October 17, 2018
Have you ever noticed how the market values dealerships versus how it values Software as a Service (SaaS) businesses that derive income from the same automotive revenue stream? SaaS businesses such as CDK trade at mid-20x P/E ratios while dealers trade at 4-6x operating profit.
One major reason for this disparity is because SaaS business revenues are predominantly subscription based, while dealers are transaction based.
Subscription revenue is considered more valuable because it’s more secure during downturns. Over time, subscription margins grow as downstream revenue outpaces previous customer acquisition costs, as long as retention remains high.
Could dealers reposition themselves as subscription businesses in order to raise their market values? Absurd? Not really. Every customer acquired has a continuing revenue stream that often extends well beyond any subscription contract.
What would have to change for dealerships to become subscription companies?
#1 Mindset. Stop selling vehicles and start acquiring customers. It’s the customer that decides where to purchase and service their next vehicle. If you spend money building and employing the best and largest customer and prospect database, market share will follow.
#2 Accounting. The customer is the profit driver. Stores are merely the means to retain the customer. Tracking and maximizing customer profitability are as important, if not more important, than tracking store profits. See what gymnastics that requires from your DMS.
#3 Organization. Stop behaving like a collection of individual stores. Groups have a unique opportunity to drive retention by actively and impartially serving customer needs across several brands. This gives the customer a wider range of choices while allowing the group to extend the customer’s subscription beyond the next purchase.
#4 Pay Plans. Stop paying associates to maximize individual transactions. Maximizing F&I profits is a transactional mindset. Maximizing pre-paid maintenance and extended warranty penetration is creating long-term, valuable subscription revenue.
#5 Process. Remove barriers that prevent consumers from returning. Eliminate service friction through customer-driven hours, make it easy for customers to set their own appointments and provide flexible transportation support. Make replacing a vehicle as easy and transparent as renewing a subscription.
#6 Metrics. Stop measuring Per Vehicle Retail (PVR) and service absorption. These are outdated metrics that drive transaction results. Instead, measure dollars per units-in-operation ($ / UIO) and customer retention rates. These metrics create sustaining subscription revenue. You get what you measure.
The fact is, most healthy stores already derive a disproportionate percentage of their profit from subscription revenue, but don’t actively promote their superior business model and hence are not rewarded for it.
Several years ago, we did a study that showed a large dealer group obtained 69 percent of its gross profit from the top 20 percent of its customers. Much of that profit is from service loyalty, adding vehicles to the household fleet and repeat purchases over several years.
Stores should be highlighting owner base quality, service contract penetration and retention. They should also compare their subscription revenues to other dealerships. These are leading indicators of creating superior long-term value.
Dealers that make the above changes and can demonstrate steady subscription revenue that rivals a SaaS business should ultimately be financially rewarded for more attractive revenue streams.
Imagine 20x bluesky!