AUTO-INDUSTRY: A PARADIGM SHIFT?

As customers evolve into new uses of technology and consumption patterns, the automotive industry struggles not only to make the business profitable, but to make the investment worth it. What role does marketing play to face this challenge?

What’s happening?

When talking about the automotive industry, most people tend to think in terms of car manufacturers, parts suppliers, market, dealers, and aftermarket. In a margin shrinking industry, where a very low return in capital is driving investors away towards other more lucrative industries, the whole offering needs to deal with more demanding and informed consumers, with stronger hold on the pull side, in an always more price driven market. A catastrophic forecast despite the recent increases in sales that somehow portray an improvement getting out of the economic crisis that busted the market since 2007. 

During the last years, we’ve seen an upward trend towards solving profitability issues through consolidation and M&A (manufacturers and dealers), but that is already slowing. As a subsequent response, all players embraced what most industries have already done as well: client centricity and digital transformation, trying to increase value generation for their customers. But what about generating value for the business and for investors? In this regard, it seems that everybody is on their own. While car manufacturers strive to make better, technologically loaded, clean, connected (IOT), and money-for-value cars in order to increase customers’ share of pockets, dealers fight to bring people into their shops more frequently, for many other purposes than buying or servicing cars (car washing, demos, parties, and even wedding celebrations!). Car manufacturers started calling their moves based on the most recent concerns for society (environment and technology, safety and entertainment) trying to keep vehicles prices competitive while attempting to generate savings through shared platforms and manufacturing. Dealers are betting on loyalty, retention, and I would dare to say… ”captivity” (in a good sense, retention to the extreme of capturing the most possible share of attention away from other car-related alternatives). For dealers, the aim is to become “the world of cars” to as many customers as possible, for as long as possible, expanding the window of opportunity to sell and covering as many communication channels as possible.

The challenges ahead

The industry players, all players, need to re-think (and many have done it already) the business model overall. From designing, manufacturing, transporting, displaying, and selling cars, to building a completely new business model where technology plays a new role in terms of communications, connectivity, safety features, entertainment options and capabilities. From exhibiting cars at a dealer shop, to generating a whole service experience boosting long term engagement and loyalty. And all these, in order to maintain and increase profitability and, at the same time, return on capital investment. To achieve these two main goals, all industry players need to work on the perception and attitudes of two main groups: customers and investors, by acting on the following:

From selling a car to offering functionalities

Cars are not a set of wheels driven by a certain amount of engine muscle anymore. Manufacturers have to focus on, developing, and producing technological innovations that respond to customers’ demands (and go even beyond their expectations) in terms of information services, cheaper, newer, and more effective safety features, machine learning, connectivity, and entertainment options. Engine power gave way, in terms of its relevance, to consumption efficiency and pollution control (demanded by customers and by the always stricter regulatory environment). The gap between the intangible value of brands dilutes as factories become more efficient, better communicators (who doesn’t like TV car ads?), and high quality becomes a standard at different prices. All cars are durable, robust, well made, and reliable. The reasons to buy a more expensive car are less dependent on the brand than before and more inclined to focus on functionalities features, services, and capabilities.

Accountability in all senses

As previously stated, car manufacturers are facing the challenge of return on capital. While commercially recovering from dropping sales, the industry overall is not generating returns at the same rate than other alternative S&P500 and Down Jones investments. While these last indexes are returning 14.8% and 10.1% respectively over the last five years, the total shareholder return for car manufacturers was 5.5%. It is not only about selling cars profitably.

As it stands right now, it seems car manufacturers are more prepared and financially capable of “driving” the change while facing the challenges. But how should dealers face this scenario? It would be unrealistic to think dealers will be able to avoid the “string pulling” from manufacturers. What can dealers do that would contribute to generate value and profitability for their own businesses and supporting those of their car suppliers, and investors?

There is something technology (and car manufacturers) will struggle to do: to generate a non-digital experience. The human touch, a listening person, the feeling of air flowing over your hair driving a convertible, a hand shake, a credible advice, a free car wash, the smell of a new car, a real person calling you to say: “happy birthday, we have a present for you, come visit us!”, an off-road driving to a nice pick nick location, a hassle-free car purchase negotiation, etc. The question is how much is this worth it? Is it worth the cost? Is it profitable? Is it financially sound?

Lots of recipes have been written and conference speakers talk frequently about the benefits of driving people to the shop, but how many dealers do really evaluate the actual economic return of those initiatives? Clearly, everybody knows when things are better than before or not. Everybody can measure sales for the same period of last year or against market trend, but is this a rigorous approach? Is it done in a robust way? What part of the improvement can or shall be attributed to each marketing or commercial initiative?

Consider media investment distribution, for instance (see right chart. Car dealers advertising in the USA data year 2016. Source: NADA). On average, each dealer invests close to $590K in advertising each year, if they had to make marginal investments, in which media would they invest? Based on which criteria, would they base their decision? At present, there is no comparable indicator in use that would allow an objective decision-making process, leaving it to biased, subjective evaluation from decision makers to take such important investment decision.

Business owners may say: as long as the business goes better, I don’t care where it came from. It is the merit of my showroom manager, my new VP of Marketing, customer service or the new General Manager. But this is a dangerous game. In order to define and retain what part of the food chain they hold on to (and car manufacturers are at the top of this food chain) they need to make their part of the ecosystem accountable.

• Is this free car wash a profitable proposition?
• Are we making money from our social media investment?
• How much does it cost to bring a person to the dealer shop?
• What is our most profitable marketing initiative?
• Can I compare my communication efforts results?
• Is my evaluation objective or just gut-feeling?
• What’s the return of my marketing expenses (investments)?
• Do I have a marketing plan, or I just go with the flow and react to market and competitors?
• Do I have clear and measurable marketing objectives?
• How do I gauge marketing efficiency?
• Do I have common performance indicators?

These are only some of the questions car dealers should be making to themselves and their executive teams. More than $1 trillion in sales per year (in the USA alone and without counting used vehicles!) demand a more rigorous and detailed way to evaluate return and profitability. In this regard, marketing should not be an exception. An estimated $11 billion per year is spent in car advertising and sales promotions in the US (rebates excluded). 8.4% of gross profit (source: NADA, 2016) is destined to communicate and promote. Most likely several promotion initiatives, like free car washes, giveaways, community management, etc., are not included in this figure. 10 to 25 stores dealers have been consistently growing during the last 10 years. 1 to 2 stores dealers have been consistently diminishing during the last 10 years. Total individual dealership owners have shrunk 27% in the same period. The market is much more competitive. Consumers are much more sophisticated, technology driven, environmentally aware, and demanding. Meticulous economic performance evaluation becomes a must at all levels within dealership businesses. Variables that go beyond visits to a shop and average conversion to car sale should be taken into consideration.

The US market, for instance, is vast and diverse. Willingness to pay for a car varies widely between states and car distribution channels jump from 1.31 dealers per 10,000 inhabitants in Vermont to 0.34 dealers per 10,000 inhabitants in California and Nevada (average US is 0.52 car dealers per 10,000 inhabitants). People in Oklahoma is willing to pay only one quarter of what they produce per year in a car while North Dakota population is willing to pay 2.4 times their GDP per capita in a car. It is evident, that there is no “one-fit-all” for dealers when it comes to marketing and communications initiatives. It depends on the state, willingness to pay and distribution penetration. And not only…

Most companies claim that they have moved from product-based management to customer-centric, and it is true ... partially. The automotive industry has moved swiftly towards addressing society’s concerns through more efficient and environmentally friendly vehicles that respond also to intangible stereotypes’ expectations (coolness, family, rough, etc.). However, while in other industries the offer seeks segments of "one", it will be very difficult for the automotive industry to segment in a capillary way. The issue of value for the customer must also be addressed by car dealers through better and more competitive services. While it is easier to define what is value to the business, it is more complicated to define what’s value to the customer. How is his or her decision making pie?  The challenge remains on planning, and specifically measuring, what generates value for both business and customer, especially when it comes to marketing and promotion initiatives.

So, now what?

We are convinced that marketing plays and will play a fundamental role in facing the above-mentioned challenges, offering concrete answers to them. What contribution can marketing make in this context? The answers vary, but we can say that:

Communication: Car sales are not facing the challenge of multichannel sales (cars are not sold online yet). All new cars are sold through dealers and there is no hint about this situation changing in the near future. However, the purchase decision making process, has changed dramatically. A recent study by Digital Air Strike shows that 72% of car buyers and 63% of service customers would drive 20 to 60 miles for a dealership with good reviews. The same study shows that 68% of car buyers and 51% of service customers used mobile devices to search/read dealership reviews. Another study by Google, reveals that car buyers engage with an average of 24 touch points (combining on and offline touch points) during a period of up to 3 months before buying a car. The sales funnel of a car sale jumps back and forth between digital and non-digital communication channels without a clear path or order. While the sales process is mono-channel, the sales funnel and the communication process is omnichannnel. This vision recognizes that the customer journey is quite indecipherable and typifiable, and that it is therefore necessary to integrate and develop channels (online and offline, on-trade and off-trade) that converge into a strategy and tactics that identify points of entry, exit, and conversion. Big data analytics and a strategic digital transformation shall grant that whatever channel the customer uses to approach and interact with the brand and dealers (and they must be considered separate), all interactions are value driven and value traceable, accountable. It is well known that this change requires an adaptation, modification, and mutation of complicated processes and systems, however, companies that do not undertake this mutation will struggle to grow and will most likely decline into obsolescence.

New Technologies: Marketing departments (along with sales) are the ones that have adopted a more open approach towards the adoption and use of new channels of communication, the addition of new technologies for information management and analysis, and performance evaluation based on big data. However, in many cases, not with the proper depth or link to the business. For this transformation to be relevant to the business, it is necessary to establish a link between marketing inputs and business outputs and in this, most marketing departments still have a long way to go. The digital transformation of marketing activities responds to the strategy and objectives of the general marketing plan although in most cases, it is not yet directly linked to the business or at least in a visible and accountable way. When considering new technologies, companies should begin with the end in mind, asking themselves: what for?

Value driven marketing: It is necessary for companies to switch back from a pseudo-customer-centric model to one based on value generation. Value for the customer (which still stays at the center) but value also for the company: returns. Marketing is the right link to ensure customers keep feeling at the center through communication and it should also be a great visible and accountable contributor to the number one value indicator for the business: profitability. As Warren Buffett said, "Price is what you pay, value is what you get." If customers are price sensitive it is largely due to their economy (and that of the market in which they are immersed), but it is also because they somehow do not see the added value proposed by brands and dealers as a differential and influential factor for making a purchase decision. Marketing is the only way to make this value visible. Considering the needs of the company business plan and taking into account the client's needs, marketing must show and make this value tangible in a way that it tilts the scale to a positive and profitable buying decision. This is the main turning point between a market-oriented marketing and a business-oriented marketing. For this purpose, it is necessary to have the appropriate methodology or systems that allow marketing and sales departments to isolate two effects of any marketing and/or commercial initiative: the number of purchase acts that have been impacted by marketing and commercial projects, and how much each project has influenced each decision making. It is thus necessary to work on creating own attribution models and isolation methods that are sufficiently robust to generate credibility and solid future planning. Several leading companies in the industry are already working on their own attribution models (leaving aside the most traditional and obsolete criteria imposed by large operators such as last-click, time-decay, etc.), learning and implementing robust methodologies, and executing processes and procedures aimed at converging marketing, sales and IT systems. Short-term profitability is fundamental to economic sustainability. Marketing should aim to measure how it contributes optimally to the real profitability of the business. Marketing projects can (and usually do) generate different returns that will end up impacting in the short term through the costs and through the economic value generated by each client. It is imperative that marketing and sales departments become aware of, acquire the capability, and measure in a standard way, the actual contribution of their projects and campaigns to the business economic results, to the P&L.

How to measure the economic contribution (ROI) of marketing in the automotive industry?

To answer this question, it is necessary to destroy a myth: that sales and marketing go and work in separate ways. It is well known that the automotive industry has essentially several types of commercial and promotional initiatives. Each one of these actions, in turn, have broad goals (to recruit new clients, not to lose the existing ones, to sell added services, to renew vehicles, to return to the dealer, etc.) that meet global business objectives (increase revenue, turnover, share value, customer portfolio, market share, product mix, etc.). All these actions involve communicating with the clients with the intention of generating a business interaction in the short and/or long term, and this is marketing. All these actions, whatever their nature, will have an impact on six variables to be measured throughout their execution and during their period of impact:

?         Positioning:    What do I want them to think about my brand or offer?

?         Education:     What do I want them to learn about my brand, offer, etc.?

?         Interaction:     What do I want them to do?

?         Costs:            How much money do I want to invest?

?         Income:          How much money to I want to collect?

?         Return:           How much money do I want to earn?

In all cases it is key to measure the six dimensions mentioned above. The first three ones are typical of marketing and the last three ones are directly linked to the business bottom line. It is necessary to establish and measure a cause-effect relationship between these two worlds. Few companies set their business and marketing goals in these terms. Even fewer are those that set goals that can be measured in a neutral and impartial way, and exceptional those ones that do it with the sufficient rigor to make conclusions robust and credible. Marketing departments are reluctant to set business goals in their plans due in large part to the lack of a proprietary, credible and accepted attribution model.

All objectives (whether market or business) should have clear indicators, with a milestone that unequivocally shows whether they have been reached or not, and with a clear period of influence to be measured. In most cases this is not done. At the same time, as in many industries, clients represent a very broad range of estimated profitability (or customer life-time value) and, therefore, the return of sales and marketing campaigns vary depending the type of customer and the type of project that was undertaken.

It is thus imperative to think of marketing and commercial actions in terms of two variables to consider: the type of action to be undertaken (new client, cross-selling, retention, etc.) and the type of customer impacted (in terms of its real profitability). “Not everything countable counts and not everything that counts can be counted” (A. Einstein). And precisely because of this, the planning, implementation, and evaluation of projects and results must consider these two variables always.

To measure the actual return on commercial and marketing actions, the following steps should be followed:

It is important to remember that the evaluation of the economic performance of commercial and/or marketing projects is not a post-execution analysis tool. It is necessary to plan not only the project itself, but also its evaluation cycle starting from its alignment with the business and following with the correct formulation of objectives that are the foundation of any results-oriented project.

The main challenge of attribution models (to figure impacted sales and influence on each sale) must be addressed from statistical relevance and mathematical rigor to generate robustness that will make them acceptable and, above all, credible. In this regard, the convergence between the commercial, marketing, and technology departments is essential since each one will contribute to the generation of information for analysis and concrete business results.

ROI MARKETING INSTITUTE

ROI Marketing Institute is the world main source of competency in efficiency and profitability of marketing and sales dedicated to spread the word, teach, implement, and evaluate processes and systems aimed at measuring the real economic return (ROI) of projects and campaigns for companies, non-for-profit entities, governments, and non-governmental organizations worldwide. It is also the only certifying body for the ROI Marketing Matrix?, its own methodology published in the books "ROI Marketing. The New Performance Standard " – ISBN 10: 1493759299 and “Marketing & Sales ROI. What Is It Good For?” – ISBN 9781532883538, both authored by Pablo Turletti. For more information: www.roimarketinginstitute.org