Provider Support for Digital Retail

A couple of press releases caught my attention last week.  The first one was APCO Acquires Strategic Diversified.  So, what’s new about that?  F&I providers have been acquiring agencies ongoingly, in parallel with consolidation among car dealers.  What caught my attention was this, from CEO Rob Volatile, “the additional resources APCO will provide, particularly in digital retailing, will help our dealers thrive in the changing times ahead.”

“The additional resources APCO will provide, particularly in digital retailing, will help our dealers thrive in the changing times ahead.” 

By now, everyone understands that small dealer groups don’t have the resources to compete effectively in digital retail.  This includes even the mighty Larry Miller group.  As CEO Steve Starks said of the Asbury sale, “we had grown the business about as large as we could without having an over-the-top digital retail strategy.”

Product providers, agents, and finance sources must have value-enhancing digital skills – which brings me to the second press release, Assurant Unveils Omnichannel Sales Optimization Suite.  This, again, is not new.  All providers have some kind of digital outreach program.  I served on the digital retail team at Safe-Guard.  In addition to my main job of growing the API business, we provided research, content, and coaching to our clients – not unlike Assurant’s offering.

What caught my attention was the high-profile announcement including, as McKinsey recommends, senior leadership for digital transformation.  This same SVP, Martin Jenns, is quoted here in an Automotive News roundup.

How F&I Providers Can Support Digital Retail

So, what can a product provider do to support “omnichannel sales optimization?”  I asked some of my pals in digital retail.  Definitely the training and API capabilities, plus digital content.  Cited as leaders were Assurant and JM&A.

“Providers should pay specific attention to how their products will present on a digital retail platform.”

The best advice came from AutoFi’s Matt Orlando, who told me, “providers should pay specific attention to how their products will present on a digital retail platform.”  That is, instead of the (completely different) experience on a portal or a menu.

For example, a service contract may have more than one hundred combinations of coverage, term, deductible, and other options.  That doesn’t work for an online consumer.  Providers should apply some analytics, Matt said, and transmit only the most-likely rates.

Short, snappy videos are the preferred digital content.  Digital retail vendors will generally set these up on request although, in my experience, it’s better if the provider can transmit the latest content via API and in various formats.  See my REST Primer for F&I.

  • White papers – Do some research, find success stories, and write informative long-form articles. Also, promotional content like newsletters, roadmaps, infographics, and this eBook.
  • Coaching – For your non-reading clients, be prepared with live-delivery content – and people.
  • API capabilities – Invest in advanced API capabilities like real-time analytics and digital content. Push the envelope of what digital retail can present.
  • Digital content – Produce digital content as video, image, and rich text (not HTML) for each level of your product hierarchy.
  • Resource center – Make all of this available to your clients using a purpose-built microsite – and people.

I remember back when the old-timers used to say that protection products “are not bought, they’re sold.”  Well, digital F&I results now exceed those in-store, with some platforms reliably above 2.0 product index.

In the midst of an inventory shortage, dealers must sell more product on fewer vehicles – and product providers must be part of the solution.

Edtech Unicorns and JIT Training

Udemy went IPO last week, and PitchBook just published a note on the category, so I thought to write about my positive experiences with Coursera.  Online learning is segmented by subject, level, and quality of instruction.  See the research note for a complete rundown.

The edtech boom has not waned now that most schools and universities are again meeting in person. 

Coursera is oriented toward college credit and professional certification.  My instructor for neural nets, Coursera co-founder Andrew Ng, is a professor at Stanford.  They offer online degree programs in conjunction with major universities.  For example, you can earn a Master’s in Data Science through CU Boulder.

I was intrigued by that, but … I have a specific business problem to solve, and I already have grad-level coursework in statistics.  It doesn’t make sense for me to sit through STAT 561 again.  For me, the “all you can eat” plan is a better value at $50 per month.

What I need, today, is to move this code off my laptop and into the cloud.  For that, I can take the cloud deployment class.  If I run into problems with data wrangling, there’s a class for that, too.  This reminds me of that scene in The Matrix, where Trinity learns to fly a helicopter.

People can gain the skills they need, as and when they need them – not as fast as Trinity, but fast enough to keep up with evolving needs on the job.  I think this is the future of education, and 37 million students agree with me.

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.