Every day, dealers are faced with multiple decisions about various facets of their business. Among them: constantly trying to decide if they should invest in buying leads to conquest more consumers or if they should spend more to retain existing customers. At the same time, they often lack the information required to choose the best course of action. In fact, due to an absence of a complete view of the lifetime value of their customers, many dealers are hard-pressed to answer even the most basic questions about them.
It may be surprising, then, to learn that dealers who over-invest in leads can actually harm their business, as has been demonstrated by AutoLoop’s analysis of buyer behavior over a 5-year period. Performed to determine how much business is generated from first-time vs. repeat customers, our 2018 analysis covered a national sample of over 400 auto dealers. Consisting of approximately 800K first-time customers—including those with no previous transactions at a dealer—and approximately 600K repeat customers, we specifically analyzed those who’d purchased a vehicle or had a service visit in the past.
Our findings? First-time customers accounted for 56% of a typical dealer’s sales units and 64% of their gross margin dollars, as shown below. However, while dealers may be tempted to invest even more money in acquiring leads to attract new customers based on these results, this is only part of the picture. To understand the true impact of these buyers on business growth and profitability, auto dealers should consider all aspects of the customer’s behavior over the entire 5-year period, as well as the role leads play in the overall scope of their business.
Two primary issues are key here: first, with less than 10% making a purchase at a typical dealership, leads have proven increasingly more difficult to convert to buyers. The second—and perhaps most important—issue is that leads who are successfully converted to first-time buyers are less loyal and less profitable over their lifetime. In fact, first-time buyers are 60% less likely to repurchase at a dealer than customers with at least one prior vehicle purchase or service visit. They also spend 10% less than repeat customers when they do eventually repurchase.
So for every 100 deals from repeat customers, the average dealer will also gain 10 more vehicle purchases and $2,660 more gross than they’ll earn from the equivalent number of first-time buyers over their lifetime.
If the ultimate goal is long-term growth and continuous profitability, then it stands to reason that pouring more resources into acquisition would be extremely risky at best. This is demonstrated repeatedly by dealers who buy leads that are less loyal. When those leads don’t turn into repeat business, they tend to buy even more leads to make up for declining loyalty over time. As you can see based on the data, this over-investing in leads actually results in lower profit in the future, thereby reducing the total value of a dealer’s business.
To break the cycle, drive real growth, and improve profit in the long run, smart dealers will shift some of their investment from costly acquisition to retaining customers for a second and third purchase. For instance, revamping sales processes and investing in digital tools will better accommodate and retain digitally minded customers who demand transparency and flexibility at every stage of the purchase process. As well, auto dealers can implement strategies and utilize tools that drive higher customer engagement in their stores and throughout the ownership period, since engagement has proven to be the most important predictor of customer loyalty. So ultimately, dealers who invest more in their repeat customers will yield a better return on their investment over a 5-year period—and they’ll reduce their costly dependency on buying expensive leads.
Doug Van Sach
VP of Strategy & Analytics
Insights | January 19, 2021