Category: Strategy

Network Effects in Dealer Systems

Last month, I wrote that the recent acquisitions of several Digital Retail vendors were driven by the need to accumulate dealer data for predictive analytics.  Today, I’d like to discuss another of Professor Rogers’ five themes, “network effects,” and how it applies to F&I software.

We’ll consider a hypothetical company that supplies admin software for F&I products, and also sells one or more dealer systems.  Having two distinct, but related, customer groups will allow us to explore “cross-side” network effects.

If the value of being in the network increases with the size of the network, as it often does, then there is a positive network effect.  Social networks are the model case.  The more people who are on Facebook, the more valuable Facebook is to its users (and its advertisers).

This is the textbook definition of “network effects,” but it’s only one part of what Iansiti and Lakhani call Strategic Network Analysis.  Below is a handy outline.  This article will walk through the outline using our hypothetical company – and some real ones from my experience.

Network Strategy Checklist

  1. Network effects (good) – Value grows as the square of the node count … maybe.
  2. Learning effects (good) – There is valuable data to be gleaned from the network.
  3. Clustering (bad) – You can be picked apart, one cluster at a time.
  4. Synergies (good) – Your business includes another network that talks to this one.
  5. Multihoming (bad) – Easy for customers to use multiple networks.
  6. Disintermediation (bad) – Easy for customers to go around your network.
  7. Bridging (good) – Opportunity to connect your network to others.

By the end of this article, you will understand how networking relates to the data concept from the earlier article, and how to apply it to your own software.

Speaking of vocabulary, let’s agree that “network” simply means all of the customers connected to your software, even if they aren’t connected to each other.  It will be our job to invent positive network effects for the company.

The early thinking about networks dealt with actual communication networks, where adding the nth telephone made possible n-1 new connections.  This gave rise to Metcalfe’s Law, which says that the value of a network increases with the square of its size.

Working Your Network

If you are supporting a “peer-to-peer” activity among your dealers, like Bruce Thompson’s auction platform, Car Offer, then you have Metcalfe’s Law working for you.  By the way, Bruce’s company was among those in the aforementioned wave of acquisitions.

If you are supporting a dealer-to-dealer activity, like Bruce Thompson’s auction platform, then you have Metcalfe’s Law working for you. 

Research has shown that naturally occurring networks, like Facebook, do not exhibit Metcalfe-style connectivity.  They exhibit clustering, and have far fewer than O(n2) links.  Clustering is bad – point #3, above – because it makes your network vulnerable to poaching.

Even if you don’t have network effects, per se, you can still organize learning effects using your dealers’ data.  Let’s say you have a reporting system that shows how well each dealer did on PVR last month.  Add some analytics, and you can show that although he has improved by 10%, he is still in the bottom quintile among medium-sized Ford dealers.

That’s descriptive analytics.  To make it prescriptive, let’s say our hypothetical company also operates a menu system.  Now, we can use historical data to predict which F&I product is most likely to be sold on the next deal.  The same technique can be applied to Digital Retail, desking, choosing a vehicle, etc.

Note that we have data from our reporting system doing analytics for our menu system – and pooled across dealers.  Any data we can accumulate is fair game.  This is why I recently advised one of my clients to “start hoarding now” for a prospective AI project.

Cross-Side Network Effects

So far, we’ve covered points 1-3 for our hypothetical company’s dealer network.  I’ll leave their provider network as an exercise for the reader, and move on to point #4.  This is where your business serves two groups, and its value to group A increases with the size of group B.

I like to say “cross-side” because that clearly describes the structure.  Iansiti and Lakhani say “synergy.”  Another popular term is “marketplace,” as in Amazon Marketplace, which I don’t like as much because of its end-consumer connotation.

It’s hard to bootstrap a network, and it’s twice as hard to bootstrap a marketplace. 

Is there an opportunity for cross-side effects between dealers and F&I providers?  Obviously ­– this is the business model I devised for Provider Exchange Network ten years ago.  Back then, it was voodoo magic, but a challenger today would face serious problems.

It’s hard to bootstrap a network, and it’s twice as hard to bootstrap a marketplace.  In the early days at PEN, we had exactly one (1) dealer system, which did not attract a lot of providers.  This, in turn, did not attract a lot of dealer systems.  Kudos to Ron Greer for breaking the deadlock.

Worse, while PEN is a “pure play” marketplace, our hypothetical software company sells its own menu system.  This will deter competing menu systems from coming onboard.  I’ll take up another of Professor Rogers’ themes, “working with your competitors,” in a later post.

Finally, network effects are a “winner takes all” proposition.  Once everybody is on Facebook, it’s hard to enroll them into another network.  That’s not to say it can’t be done.  Brian Reed’s F&I Express successfully created a dealer-to-provider marketplace that parallels PEN.

This brings us to point #5, “multihoming.”  Most F&I product providers are willing to be on multiple networks.  When I was doing this job for Safe-Guard, we ran most of our traffic through PEN, but also F&I Express and Stone Eagle, plus a few standalone menu systems.

The cost of multihoming is felt more by the dealer systems, which are often small and struggle to develop multiple connections.  On the other hand, Maxim and Vision insisted on connecting to us directly.  This is point #6, “disintermediation.”

New Kinds of Traffic

Fortunately for our hypothetical company, Digital Retail is driving the need for new kinds of traffic between providers and dealer systems.  This means new transaction types or, technically, new JSON payloads.  Transmitting digital media is one I’ve encountered a few times.  Custom (AI-based) pricing is another.

Digital Retail is driving the need for new kinds of traffic between providers and dealer systems. 

Controlling software at both ends of the pipeline would allow them to lead the market with the new transaction types.  Key skills are the ability to manage a network and develop a compelling interface (yes, an API can be “compelling”).

As before, note that the same concepts apply for a dealer-to-lender network, like Route One.  There is even a provider-to-lender network right here in Dallas.  Two, if you count Express Recoveries.

So, now you have examples of Strategic Network Analysis from real-world F&I software.  This is one of the methods the Virag Consulting website means when it says “formal methods” to place your software in its strategic context.  

If you’ve read this far, you are probably a practitioner yourself, and I hope this contributes to your success.  It should also advance the ongoing discussion of data and analytics in dealer systems.

Looking for Work

I am ready for my next engagement.  This blog, together with my Linked-In profile, gives some indication of what I have accomplished and what I can do for your business.  There are also some case studies on my web site.

I am currently interested in digital retail, digital marketing, and artificial intelligence.  I generally do contract work, but will consider salaried.  If you have a job that requires my particular set of skills, please get in touch.

Digital Retail Consolidation

There has been a wave of buyouts and tie-ups lately, and so it is time to reexamine the competitive landscape.  We start by fleshing out the model I described in DR and Dealer Websites.  This is a commerce-oriented model, placing software products along the customer journey.

Looking at the three big DMS vendors, we see Roadster and Gubagoo filling important gaps for CDK and Reynolds.  Cox has long been in this space, now with Accelerate, and MMD before that.  Cox is the only one of this group to own a listing platform, Autotrader.

Last year, CDK sold its dealer marketing operation to Ansira, including the dealer site business formerly known as Cobalt.  The new entity, Sincro, now has a tie-up with Tekion.  As far as I know, this is indeed the first real-time interface from website to DMS.  I have worked with clients on other DMS interfaces, but none that cross the Buy Now boundary.

In the dealership, I list only the DMS, although the model could be extended to break out other point-of-sale systems.  Note that CDK and Dealertrack no longer have their own menu systems.  Both are now offering Darwin under license.  To round out the DR theme, I include TrueCar’s tie up with AutoFi, and Fox Dealer’s acquisition of TagRail.

So far, so typical.  Everybody wants a DR partner, and the big vendors have always acquired the innovative upstarts.  But now, we discover a new theme. CDK paid a lot of money for Roadster, $360 million, to plug a gap in its product line.  Why did J.D. Power, not a software vendor, pay even more for Darwin?

Digital Retail Acquisitions are Big Data Plays

J.D. Power is primarily a data business.  They own ALG and Autodata.  According to the press release, they are “focused on maximizing the value of our extensive data and analytics assets.”  Darwin, through its powerful DMS interface, has been reading and analyzing sales data for thousands of dealers.

MotoInsight, the Canadian DR company (my profile here) was recently acquired by a unit of Thoma Bravo, which in turn owns J.D. Power.  Seeing a pattern yet?  The Autodata merger is pretty recent, and also mentions analytics.

“In working with Modal, we are leveraging aggregated purchase data and AI to improve conversion.”

Another DR player, Modal, recently teamed up with a data science company called Inmar.  I couldn’t find the commercial terms, but founder Aaron Krane has stepped back.  There’s a new CEO, and a plan to “catapult analytics to the forefront.”

The press release for the recent acquisition of Dealer Socket by Solera, “the preeminent global data intelligence and technology leader” specifically mentions machine learning.  While we’re at it, let’s note that Automotive Mastermind is a unit of IHS Markit, as are Carfax and R.L Polk.

You’ve probably heard that “data is the new oil.” Opinions vary, but I think the metaphor holds up here.  If you study analytics the way I do, it’s easy to see the data resources underlying these transactions.  You can also check out this book, or the usual sources like HBR and Sloan.

Digital Retail is “the engine,” giving customers a self-sufficient buying experience.  This engine is amenable to endless AI-based use cases, from recommenders to NLP chatbots … and AI runs on data.

The Case for D2C

A while back, I wrote a survey of Direct to Consumer VSC Sales.  This was a “how to,” and today I am writing about the “why.”  The short version is that D2C is a large and unserved market.  Franchised dealers sell service contracts with 47% of new vehicles, which is great, but that leaves the other half unprotected. 

Add 6% to reported F&I gross, plus 4 to 5 times that amount for the backfile

Depending on which “touchpoint” you wish to pursue (see here) this market includes roughly 67 million vehicles.  That’s how many are on the road, less than six years old, with no coverage.  Dealers are the group best positioned to serve this market.  Of course, a dealer can only address his local share of the market, not the whole 67 million.  See Profit Opportunity, below.

To succeed with D2C, you must have an existing relationship with the customer.  That’s because success requires digital marketing, and anti-spam laws limit what you can do without a relationship.  For example, an OEM can email their customer a solicitation for their factory-label protection products, but a TPA cannot.

So, the dealer has the inside track.  He has the relationship, the contact info, and a service department to verify eligibility.  Plus, every additional VSC aids in service retention.  Depending on the dealer group, it may also have the other ingredients.  Here’s the parts list:

Direct to Consumer (D2C) Operation

  • An advanced CRM with the ability to run a scheduled, multichannel contact program.  Salesforce calls this a “customer journey.”
  • A source of premium finance, like SPP, Budco, or PayLink.  Dealers will already have one of these, for their instore F&I operation.
  • A call center, which could be the BDC, to participate in the selling journey and also to deal with issues around premium finance.
  • A branded website capable of presenting and selling the service contract, including Visa checkout and premium finance.
  • A service facility.  If you’re not a dealer (trying to cover all bases here) there are still things you can do with Pep Boys and mobile facilities like Pivet.

Depending on the dealer group.  Obviously, if you’re Lithia, you already have a finance arm which could (with training) handle bounced Visa charges.  They’ll need to comply with the PCI security standards.  Maybe that’s best left to PayLink. 

There is a host of such decisions, for which you will need expert assistance – but let’s get back to the “why.”  We are going to make a gross profit calculation in three steps:

Direct to Consumer (D2C) Profit Opportunity

  1. Compute the potential product gross that didn’t close with the vehicle sale.
  2. Estimate the likely D2C conversion rate.
  3. Add the backfile of customers from prior years.

Let’s look at AutoNation.  Sorry, NADA Average Dealer doesn’t provide enough detail.  Even the AutoNation data doesn’t provide much detail on product sales.  Still, we can draw some inferences using the 2019 annual report, industry norms, and these remarks from then-CEO Cheryl Miller.

AutoNation reported sales of 283,000 (new) and 246,000 (used) with F&I PVR of $1,904.  That’s the headline figure, including finance reserve.  Owing to adjustments, the figure in the annual report is a little higher, and the calculation based on Miller’s summary is a little lower.

The $1,350 (new) and $1,050 (used) are averages across all units.  We can infer that product gross was roughly $2,580 (blended) on 47% of units.  That leaves the other 280,000 vehicles unprotected, with a potential gross of $720 million, equal to 71% of AutoNation’s reported F&I gross.

You can use 75% of F&I gross as a rule of thumb.  In general, product gross is two-thirds of F&I gross, and this is derived from fewer than half of the vehicles sold (omitting ancillaries).  The ratio of D2C opportunity to instore penetration is 53/47 of the two-thirds, which makes 75%.   

This $720 million is the potential gross AutoNation left on the table in 2019.  Okay, that’s not fair.  It’s only on the table assuming every one of the D2C prospects will buy the product, which they won’t.  Most won’t, in fact.  The conversion rate is the product of three factors:

  • The number of contacts per customer, based on your touchpoints and your programmed journey.
  • The take rate, which is the percentage of people who take action by clicking the PURL link, scanning the QR code, or whatever.  The industry norm here is 2-5%
  • The close rate, which is the percentage of takers who are closed by the call center or self-close on the web site.  Expert closers can do 20-30%.  Remember, this is within the self-selected “takers.”

The conversion rate is what counts, but we break out the components for management purposes.  For instance, maybe the take rate is high but your closers are weak.  Success requires a lot of contacts, with compelling CTAs and good closers.

Let’s say we utilize all of our advantages as a dealer – an aggressive journey on all touchpoints – bringing our contacts to 10.  Multiply this by a conservative 20% close rate and 4% take rate.  This gives us a conversion rate of 8%. 

In our AutoNation example, this would mean roughly $58 million of additional gross.  All of this arithmetic generalizes, too.  Simply take reported F&I gross and multiply by 6% (8% of the 75%, above, makes 6%).  So, now I can crack the Lithia annual report with F&I gross of $580 million, and reckon that D2C could mean $35 million to them.

This incremental income recurs annually, since it’s based on one year’s volume – but we start the game with a backfile of unserved customers from prior years.  We might reasonably want to go back five years for new vehicle buyers and three years for used. 

AutoNation is a convenient example because they sell new and used in roughly equal parts, so this works out to (blended) four years’ worth of volume.  If your mix skews more toward new vehicles, then your backfile opportunity will be richer. 

In short, you can use the 6% rule to compute the annual recurring, and then add a one-time opportunity of 4 or 5 times that amount for the backfile.  This more than pays for setting up the operation.  So, is it worth the hassle to earn an extra 6% of F&I gross?  Ponder that next time you see the Car Shield ad on television.

DR and Dealer Websites

I was chatting with my pal Kiran Karunakaran about his new role at Fox Dealer.  You may recall that Kiran’s DR solution, TagRail, was acquired by Fox earlier this year.  At that time, I figured DR would be an absolute requirement for dealer websites, and I expected to see CDK bid for, say, CarNow.  Here are the pairings:

  • Fox Dealer, TagRail
  • Dealer Inspire, Online Shopper
  • Dealer Fire, Precise Price
  • Dealer eProcess, SARA
  • Dealer.com, Accelerate

Note that, with the exception of TagRail, these DR solutions were all developed by their website partners.  Missing are the pure DR startups I usually write about: Roadster, Modal, and Moto.  Maybe they’re better off uncommitted.  I decided to test this theory with a little research.

I went through Wards’ Top 100 Internet Dealers, identifying the website provider for each one, and their DR solution.  The Wards sample skews strongly toward DDC, at 60%.  The Datanyze survey (chart above) has DDC at 18%.  Remember, I am not looking for market share so much as patterns in DR adoption.

For example, 20% of “top internet dealers” had no DR solution.  That was a surprise.  A few of these had cobbled together the Dealertrack frame with Trade Pending and a homebrew payment calculator – not DR as it is usually defined.

Same-vendor pairings for DR and website were rare

Some dealers use the same website and DR solution across all their stores, and some skip around.  Herb Chambers uses DDC and Darwin faithfully except in his Chevy store, which uses CDK and Shop Click Drive.  Paul Rusnak and Fred Anderson are faithful to Roadster and Gubagoo, respectively, but vary their choice of website providers.  Of course, these choices are often mandated by the manufacturer.

Of manufacturer DR preferences, the best known is probably Shop Click Drive, followed by AutoFi.  AutoFi is historically associated with Ford, and still used mainly by Ford dealers.  I did find one Kia dealer in Peoria using AutoFi.  Chrysler’s DriveFCA is powered by Carzato.

Same-vendor pairings for DR and website were rare, at 12%.  These were almost exclusively DDC with Accelerate.  I found one instance of Dealer Inspire with its mate, Online Shopper.  Free-agent DR solutions did much better than those associated with website providers.  Roadster, Darwin, and CarNow together accounted for 59% of DR in the sample dealerships.

As it happens, CDK did not acquire a DR solution.  Instead, they sold their website business to Sincro, a digital marketing company.  The Sincro announcement reminds us that what I am calling the “website business” may also include digital content, advertising, SEO, social, reputation, CRM, and lead-gen.

The right framework is not DR plus website, or even DR plus website and marketing, but a continuum across the customer journey.  The journey begins with the various marketing services required to land the customer on the website, and ends with point-of-sale (POS) systems like menu and desking.

Recall that Roadster, Darwin, and Moto also play in the POS space.  At the other end, there are pure-play marketing agencies that don’t do websites.  You can evaluate strategy for these companies in terms of where they are concentrated along the journey, and where they are extending.

Dealer Fire moved up funnel, through their partnership with Stream, and Fox extended down a notch with TagRail.  Darwin is unique in having moved to DR from point of sale. (I am using the linear model for simplicity. To account for CRM and reputation, you need the loop model.)

My goal here was to explore the synergy between DR and dealer websites, and the answer is that they’re not as compatible as they appear.  Research showed much less crossover than I had expected, between marketing agencies on one side of the BUY NOW button, and DR specialists on the other.

Spinoff Startups in F&I

The popular notion of a startup is two guys in a garage, like Hewlett and Packard, but this is not always the case.  Sometimes a mature company will give birth to a new business unit.  I did some foundational work for Dealertrack and, at that time, it was the eCommerce department of Chase Auto Finance.  In fact, a number of the startups I’ve worked with have been F&I spinoffs like Dealertrack.  Today we’ll explore these for common themes and lessons learned.

One common theme is the role of outsourcing.  You can begin with a core team, plus service providers, and then insource the functions systematically over time.  I was an early employee of BMW Financial Services, which began as a department of the sales company and all functions outsourced to GE Capital.  The head of this department, Kevin Westfall, had a plan to bring the operation under his control as a new entity with a new service provider.

I was recruited from Coopers & Lybrand, which was tasked with selection and contract administration for the service provider – outsourcing the outsourcing, so to speak.  After a few years at BMW, I followed Kevin to AutoNation and the same strategy.  We outsourced Funding, Customer Service, and Collections to World Omni, but kept staff functions and the Credit department in house.

You have a lot more autonomy managing a service provider than you do with permanent staff on the parent company’s org chart. 

Outsourcing isn’t magic, though.  If you can’t manage the function in house, then you probably can’t manage contracts and SLAs either.  On the other hand, this is a great way to get around the parent company’s hiring restrictions.  They may not be willing to hire the requisite staff for, say, a Collections department, but will sign a flexible contract with a service provider.  Also, to be frank, you have a lot more autonomy managing a service provider than you do with permanent staff on the parent company’s org chart.

McKinsey’s Meffert and Swaminathan write about “breaking the gravitational pull of the legacy organization,” and this is such an apt metaphor.  Many at BMW viewed the breakaway department with suspicion.  There was political pressure to keep Kevin under control of the Finance department, an obvious misalignment, and passive resistance from some of the others.  It was important in this case to set up our own HR department, and move it out of town.

It was the same story at AutoNation Financial Services.  We had our own IT, Finance, Ops, and Marketing plus dotted lines to the respective “real” departments of the parent company.  This gravitational pull is normal organizational behavior.  Managers are always starved for headcount and, since the new initiative is hiring, they want their piece of it.

When your army has crossed the border, you should burn your boats and bridges, in order to make it clear that you have no hankering after home.

When ANFS was shuttered in 2002, most of our crew was absorbed back into the parent company.  Obviously, having an escape route like this is not conducive to the kind of commitment required by a startup.  Insert Sun Tzu quote here.

There was no such option for two of my consulting accounts, Route One and Provider Exchange Network.  Route One, for example, was manned by senior managers from various captives.  There was not much chance of these guys going back to their old jobs if Route One were to fail.  I am thinking in particular of the founding CEO and CIO, Mike Jurecki and Joel Gruber.

Joel retained me as a subject matter expert in online credit systems, to work on the outsourced (there’s that word again) development of Route One’s core system.  I called on Joel a few years after the project and we talked about the career risk he had taken.  By that time, I was involved in a startup of my own, with no small amount of risk.

Paradoxical though it may sound, we believe companies need to take more risk, not less.

McKinsey cites the top ten ways to fail at digital transformation, and “excessive caution” tops the list.  It’s my personal belief that you can never achieve anything unless you’re willing to take a risk for it.  In any case, a big, risk-averse corporate parent is certainly going to impede the new unit.

Provider Exchange Network, likewise, was staffed by people hired for the purpose.  We had, from the outset, our own IT, Finance, and Marketing.  We did, however, run our hiring through the excellent HR department of Reynolds and Reynolds, and this is maybe the counterpoint to my arguments about autonomy.

The parent company is unlikely to have functional expertise useful to the new venture but, where it does, you should use it.  BMW had zero expertise in consumer finance, but they had a terrific Legal department.  At AutoNation Finance, we made good use of our parent’s FP&A capability.  Also, the spinoff may be designed specifically to exploit some asset of the parent company, like its dealer network or OEM relationships.

So, my takeaways on this topic are:

Group Cohesion – The new unit should be united around a common purpose, with people hired for the purpose or as a breakaway department.

Cutting the Cord – The spinoff will have to win some turf battles with parent company managers who refuse to let go.

Leverage Legacy Assets – On the other hand, take advantage of the parent’s core competencies, especially those that are hard to duplicate.

Outsourcing – Find partners.  Rent to own.  McKinsey and others have stressed the importance of thriving in an entrepreneurial ecosystem.

Take Risks – Fortune favors the bold.  No shortage of clichés here but, seriously, all of the literature talks about new initiatives that move too slowly and become roadkill.

I recognize that these points are open to some interpretation.  They’re based, as you see, on my firsthand experience.  That’s some good experience, though, so if you’re doing an F&I spinoff maybe you can profit from it.  Best of luck.

Digital Transformation Playbook

I read a good book over Christmas break, The Digital Transformation Playbook, by David Rogers.  This is a good book because it has both theory and practice, plenty of research and real-life examples, and practical “how to” guides.

Just when you’re thinking, “oh yeah, when has that ever happened?” Rogers comes up with an example.  Many of the these include commentary from the people who worked on them.  It’s clear that the professor gets out of his classroom for a fair amount of consulting.

Digital transformation is not about technology – it is about strategy and new ways of thinking.

Most books like this focus on digital native startups.  That’s the sexy stuff and, in fact, where I have most of my experience.  I chose this book for its focus on digital transformation, in existing companies and hidebound industries (like auto retail).

The book is organized around five strategic themes: customer networks, platform marketing, upgrading your value proposition, data as an asset, and innovation through experimentation.

I did grow a little impatient with Rogers’ incessant enumerating: five core behaviors, four value templates, three variables, two trajectories (and a partridge in a pear tree) but I appreciated the effort to boil everything down to a foolproof recipe.  There are a number of these:

  • Customer Network Strategy Generator
  • Platform Business Model Map
  • Value Train Analysis
  • Data Value Generator
  • Experimental Design Templates
  • Value Proposition Roadmap
  • Disruptive Business Model Map
  • Disruptive Response Planner
  • Digital Transformation Self-Assessment

I was even inspired to start making value train diagrams of our business, and platform model maps:

On the theory side, Rogers reexamines familiar models from people like Drucker and Levitt.  He shows, for instance, that Christensen’s theory of “digital disruption” is a special case, and broadens it.

By the way, this discussion of digital disruption is one of the most lucid (hype-free) that I have read.  As usual, there is a checklist: analyze three features and choose one of six strategies.  If that doesn’t work then, yes, you’re disrupted.  Time to update your resume.

I read all the time, though I don’t often write book reviews (here is the last one) so Rogers’ fifteen-page bibliography was an extra treat.  That should keep my Kindle stoked for a while.

Toward a Digital Auto Marketplace

Will the big public groups dominate online retail, as I predicted last week, and drive private dealers from the field?

This trend seems to have recovered, after some false starts, with the availability of fresh talent like Shift, Drive, and Roadster.  Shift has $253 million in funding, notably including Lithia.  AutoNation has recently invested $50 million in Vroom, valuing the online startup above $700 million.

How can smaller groups compete in this high-stakes contest?  One way, as I wrote here, would be to consolidate themselves online.

To defend themselves online, private dealers will migrate into the most capable of the platform sites. The winning platforms will not be mere lead providers.

I know something about platform marketing, having organized the Provider Exchange Network around cross-side network effects.  The more menu systems we added on the dealer side, the more success we had with F&I providers on the other side.

The difference between a selling platform and a mere lead provider lies in the site’s ability to deliver a completed deal.  That is:

  1. Show the true price online.
  2. Sell protection products.
  3. Provide a firm offer for the trade-in.
  4. Offer hard-pull credit approval and deal structuring.
  5. Allow the customer to save multiple deals and self-close.
  6. Sign the contracts online.
  7. Provide for home delivery.

Home delivery is not just a nice touch.  It demonstrates the capability to truly complete the deal online, with no tasks left over.  It is the acid test for online retail, even though most customers will opt to finish the deal in person.  The tasks are described here, and the workflow is here.

This capability is not so far-fetched as it was when I started writing about it, some years ago.  Delivering it on a multi-dealer site, however, poses special challenges.  The only eCommerce capable sites I can think of are run by monolithic used-car dealers Shift, Vroom, Carvana, and CarMax, or single points using digital storefronts from Roadster, Drive, and TagRail.

So, I am back to writing about the future.  In the fullness of time, someone will figure out how to do eCommerce for:

  • New cars
  • Multiple new-car stores in a group
  • Multiple unrelated new-car stores

When I started writing about the platform concept, I naturally assumed that Autotrader, et al., would be there.  Now that I have spent some time exploring Autotrader, Cars.com, Car Gurus, Edmunds, GoGo, Carfax, TrueCar, Autobytel, Kelley, and Deliver My Ride, I can tell you this is still uncharted territory.

Everybody promises eCommerce, of course, but most stumble at the first gate.  This challenge, price transparency, was supposed to be TrueCar’s edge.  In fairness, the platform model poses some special challenges:

Price Transparency – This one needs no explanation.  Despite glimmers of hope from the Rikess Group, online pricing is mostly confined to used cars.  A new car marketplace would have to disclose, on the search results page, prices from competing dealers.

Protection Products – Same story here, as regards pricing.  Also, if you want to do it right, you need to copy the dealer’s menu system setup, and ping those providers for pricing.  In fact, each step of the online process needs an interface with its “system buddy” in the dealership.

Trade Valuation – There are plenty of tools, but participating dealers must agree to honor the platform’s valuation.  This is easier if the platform happens to be Kelley.

Credit Approval – Each dealer will have their own stable of finance sources.  It’s best simply to bounce the application off the dealer’s Route One or Dealertrack credit system, and then return the results to the platform.  This data needs to be in synch with the dealership anyway.

Deal Structuring – I complain all the time about weak payment calculators on consumer sites.  The special challenge here is that data must be shared with each dealer’s desking system, and the calculations must match.

The rest of the process is pretty much unchanged from single-dealer: saving and transmitting the deal, signing (standardized) forms with DocuSign, and scheduling the delivery.

I recognize this is but the broadest broad-brush outline.  My purpose here is not to explicate the design, but to illustrate how progress toward the digital marketplace is impeded by these special challenges.

We may need to cooperate with a direct rival due to interdependent business models or mutual challenges from outside our industry.

How will these challenges be resolved?  Will competing dealers learn to cooperate, for the sake of their online survival, or will the palm go to a single online victor – like AutoNation, or Amazon?  The quote above is from Professor Rogers’ definition of “coopetition.”

Smaller groups cannot afford to invest $50 or $100 million, as AutoNation and Lithia have done.  Look a little farther down the league table, though, and it’s not hard to find four or five dealer groups which, combined, match the scale and revenue of a public group.

Joint ventures are not unheard of in our industry, especially when it comes to eCommerce.  My own brainchild (and eCommerce platform) PEN, like CVR before it, is a joint venture between archrivals CDK and Reynolds.  Route One is a creation of the Detroit three captives, plus Toyota.  Honda and GM are working together on electric cars, while BMW and Daimler collaborate on mobility services.

Combining four or five dealer groups simplifies the problem, relative to a fully open marketplace.  It reduces the number of systems, lenders, and product providers that need to be integrated.  The ideal venture partners would already have a high degree of standardization within each group, and similar choices of software among them.

Such a project might proceed “depth first” by developing core functionality in one partner, and then folding in the others, or laterally by function, or by merging the existing eCommerce capabilities of the partners.  What to aim for as “minimum viable,” and how best to expand it, depends on a number of factors.

Meanwhile, the commodity lead business is under pressure.  Damage reports and reviews do not offer adequate differentiation, whereas investments in eCommerce could yield significant new opportunity.  The Cars.com situation marks the beginning of the shakeout, consolidation, and – just maybe – the digital marketplace.

Asbury Drive in the House

Photo Credit: Nyisha MorrisKelly and I were sipping coffee at Digital Dealer, greeting participants, and speculating on how the ultimate online buying experience would come to pass.  Presenters had talked about Amazon, obviously, and the recent opening of a Hyundai digital showroom on Amazon Autos.

A while back, I organized the various offerings into categories like: online platforms where multiple dealers may list their inventory (basically lead providers) versus eCommerce plug-ins to be placed on individual dealer web sites.

One key variable was whether the site actually holds inventory, i.e., is a dealer, not just a technology play.  Carvana, for example, or Shift.  Increasingly, what I notice is that the good technology either evolved from a dealership, or – I found this intriguing – they will buy a dealership to serve as a test bed.

Your rapper name is a top twenty dealer group plus a digital retail system.

Roadster came from a concierge buying service which, as far as I know, they still operate.  A2Z Sync came out of Denver-based Schomp group.  The Gogocar people operate a Kia dealership.  This brings me to the next level of dealer technology tie-ups, those where big dealer groups choose an online retail solution and commit to it.

Roadster is working with AutoNation, Lithia just bought a big stake in Shift, and Drive is in all Asbury stores.  The Lithia deal is pure genius, because it allows Shift to handle more inventory and slashes their floorplan costs.  The many links in this post show support for my prediction using publicly available information.

We philosophically do not believe that software development is our expertise. Instead, we’d prefer to partner with third parties – Craig Monaghan

That prediction is … continuing the consolidation megatrend, we will see dominant groups taking the lead in online retail, but unable to master the technology on their own.  This is what I call the “Kodak syndrome.”  Incumbent leaders are not agile enough to ride a paradigm shift.  This means not only the dealer groups, but the traditional software vendors.

I expect to see the Sonics and Asburys of the world buying up the digital retail people, absorbing their talent, and denying access to their competitors.  I characterized this as a “land rush” in the earlier piece.  Direct to consumer is the final frontier.

Deconstructing the Dealership

Remember when dealerships had body shops?  Two out of five still do, but they comprise less than 20% of this $35 billion market.  Somewhere along the line, it became clear that collision repair was better done by specialist facilities, unconnected to the dealer.  Scale, capital investment, brand diversification, and (lack of) synergy were factors.

We may now wonder if parts and service belong in the dealership, thanks in some measure to the rise of automotive eCommerce.  Jim Ziegler warns that Valvoline Express is beating dealers in the shop and online.  Ward’s makes the same point, with emphasis on Google search optimization.  In the same vein, Amazon has come up with a way to sell tires online.

There can be much synergy between the two ends of the business, which can be leveraged to manage and sustain customer relationships – Vincent Romans

My approach is to “follow the money” and, sure enough, here is Carl Icahn buying up repair facilities.  Icahn Automotive Group is a classic consolidation play, with 2,000 locations including Precision Auto Care, Pep Boys, Just Brakes, AutoPlus, AAMCO, Cottman, and CAP.  Icahn is vertically integrated through Federal-Mogul Motorparts, which includes ANCO wipers and Champion spark plugs.

So, will eCommerce pick off the dealer’s profit centers one by one?  In this example, we see the convergence of powerful megatrends.  The traditional dealer model is challenged by two new ones, which I like to call the Best Buy model and Amazon model.

History tells us that the Amazon model will prevail in the end, but it doesn’t tell us what the transformation will look like, or how dealers should prepare.  To learn that, we employ an old tool from Business Process Reengineering, and we discover a surprising result.  Here is a breakdown of the traditional dealer operations:

The Seven Profit Centers of a Car Dealer

  1. New Sales
  2. Used Sales
  3. Finance
  4. Insurance
  5. Parts
  6. Service
  7. Collision Repair

We can consider each operation in terms of how it will respond to the new challenges – and whether it belongs with the others.  We have to start somewhere, so let us define new vehicle sales as the nucleus of the dealership.  The test drive is the process most resistant to eCommerce although, as I wrote last week, there are ways around it.

Used vehicle sales will certainly not stay in the dealership.  It is vulnerable to both consolidators and eCommerce.  This is a shame because taking vehicles in trade used to be a great synergy.  The new specialists are true “auto traders,” using high-volume analytics to trade both ways with the public and the auction.

Coming back to fixed operations, there is a clear synergy.  According to Cox research, customers who are properly introduced to the service department are two and a half times more likely to come back for service.  But there are other ways to exploit this synergy, like the “zero deductible at our dealership” service contract – and the Amazon tire store shows that parts can be separated from service.

Lithia Motors has 186 locations including, by my count, fourteen collision centers.  There is not much synergy between body shops and vehicle sales, or even service, but they run fine as standalone operations connected to the brand.  Likewise, given a branded service contract, I can see Lithia’s mass market franchises supporting shared service facilities.

F&I is the subject of fierce debate, too much to cover here.  Can it be merged into the sales function? Can protection products be sold successfully online?  What is the future of indirect finance?  Do “F” and “I” even belong together anymore?  For our purpose today, we need only observe that while F&I has a workflow linkage to sales, it does not need a physical one.  F&I could just as easily skype in from a call center.

As Carl Icahn would tell you, these are distinct businesses without much synergy, if synergy is defined as “positive return from shared personnel and facilities.”  Dealers organized along these lines will, indeed, be picked apart by eCommerce and consolidation.

On the other hand, if synergy means “positive return from shared customer contact and branding,” then these businesses will hang together.  Dealers organized along this principle will have diverse and independent operations, making them resilient to disruption.  They will have “optionality,” to use Nassim Taleb’s term.

You may be taken aback by this assault on the venerable “rooftop,” and I admitted earlier to being surprised.  However, decoupling and diversification (and divestiture) are textbook responses to an industry in flux.  Just look at how many departments are no longer in department stores.