Recession Marketing  (continued)
In the face of these challenges, it can be difficult to know the right course of action. The purpose
of this paper was to put the industry’s current challenge in the context of some of the best
independent research available.
    Responding to a Recession
    In a recession, the natural reaction of consumers is to re-evaluate every business relationship they have. Despite
    this, the counter-reaction of many dealers is to “cut, cut, cut,” at a critical time when customers need to be given
    additional reasons to stay. Dealers too often focus on the short-term overall cost of advertising and marketing
    instead of focusing on the long-term cost of losing customers and the even higher cost of acquiring new
    customers. This can be a BIG mistake. Reducing their share of voice in the market place can have significant long-
    term impact on the dealer’s market share. A study of the last major recession by McKinsey and company came to
    this conclusion:
The most dramatic, and least expected, response of the leaders to the recession was
their approach to operating expenses. While most companies tightened their belts,
successful leaders, trading lower short-term profitability for long-term gain, refocused
rather than cut spending. Indeed, these successful leaders, perhaps reasoning that a soft
market required greater effort or provided greater opportunity, actually spent significantly
more on selling, general, and administrative (SG&A) costs than did companies that lost
their market leadership.

Expenditures on advertising followed a similar pattern, with successful leaders spending
more money (as a percentage of sales) than did their former peers during the recession
and smaller amounts of money in periods of growth. Expenditures on advertising followed
a similar pattern, with successful leaders spending more money (as a percentage of
sales) than did their former peers during the recession and smaller amounts of money in
periods of growth.

Thus, when other companies simply battened down the hatches, seeing only risk during
the recession, the more successful competitors found opportunity and pressed their
advantages. As companies today look to the end of the present downturn, they should
consider that managing risk doesn’t mean avoiding it altogether.
Final Note: If you expect different results in Fixed Operations as a whole, you either have to do things differently or do
different things.  My suggestions for many dealers are to do things differently and expect dramatic results.
    While it may seem counter-intuitive on the surface, the simple fact is that strong companies use recessions to take
    advantage of weaker competitors. In his book Recession Storming, author Rupert Hart put it this way, “Most
    people focus internally, even hibernate in a recession. This seems to miss the great potential of a recession or
    downturn, which is to reap the extraordinary profits in the recovery.” On the decision-making process in
    recessions, Hart wrote, somewhat tongue-in-cheek:
    Throw out your fine calculations of the most cost-efficient ways to acquire a new customer, your
    carefully-deliberated programs to inculcate loyalty in customers to capture the highest present
    value of lifetime value, your shrewdly-executed promotions to engender the most profitable
    positioning in the eyes of the customer and your exquisitely-tuned competitive analysis of price
    based on the value to the customer and competitive pricing. Guaranteed, it will all get mucked up
    by someone somewhere in the company’s desperation to gain cash flow even at a loss. Even
    when the corporation has enough cash to afford the key programs and even when something will
    increase net profit and cash flow, corporations do not always appear to act rationally in crisis.
    We all have learned the concept of Return on Investment (ROI) early in our business careers; however,
    recessions tend to cause some decision makers to only focus on the “I” and disregard the “R.” On this, another
    recent article from consulting company Millward Brown, said:
    Without doubt, the biggest barrier to action during tough economic times (apart from the size of
    your budget) is the mindset of a company’s senior management. Even if funds are available,
    managers who don’t value marketing may be unwilling to maintain existing levels of support for
    brands, let alone condone increases in spending. The need to prepare quarterly financial
    reports for investors will keep them focused on the bottom line. When innovation and marketing
    budgets are scaled back, little appears to be lost in the short term even though the evidence
    suggests that many brands will suffer as a result.
Clearly recessions are times of great challenge, yet also times of great opportunity. Once the decision is
made to take a breath and make a rational decision to continue to invest in advertising and marketing, the
next question becomes one of effectiveness. This is where a loyalty program comes in.
    Solution: Build Loyalty
    As a response to the increased potential for customer defections, many dealers are considering the
    implementation of a loyalty program. In fact, this was the #1 fixed ops strategy in the October 2008 issue of NADA’
    s AutoExec magazine. “There’s a reason every grocery store, airline, and retail chain has loyalty programs – they
    work.” While a loyalty program can never replace the fundamentals (providing a quality offering at a fair price with
    effective communication), it can give a dealer the edge in keeping a key portion of their customers – customers
    who also tend to be the most valuable.

    Study after study has shown 70% of a dealer’s customers disappear from the service department after the
    warranty runs out, so there is clearly an opportunity to prevent a portion of those customers from defecting. The
    good news is a little movement in the needle can have a big effect on the bottom line. A Deloitte and Touche
    study of the auto industry not long ago found just a 5% increase in customer loyalty in the service department can
    mean a 25% increase to the income of the entire dealership. A large part of this is due to the fact that a 4th year
    customer spends more than 3x as a 1st year customer. And every first-year business student learns that it takes
    $10 to recruit a new customer for every $1 it takes to keep a current customer, with a loyalty program being one
    of the easiest ways to take advantage of this age old law of marketing.

    Better yet, enhancing the service offering can even influence future vehicle purchases. J.D. Power and Associates
    found that 80% of a customer’s repurchase decision is based on their service experience. So if they are leaving
    the service department, the dealer is also potentially losing a future sale right at the time when the customer is
    starting to consider their next purchase.

    With a number of loyalty program options in the market, the choices can be confusing and loyalty program design
    is not typically part of the expertise of dealership personnel. That is why we would like to present this guide to
    designing a successful loyalty program using some of the best research available.
    The Nature of the Reward
    The most important decision to make when launching any loyalty program is what the reward will be. Above all,
    desirability in the mind of the customer must guide the decision. As Incentive Magazine stated so well recently, “It
    is important we give the customer what they want to receive, not what we want to give them.” A Harvard Business
    Review article put it this way: “Consumers love to be given a treat they would not splurge on with their own money.
    And so the most successful loyalty programs often feature less functional and more pleasure-providing rewards.”
    The article continued,“Sticky rewards stick in the recipient’s mind, reinforcing the relationship with the program
    provider, while slippery rewards are more mundane and tend to slip from memory.” In other words, “utilitarian”
    rewards are not remembered, whereas rewards with a high-desirability factor remain in memory.

    This is where most loyalty programs in the auto industry fall flat. There are many programs that give customers
    the ability to earn points that “must be spent back at the dealership.” Such programs are designed to do one thing
    very well – appeal to the dealer’s ego. Who doesn’t want to think that their brand will elicit as much consumer
    excitement as that consumer’s effort to collect enough points to take the family to DisneyWorld? The fact is,
    however, consumers are as excited by dealership points as earning points towards the dentist’s office. How many
    dentists have you heard of who offer points towards future root canals?

    This is not a knock on the importance of dealer service by any means. Maintaining your vehicle at the dealership
    is as important as going to the dentist regularly. We must be honest, however. Customers NEVER wake up in the
    morning looking forward to either. It is not only important to give customers desirable rewards but also a choice of
    rewards. A summary of a poll conducted by Maritz Loyalty Marketing confirmed “A one-size-fits-all approach is not
    only outdated, it is a waste of dollars and can break a relationship with your most-valued customers.

    The question then becomes, what do customers want? The Maritz poll found that 63% of households making
    $100k+ chose “free travel” as their number one choice. Other popular choices were “cash back” (50%), “free
    merchandise” (35%), and “gift certificates” (23%). Only the lowest income households, $35K and below, chose
    “discounts” as their number one choice, and this is a group that rarely sees the inside of a dealership service
    But What Currency?
    While the results of the Maritz poll may send your head spinning with visions of complexity, this does not have to
    be the case. One other key element of loyalty program design is to make sure you don’t create a new currency.
    There are airline programs, credit card programs, hotel programs, restaurant programs, retail programs, etcetera,
    but they have one thing in common: While they may offer their own points, they also all offer the now ubiquitous
    currency of airline miles. In fact, the Harvard Business Review estimates over 20,000 businesses in the United
    States offer airline miles as a loyalty tool.

    The reasoning is very simple. The last thing a consumer wants is one more program to keep track of and they
    would rather build on a program in which they already participate rather than participating in a new program from
    scratch. Therefore, the best selection is to take advantage of the currencies that already exist. There is no need
    to reinvent the wheel. Rather, it is not only recommended but also much easier to “piggy-back” on to the
    currencies that already exist, taking advantage of the consumer awareness and brand equities the other
    currencies have already built.
    “10% Off” is No Loyalty Program
    One currency that currently exists but should be avoided at all costs is discounting. Most so-called “VIP” type
    programs offer guaranteed discounts like “10% off” to participants. There is a large and growing body of research
    which clearly shows discounting erodes the perceived value of the dealer’s service other marketing efforts work so
    hard to build. While “10% off” has been done for 30 years, it is actually detrimental to long-term performance. In
    his book Price Wars, expert Thomas J. Winninger said:

    Consumer goods marketers should replace the short-term sales promotion (coupons, rebates,
    and so on) with a long-term orientation toward developing the loyalty of a core group of best
    customers. Customer loyalty is the Holy Grail of the value merchant. Coupons tend to diminish
    customer loyalty and should be used with great care. Couponing or discounting often lowers the
    value of an item in the eyes of a customer. It also conditions the customer to wait until the item is
    available at the coupon price before buying again at that particular store.

    Any manager who has lowered the price to get an order only discovers that he will have to lower
    the price again when he wants the customers to buy that item. The end result of couponing is little
    or no profit.

    Few in the industry would disagree with the assertion that consumers perceive dealers to be more expensive than
    independent shops. By offering a “10% off” coupon, the dealer is essentially saying, “We are priced 10% too high
    in the first place so we can give it back to you.” There are many reasons to choose a dealer over an independent,
    not the least of which are the factory trained technicians, the factory parts, alternative transportation, and the
    backing of the manufacturer to name a few. A “10% off” coupon, however, tells the customer, “Forget all those
    other factors, price should be the ONLY reason to come to us,” and a price war with the independents is rarely

    Another book on pricing strategy described discounting this way:

    Discounting as a regular practice is perilous for other reasons as well. Brand loyalty usually
    suffers when firms engage in regular discounting. Price-seeking customers are rarely loyal,
    which pits one seller against another. They will maintain repeat patronage only until such time
    as the next deal is presented. The company unwittingly “prostitutes” the brand to the point where
    it eventually assumes a commodity status.

    Perpetual discounting also produces undesirable side effect in regard to the brand’s image, often
    cheapening it.

    Finally, repeated discounting also conditions customers to seek price rather than looking at the
    value of the firm’s offer.

    We caution against the overuse of discounting due to its “narcotic” effect on buyers and its
    adverse impact on brand loyalty.

    The good news is a well-designed and executed loyalty program that offers highly-desirable rewards can allow a
    dealer to transition away from corrosive discounting quickly, and often will cost significantly less than what was
    being lost to discounts in the past. On this subject, Reichheld and Sasser said in their article “Zero Defections”:

    Companies with long-time customers can often charge more for their products or services. Many
    people will pay more to stay in a hotel they know or to go to a doctor they trust than to take a
    chance on a less expensive competitor. The company that has developed such a loyal following
    can charge a premium for the customer’s confidence in the business.
    In short, dealerships can easily get away from discounting and start to confidently charge their worth
    IF they can successfully communicate the added value provided by coming to the dealership, and a
    loyalty program is certainly a large part of that offering.
Jim Burness is CEO of DealerMiles, LLC, headquartered in
Denver, CO. Mr. Burness has a BS from The Colorado College,
an MBA from The Daniels College of Business at The University
of Denver, and has held positions with J.D. Power and
Associates, American Honda Motor Company, and Microsoft

By Jim Burness and others
CEO/DealerMiles, LLC
Copyright © 2008 Automotive Dealers Network. All rights reserved.