This story first appeared in the April issue of AutoTalk – CLICK HERE to download the magazine FREE
The nation’s auto dealers await the financial impact of the Australian Securities and Investment Commission’s (ASIC) announcement in March that it will go ahead with the long-debated prohibition of ‘flex commissions’. ASIC has decided on prohibition as a comprehensive, industry-wide solution that will deliver broad changes for the benefit of consumers. It will apply to car dealers and finance brokers.
While the prohibition will still allow lenders to pay other types of commissions to car dealers, finance and insurance aspects of the regulatory changes will have a fairly drastic impact on profitability.
ASIC recognises the need to allow a reasonable period of time for lenders to develop different pricing models, and will provide a transition period of around 18 months. Mark Ward, partner at BDO, and Simon Scalzo, chief executive of Openpay, have been working closely with dealerships to react and engage with these challenges. Some of the specific discussions have been around creating financial models and strategies which would help to overcome this massive cap cut.
A new era of profitability for dealerships
Increased access to the internet has given unprecedented transparency of pricing to consumers, imparting the power for them to negotiate cheaper car deals, and thus resulting in thinner profit margins on car sales.
Given difficulties in reducing the cost of doing business in other areas, due to pressures from major brands to keep showrooms in premium land locations, increasing revenue is essential to the survival of dealerships.
Manufacturers’ incentives-based models are one avenue for larger dealers to maximise access to financial improvements and decrease risk. According to a report from BDO Automotive, it has been observed that an increasing number of smaller dealers are also looking to consolidate. Maintaining profitability becomes extremely challenging under ASIC’s commission caps.
It is clear that, as a generalisation, ‘smaller dealers’ are unable to leverage the incentives-based model to the same extent as their larger counterparts. In fact, the incentives-based model works against them.
Instead, the dealership business model faces a seismic shift in capability and culture to renew the focus of adding additional value to new and used-car service and aftermarket sales. Here are three simple strategies to begin the transition.
Grow transaction value by upselling additional work and bundled services
In this new landscape, the success of many car dealerships will be attributed to their tenacity when it comes to upselling — with tighter regulations on add-on insurance policies it is time to focus additional value on each transaction.
Once the customer is through the door, it is up to the sales team to activate the strategy to grow transaction value by upselling additional product and bundled services. This could include upselling future services when a customer is engaged for other repairs.
If you’re having trouble getting car buyers sold on these added value products at the time of sale, it may be worth adopting a buy now, pay later model.
With buy now, pay later options available to customers, in which bundled goods can be paid off over extended periods, with no interest, dealers are reporting close to 25% more new customers per month, and an increase in average transaction values to $1900.
New app-based alternatives, like Openpay, guarantee payment the next business day while giving your customers the flexibility to spread payments across many months — ideal for purchases such as unexpected repairs or big-ticket aftermarket packages.
Renew your focus on used cars and aftermarket products
When it comes to finding success within new constraints, opportunities always abound — the untapped incremental revenue from used-car services and aftermarket packages are a prime example of this.
Currently the used-car market benchmark is underdeveloped. For every new car sold, less than half a used car is moved. Many car dealerships fail to see past the immediate return on investment, so a shift toward aftersales products and care could be very lucrative for your business.
Switch to a customer centric sales approach
In a marketplace where consumers are becoming more able to set the terms for their purchase experience, the car industry has remained relatively stuck in its ways.
To retain consumers, sales teams will need to put greater importance on understanding the customer’s needs to tailor their marketing strategies. A focus on promoting timely and customised product offerings and payment methods removes the barriers to sales conversions by anticipating customers’ demand for product and service solutions.
With the ban on add-on insurance products, car dealerships can only adapt by offering buyers a more human experience.
A shift in mentality from ‘salesman’ to ‘trusted advisor’ will not only go a long way in helping dealerships regain the trust of their customers, but equally encourage repeat purchases and greater opportunity for aftersales care.
Car dealerships may be facing a bumpy road over the next 18 months. However, those that remodel their business to focus on departments outside of F&I can expect the smoothest journey.
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