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.
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.
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
Compute the potential product gross that didn’t close with the vehicle sale.
Estimate the likely D2C conversion rate.
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.
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
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.