, when customers come to trade-in, they expect free service again.  Actions speak louder than words so even though you have explained (verbally and in writing) that the free service is for a defined period, the manufacturer has conditioned customers to expect it, so when the free service offer expires, many customers interpret this as a painful experience.

4. Free Service Increases ‘Dumping’ Which Hurts Resale Values, Which Affects New Car Sales

When the free service period is over, more customers are likely, and induced to sell their car because service costs them money from this point on.  This is the ‘same’ service that has cost them nothing up to this point so why should they now pay for it?  Whether or not manufacturers and/or dealers actually seek to recoup  some of the profit lost during the free service period by slightly increasing service costs afterward,  many customers now see this paid servicing as too costly and perhaps even as the dealer trying to take advantage of them.  Many customers then decide to sell the car and get a new car.  Notably, this would include customers who would otherwise have kept their car longer.  With more of the brand’s cars coming onto the used car market faster and earlier in their life, and with service that now costs and was previously free there is less demand for the cars second-hand and greater supply which pushes resale values down.  A reputation for poor resale can then affect new car sales with wary new car buyers seeking a safer resale bet.

5. Free Servicing Reduces Service Profitability

Some manufacturers claim improved service retention levels on new cars with free servicing.  But at what cost?  None that I have spoken with have claimed a 100% service retention rate – not even close.  So it’s not all about the price.  They can congratulate themselves on pricing their service so that it cannot be beaten by franchised non-dealer service centres or a local garage mechanic, but if they have sacrificed most of their own and their dealers’ profitability to achieve this, what’s the point?  If service retention rates were low enough for ‘competitors’ like Ultratune and others to be a major concern then the problem is probably not the price.

6. Reduced Service Profitability Affects The Business in Other Ways

To operate on forced lower profitability, some dealers may start cutting corners to reduce costs.  They may be tempted to use cheaper oils, reduce the level or quality of service provided.  In a time when the retail motor industry in Australia is losing capable, experienced technicians to the high-paying mining industry, reduced profitability also reduces a dealership’s ability to keep pay levels competitive for good technicians.

7. Don’t Pay for What You’re Already Getting

Several brands that I have seen employ the ‘free service’ idea already had industry-leading service retention and brand loyalty.  So a large proportion of their customers were loyal repeat customers both in sales and service. The manufacturers were already getting that business.  They provided a ‘free service’ offer that cost the manufacturer, say $2,500 per vehicle.  The manufacturer has just paid those customers $2,500 each to do what they were going to do anyway!

They have taken customers who valued the certainty provided by their brand experience and re-educated them to value money-throwing offers, increasing the susceptibility of those customers to be lured away to other money-throwing brands.  A story of a goose and a golden egg comes to mind.

8. Alienates Customers Who Bought Before the Program

Customers who bought your product in the months (perhaps up to a year) before you offered ‘free service’ are likely to feel that they have missed out.  Some will even believe they were tricked into buying the car before the promotion began.  Naturally it follows that a percentage of customers make requests to dealers and manufacturers for some ‘compensation’.  Sometimes they get it.  So in those instances, manufacturers and/or dealers are yet again paying even more for a customer they already had.

On occasion, we have even been asked to advise on helping manufacturers clean up the mess created by this situation.

9. Unrealistic Expectations from Customers of What is Covered by Free Service.

Manufacturers who offer free service will publish disclaimers and conditions that are best understood by two groups of people:

• People who work in the industry
• Customers who know enough about service to pay for it in the first place

The target markets for free service offers are people who are ignorant of servicing and as such, can’t appreciate the value for money that service offers.  In the same action that you take to attract those people, you put in disclaimers and exclusions that those people are not likely to understand.

So customers who do not understand service and the definition of ‘scheduled servicing’ end up expecting (or sometimes pretending to expect) free tyres, brake pads, batteries, wiper blades, etc.  Even if they are not then given free of charge, there is a significant amount of time and energy that can be wasted by service advisors having to explain to customers that their latest need is not covered under the free service arrangement.

10. Removes an Important Indicator of Quality of Service

Price is an important indicator of quality.  For example, a new Tag Heuer watch may cost $3,000.  A fake copy of that Tag Heuer watch may cost $20.  The real watch will last better, keep better time.  The fake won’t work anywhere near as well.  Noone offered a $20 Tag Heuer would believe it was the real thing.

Customers who understand vehicle servicing may be bewildered or disbelieving that their car has been serviced properly for a price as low as low as $0.

As an example, when I worked for Lexus, one of our first customers in Australia was used to service costs of more than $1,000 every time he serviced his other luxury car.  A real automotive enthusiast, he had great trouble believing we could possibly have properly serviced his Lexus for less than $400.  He thought, at first, that $400 was a rip-off because it was too low!  It took some convincing, including him watching his services being performed, for him to see that his car was being properly serviced for less than $400.

So free servicing removes an important indicator of the quality and quantity of work performed and parts used.

11.  Increase Resistance to Service Recommendations.

If I am knowingly investing $450 on a service and the dealer calls me during the service and says I need a new pollen filter (for example) and it will cost $45, that price , compared with the cost of the service, is relatively small and increases the chance that I’ll agree to the new filter.

If I am having that same service performed free of charge and the dealer calls on the same $45 pollen filter, that $45 compares very unfavourably with the $0 I am paying for the whole scheduled service.  This reduces the chance of me agreeing to the new filter.

This is just one of many examples of how free servicing increases customer resistance to service recommendations.

12. Compound Problems from Customer’s Refusal of Extra Work

Anyone experienced in working in automotive service for a few years would have seen this happen.  A customer refuses the service department’s suggestion of extra work.  Not having the work done, then causes the customer future problems.  In many cases, the customer then blames the service department for the problems caused by the customer refusing the extra work.

For example, a service department may suggest that the $70 set of front brake pads need replacing within the next 1,000 km.  The customer decides not to get the work done.  Subsequently, the customer forgets to get the work done and the brakes end up going metal to metal and damaging the brake discs, causing a $500 disc machining job.  Or worse, the brakes don’t work properly and the customer has an accident.  And the customer blames the dealership service department!

13. Dilutes the Effect of Any Dealer Goodwill

In a well-run service department, there are judicial allowances made by the servicing dealer for customer goodwill.  These are gestures made by the dealer, at the dealer’s expense, to help a customer in certain situations.  As the customer realises that the dealer is paying for something they don’t have to, to help the customer, there is ‘goodwill’ created with that customer.

When there is a culture of free service, any goodwill action taken by the dealer is more likely to be interpreted by the customer as just part of the free deal.

14. Dealers can Become Conditioned to not Provide Goodwill

As a result of point No. 13, dealers can become conditioned to not provide goodwill.  Dealers can  become cynical about goodwill because its effects have been eroded by ‘free service’ mentality.  So they reduce or even stop providing goodwill.  This in turn, can harm the service reputation of the dealer and the brand.

15. Can Create a Type of Buyer’s Remorse

Customers who have bought your product previously and spent thousands of dollars on service with you are now getting the same service free.  It can make those customers wonder how much they were being ‘overcharged’ previously.

16. Doesn’t Necessarily Alter the Customer’s Perception that Your Service is Expensive (when it’s not free)

Some manufacturers who head down the road of offering ‘free service’ do it to try and address reported customer perceptions that the manufacturer’s service may be expensive.  Offering that service for free doesn’t necessarily alter that ‘expensive’ perception – and creates other problems listed on this page.

17. Makes Other Service Offers Redundant

Let’s say a manufacturer offers a three-year free service on new cars.  During that period, any service marketing by dealerships to that customer are redundant at best.  For example, some dealers promote pre-holiday safety check services. Even though these may be priced extremely keenly to generate more work for the service department, free service customers are likely to either ignore the special or expect it free.

If you give a customer all of your profit in your first offer:

• The customer thinks you must have a lot more to give because noone in business would be so desperate to give their profit away in their first offer.
• You have nowhere left to go in any subsequent negotiation or offers.

18. Hurts Your Dealerships’ Late-Model Used Car Business

Dealerships that sell late model used cars of the same brand will notice that the free service offer on new cars either:

• Diminishes demand for their late  model used cars  and/or
• Pushes used car prices down to ‘compete’ with the free service offer.

19. Creates Extra Work

The free service programme has to be administered.  Usually it has to be coordinated and validated at the manufacturer/distributor office.  Often subsidies are paid to the dealer.  Of course the dealer also has to process the free service claim and check that the car is within the parameters of the free service agreement.  This extra work is generated to give service away free, so the cost of this extra work further diminishes the profitability of service departments.

20. Makes Sales Teams Lazier

New car salespeople should be professionally helping customers to buy – not just new cars, but also the dealership and its service.

Free servicing is a short term strategy that creates significant long term problems for manufacturers, dealers, and most importantly, customers.

Instead of teaching salespeople to sell the dealership and its service and manage them properly, some manufacturers relieve the salespeople of their professional responsibility by offering service free of charge.

It incorrectly teaches salespeople in the affected network, on a large scale, that the way to ‘sell’ something is to just keep making it cheaper.

Summary

These are just some of the most obvious problems I have seen caused by free service offers.

I would never advise a client competing in a premium market to run a sustained free service offer.  With minimal and dubious short term benefits, it does too much significant long-term damage to your business.

As Mark Twain said; “Nothing astonishes men so much as plain dealing and common sense”.

Several years ago when working with a manufacturer I was asked for my thoughts and advice on their latest ‘marketing’ promotion.

The company was advertising their cars at $5,000 off RRP (that was the marketing message).  They had print ads, a direct mail program and an electronic mail program.

I told them that my first impression was that it was an imbecilic campaign, but I was happy for them to prove me wrong with the results it had generated.

We checked with their agency, who kept talking about reach and sets of eyeballs and other smokescreen nonsense.  We insisted that the agency show us the click-throughs and the enquiries generated from the e-mail program.  Ignoring the issues of target market for the moment (their e-mail list was of reasonable quality), from over 20,000 e-mails, they had received four enquiries with no sales to date.

One of the marketing team enthused: “And we have another 20,000 going out later this month!”

I asked why they would want to double their efforts on such an ineffective exercise.

The marketing person replied “Well it doesn’t cost us much.”

I asked “What about the cost of the damage to your brand?”

She looked a bit bewildered so I elaborated: “Your target market are reasonably intelligent consumers.  They see your sole marketing message as: $5,000 off.  They think:  ‘You can’t sell these cars.'”

The marketing person jumped in enthusiastically: “Yes, but they’re last year’s compliance plate cars!”

I replied “So they now see the message as ‘You haven’t been able to sell these cars for a year!'”

One of Robert Cialdini’s six proven principles of influence is social proof.  People are powerfully affected by what they see other people do, especially groups of people.  This marketing ‘strategy’ was plainly demonstrating to prospective customers that other people aren’t buying these cars (but why don’t you?).

Very early on my career I saw a quote in an essay in BRW that read ‘discounting is a sign of commercial idiocy’.  That idiocy takes on phenomenal proportions when it is conducted by a manufacturer, let alone a prestige manufacturer.

In 25 years in sales and marketing, I have seen mountains of research showing that the customers who pay the least are least satisfied with their purchase and have unsurprisingly low brand loyalty.

At a time when some of the established automotive distributors are complaining about the onslaught from the Korean brands (and soon, the Chinese brands), they are in a way preparing their customers for the Koreans and Chinese brands with tailor-made marketing.

They are refusing to promote their unique selling propositions (and market strengths) and positioning themselves closer to ‘competitors’ in way that gives strength to the competitors.

They are focusing on price (which the high quality of their products ensures that they will never be market leaders on).

They are ‘dumbing down’ the market place.

In doing so, they are gift wrapping the market and presenting it to the market newcomers.

To remain premium, they should keep their message, their marketing and their pricing premium.