Opinion: the value of customer loyalty

When the credit crunch hit the United States and extended to Europe beginning with the fall of Lehman Brothers Investment Bank in 2008, automakers knew almost immediately that the ability for most consumers (particularly in loan and lease-heavy America) to obtain the credit necessary for new car purchases would fall. Indeed, automotive dealers saw it almost immediately. Three years later, in Spring 2011, we finally sense a recovery in the industry. Profits are stable, Ford’s Alan Mulally has show recently that OEMs are handing out big bonuses, and hiring is back at seemingly all OEMs.

Considering this resurgence, auto dealers must prepare themselves. They must change their business model to accommodate a much slower automotive market with far fewer than the 17.4 million sales of 2005. To cope in a market of a mere 12 million sales dealers must implement a strategy to emphasize stress free buying in their advertising and more importantly, in the showroom.

What does this mean? We need to look at it from the buyer’s perspective. First off, people want and NEED to be treated with respect. Nowhere is this more important than an automotive showroom. A 75-year-old with wads of cash falling out of his pockets ought be treated no differently than the 18-year-old looking to finance their first car purchase. Indeed, the loyalty value of an 18-year-old is far greater when we look at the sales potential over the lifespan of that individual.

To illustrate, let us take the “average” Porsche owner. Porsche was disproportionately affected by the credit crunch for a variety of reasons, but chief amongst them was that they are a niche manufacturer of premium foreign automobiles. Because of the relatively high entry-price, Porsche buyers are likely to start buying at age 30 or perhaps a bit older depending upon income level (versus age 22 for a Scion), starting with perhaps a used Boxster or Cayman. We might calculate that a dealer’s profit on such a car is $4000, give or take. Fast-forward 4 years, and they might opt for a new Boxster/Cayman or a used 911 at perhaps $6000 profit. So already from 4 years, a Porsche dealer in this example has profited to the tune of $10,000, or an average of $2500 per year NOT including service profits. Let us not forget that Porsche dealers make a considerable sum from service visits.

Now if we play our cards right, we have sold two excellent cars and we still have on average 41 years of Porsche driving experience left. So let us assume that the buyer gets married and either keeps their car, or replaces it with something roomier for the young children. For the sake of this illustration, they will buy an entry-level Cayenne – a car that has plenty of room and is safe and sensible for a young, successful family. Such a car might earn the dealer $5000. Repeated again after 4 years and the dealer profits another $5000. Now age 42, the successful father may want to consider moving up to a Porsche Panamera, which while sporty, can shuttle the children around in style now that they are out of child seats. Let us chalk up $7000 profit for that purchase. Then $8500 for a Panamera S another 4 years down the road.

By age 46, $30,500 of profit may be garnered directly from vehicle sales. Hitting a mid-life crisis at 50, your buyer may feel he deserves a sporty Carrera convertible to drive, and so the dealer sells it to him with $10,000 profit. Twenty years into the relationship, the dealer has garnered a whopping $40,500 in profit from sales alone. Taken at 20% of profit, the sales person would be well happy to have and extra $8100 into their pocket, on one customer, just for treating them right. If we assume another six Porsche 911s are in that person’s future before they can no longer drive, and if we upsell and retain an average of $12,000 per car, we end up with a lifetime total profits of $112,500 in sales on that one buyer alone, to say nothing of service profits. At a 20% commission, even the stodgiest salesperson is unlikely to turn down a paycheck of $22,500.

While not an actual example, we can use this story to illustrate the importance of getting the buyer into the door at an early age and giving them a great buying experience while relatively young. By continuing to foster that relationship through respect, patience, and knowledge, a company like Porsche can retain a customer for life. Now is the time for dealers to clean up their act.