Is Market Pricing Hurting the Industry?

market pricing

Market pricing has been a hot topic in the industry lately, with some saying it’s done nothing but create problems for dealers and impede business, while others claim it’s natural, and that companies need to adapt.

Here, two of our automotive insiders take a side and argue its point. Rick Ricart, Vice President of Sales and Marketing at Ricart Automotive Group, will argue “yes,” market pricing is detrimental, while Eric Miltsch, Co-Founder of Dealer Teamwork, takes the “no” side.

The “Yes” Side
By Rick Ricart

The choices dealers make to remain profitable while market pricing takes hold has created a domino effect that could be viewed as a race to the bottom.

Once the Internet came along and became the primary shopping and research tool, consumer behavior shifted, and the way car shopping was conducted drastically changed. When we lower our prices to match those that consumers have determined to be right, we also lower our chances of being successful in the long run.

If I were the only one adopting market pricing, I’d have a pretty fair chance of being successful. But once I lower my prices, my competition will too – or risk losing their customers to me.

So maybe we’ll all just increase the number of cars sold to make up for the loss caused by lower prices. This may have seemed feasible over the past decade, when car sales were on the rise, and hit record numbers, but forecasters see that number decreasing in the coming years. We are all aware that last year’s numbers were saved due to an increase of car sales following the active hurricane season.

Yet another domino gets lined up and knocked down when we all start lowering the trade-in offer, too, in an effort to make up some of the profit loss. Now our brand – already devalued due to lower new-car prices – depreciates further in the consumer’s mind, and they begin to lose confidence in the cars they once loved. This, in turn, hurts new car sales.

Every space where a car sits is an asset. We need to turn vehicles. But when the market reaches saturation, confidence in the brand is lost, and competition is stifled, it becomes harder and harder to do this.

When we lower our prices to match those that consumers have determined to be right, we also lower our chances of being successful in the long run.

Of course, all is not lost. We just need to shift the way we do business. Gross will decline if your entire business model isn’t changed, and your focus isn’t transferred from front end to velocity, cash flow, internal service, and F&I. That takes time. The smaller the inventory, the shorter the profit recovery time – the larger the inventory, the longer it takes to cycle through to the new model.

Embracing the new world of digital marketing is also vital. Online merchandising, pricing, pictures, comments, VDP layouts, conversion button/tools, PPC, SEM, third-party listings, etc., all become new priorities with competitive pricing.

The “No” Side
By Eric Miltsch

“Market pricing is an absolute must-have element of our operations. This is how modern dealers are adapting to today’s market and give car buyers the shopping experience they expect. We can move more vehicles, make a fair profit, and make sure customers are very happy!”
–John Iannone, CEO of Auto Outlets USA

Market pricing isn’t hurting automotive – dealerships and their employees who are unwilling to adapt to the evolving industry and make changes to their daily behavior are the culprits.

Let’s consider the bigger picture and forces at work here. It’s important to understand why market pricing in the automotive-retail industry exists in the first place.

  • Standard e-commerce activities created the opportunity for cost savings.
  • Wholesale and retail markets passed along a new layer of pricing to their customers.

Next, the Internet changed customer behavior, and the retail segment of the automotive industry ignored these changes. For years, many stood by their claim that it was a fad, and wouldn’t last, or you were labeled crazy to believe in such nonsense.

E-commerce was responsible for lowering prices, as a result of increased competition. Online shoppers quickly became accustomed to searching online for, and finding, better bargains. Suddenly consumers were empowered, and began researching different product characteristics. They could make price comparisons, communicate with sellers more quickly, and get recommendations from peers via social platforms.

The result? Both traditional and online suppliers continued to keep prices low. While that ultimately contributed to lower profit margins, there were several areas for retail organizations to offset these lower margins (via marketing automation, POS systems, lower marketing costs, and additional methods).

The long-term effects of the general e-commerce ecosystem have been at work ever since car dealers began taking advantage of the Internet’s ability to significantly amplify their inventory’s exposure. Initially, many dealers resisted including prices, with the belief that this would drive phone calls. Big shocker—it didn’t! And still doesn’t today.

Shoppers realized they could find pricing data online on other automotive sites. In fact, this paved the way for even more significant changes in shopping patterns. Florian Zettlemeyer was a pioneer of this concept when he stated, “Consumers who dislike the face-to-face bargaining process might benefit more from obtaining information from the Internet than consumers who do not mind bargaining” (2006, “Journal of Marketing Research”). Pricing vehicles online became the expected behavior of car dealers, regardless of what the outliers believed.

When Zettlemeyer conducted his initial studies, mobile online traffic wasn’t even a consideration. Within two years of the ’06 study, dealers would suddenly begin to see up to three percent of their traffic come from mobile devices, which would eventually act as a consumer-behavior and expectation accelerant.

Fast forward, and we find ourselves in the midst of another transformation within the market-pricing movement. The inclusion of transactional data is positioned to move online shopping experiences even further.

Market pricing is a natural response to the massive shift in consumer behavior and expectations.

Market pricing wasn’t created to hurt the industry. It wasn’t designed as a race to the bottom. Dealers not understanding other market forces at work were quick to label it as such. Instead, market pricing was a tactic born out of the necessity to participate in the rapidly changing shopping environment. The shopping experience simply demanded it. Shoppers are not necessarily seeking the lowest price; they are merely searching for a price. Now car buyers are seeking answers to their specific search queries. They expect their phones to deliver the answer to the question “Ford Explorer Lease Deal.”

The dealers who seize this opportunity, and provide relevant results, are rewarded with higher-quality traffic, lower marketing costs, and improved performance. This change provides dealers with the opportunity to offset possible margin compression in extremely competitive environments.

Additionally, the opportunities for success extend beyond the new car market. Used cars, certified vehicles, and fixed operations, present opportunities for dealers to leverage market pricing, demonstrate additional value, and provide shoppers with the relevant transactional information they’re seeking online.

The majority of the industry treats standard metrics as gospel. According to a 2016 study, over 60 percent of the top 100 Automotive News dealer groups have adopted several key guide posts to maximize their operational excellence. They include:

  • Market Days Supply
  • Cost to Market
  • Price to Market
  • Average Days in Inventory
  • Annual Inventory Turns
  • Average Inventory Cost

The challenges facing the retail segment should not be blamed on market pricing. Other examples of changes dealers say hurt the industry are those that come from those that have accepted market challenges, altered their business models, and pivoted to one-price experiences. “One-price dealers make up an estimated 10 percent of the market now, and that number will continue to grow each year. Every change the retail market experiences begins with removing the friction out of the buying process. In general, easier, faster, and simpler always wins,” said Alan Krutsch, Vice President of Sales and Marketing at Ryan Adams Group.

Dealers embracing market pricing create new cultures around the experience, implement new marketing solutions to deliver relevant content effectively, and build new processes to maintain their competitive edge.

Industry changes will continue to accelerate. Stop fighting them, and get up to speed, so you aren’t left behind.

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