Local automotive dealerships are well aware of the need to promote sales with digital display advertising — after all, new and used car sales are high ROI profit centers. However, dealerships tend to overlook digital display opportunities for three other significant profit centers which are ripe for promotion: Service, Parts, and Collision & Repair.
Image courtesy of Vantage Local
While display efforts aimed at increasing sales of new and used vehicles are important, car sales constitute but one component of a dealership’s revenue stream. The integration of all profit centers into a dealership’s display strategy is critical for strengthening its absorption rate — the percentage of total dealership expenses that are absorbed by the gross profit generated from these divisions — and for maintaining a competitive position against increasing pressure from local third-party parts and service vendors.
Background
The service, parts, and collision & repair profit centers are seldom integrated into display strategies due to a disconnect between digital agencies and their automotive dealership clients.
Digital agencies often underestimate the importance of these independent profit centers in shaping a dealership’s overall profitability; these agencies incorrectly assume that a dealer’s success depends predominantly on unit sales.
Dealerships, on the other hand, are cognizant of the importance of these divisions, but receive minimal direction from digital agencies on strategies to incorporate them into their digital efforts. As such, dealerships often remain reliant on traditional forms of marketing — such as direct mail — to promote these other divisions.
This disconnect negatively impacts the dealership in three ways:
A significant piece of ROI remains unclaimed by failing to implement an integrated digital approach to promote divisions outside of vehicle sales.
Dealership parts and service divisions become increasingly vulnerable to competing third-party vendors that implement sophisticated digital branding and sales strategies.
Dealership digital marketing efforts on sales alone make them overly-reliant on one revenue stream. There are risk mitigation features of a diversified portfolio that the dealership is missing.
In order to strengthen these independent profit centers and remain competitive with local third-party vendors, agencies should work with their dealership clients to design integrated and appropriately-targeted display campaigns that promote the respective profit centers. The progress of this integrated display effort can be measured via a metric that is familiar to every dealership — the absorption rate.
Absorption Rate
Selling new and used cars is but one component of a dealership’s complex business model. Unlike other retail businesses, automotive dealerships depend upon multiple profit centers to maintain a healthy bottom-line.
The percentage of total dealership expenses that are absorbed by the gross profit generated from these divisions is known as the absorption rate. The absorption rate percentage is calculated as:
For example, an absorption rate of 100% means that the profits from the parts, service, and repair divisions within a dealership are able to cover 100% of the dealership’s overhead.
The absorption rate metric is of the utmost importance to dealerships, as a rate of 100% means that the dealership is making a net profit on the first vehicle it sells. Absorption rates vary from dealership to dealership, typically falling within the range of 80-115%.
Current Digital Efforts
According to “The US Automotive Industry 2013: Digital Ad Spending Forecast and Key Trends,” a new eMarketer report, “[t]he US automotive industry will spend $5.07 billion in 2013 on paid digital advertising, and that total is expected to rise to $7.80 billion by 2017.” While eMarketer notes that search and display will constitute the largest portion of these digital efforts, the report also indicates that the primary goal of these efforts is to increase sales — intercept prospective buyers and bring them into dealer showrooms.
Although the use of digital advertising to promote new and used cars is vital for a dealership, a truly integrated approach is missing. The supporting divisions which increase the absorption rate — parts, service and repair — remain underserved by utilizing only traditional forms of marketing such as direct mail, leaving them vulnerable to the increasingly sophisticated marketing efforts of local competitors.
Competition
Dealers’ own auto franchises are protected by franchise laws, which prevent the automaker from allowing another dealership to offer the same line of automobiles within a certain geographic distance from the franchisee. While this protects dealers from new car sales of the same brand they represent, it does not protect their parts, service and repair divisions from competition.
As a result, scores of third-party vendors have established a presence in the immediate vicinity of dealerships; these vendors directly compete with dealership parts, service and repair divisions.
This competition from retail giants such as O’Reilly Automotive, AutoZone and Advance Auto has experienced significant growth over the past five years. With the unchecked competition and lack of protections, dealership profit centers will remain under increasing pressure by local vendors for the foreseeable future.
Integrated Display Strategy
A truly integrated display solution for local dealerships incorporates individual creative development and targeting strategies for each of the dealership’s profit centers, not just for new and used vehicle sales. As a standard, agencies should focus on the development of five sets of creative per dealership, each set to promote a different profit center.
Message development within each ad set should focus on competitive positioning against local third-party vendors. In addition to creative development, the dealer and agency should collaborate to determine the most appropriate blend of targeting strategies.
By integrating these significant profit centers into the overall digital display strategy, dealerships will not only compete more effectively with local third-party vendors and lay claim to potential ROI, but they will also reduce the economic risks associated with fluctuating auto sales by diversifying their revenue stream.
Co-Authored by Phil Aime, Senior Director National Automotive Sales & Motor Sports Program at Charter Media
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