SAN FRANCISCO – Can “Big Data” solve the industry’s big incentive problem? John Krafcik thinks so.
The president of vehicle-shopping website TrueCar says new mobile technology, a growing base of Millennial-generation buyers and an eager constituency of dealers and automakers means there’s the potential to cut billions from the industry’s annual incentive bill.
“(Automakers) shouldn’t be spending $45 billion (a year) on incentives,” he tells WardsAuto in an interview at the 2015 NADA Convention & Exposition here. “What if we could take that $45 billion and make it $20 billion, and the industry could take that $25 billion and invest it in safety features and brand building and more fuel-efficient technologies (instead)?”
The solution, Krafcik says, is fewer full-market rebates that are wasted on too many consumers who would have bought the vehicle anyway and more targeted spiffs directed at price-sensitive shoppers who might not have.
To that end, TrueCar is working with about a dozen OEMs so far to push unique one-time rebate offers to individual buyers who are using the car-shopping site to find a vehicle at the price they want to pay.
Ultimately, Krafcik says, automakers will be able to cut their incentive spend, dealers will enjoy higher profit margins, used-car residual values will be maximized and consumers will remain even more loyal to their vehicle’s brand.
Here’s the basic math as the TrueCar executive sees it. It costs automakers $1,000 per unit to increase the volume of an average vehicle 5%. With a system-wide price cut, that means the industry is wasting $1,000 on each car it sells to the other 95% of buyers during the promotion period.
It would be far more cost-effective, he says, if discounts were targeted only at the remaining 5% of price-conscious consumers – the type of buyer likely to use a service such as TrueCar.
“We’ve studied the behavior of consumers who get these targeted offers,” Krafcik says. “They are four to six times as responsive as general-market buyers to those discounts. That’s huge.
“If an automaker wanted to sell cars the old-fashioned way, they might put $10 million of incremental incentives into the market (and) give a general-market discount (of) $1,000 to 10,000 buyers, most of whom would have bought the car anyway,” he adds. “Or they could provide that $10 million to platforms like TrueCar that attract more price-responsive buyers and shoppers, and they could sell four to six times as many cars.”
In addition to zeroing in on the cost-conscious, OEMs could serve up special offers to certain highly desirable customers, such as those already loyal to the brand or those of a certain income or demographic group it would like to conquest from a competitor.
By offering up an extra rebate to a shopper already in the throes of the price-negotiation process, the OE can help close the sale, and the dealer doesn’t have to dig deeper into his already tight margin.
Once the buyer accepts the offer via the TrueCar app, it is barcoded and forwarded to the retailer. In addition to a $299 dealer fee, TrueCar collects from the automaker for helping deliver the rebate that closed the sale.
Because the incentive is targeted to specific buyers, it has a better chance of flying under the radar of industry trackers and the general public, meaning used-car values are better maintained and lease-subvention costs are kept in check.
“Every OE we’ve spoken to is extremely interested in whatever can be done to improve their incentive spending,” he says of the program. “It’s the single-biggest line item on every automaker’s income statement – 9%-11% of their revenue.
“If we can take just a percentage point away, it automatically trickles down to the bottom line.”
TrueCar’s smartphone app – now more advanced to allow buyers to search by vehicle type and generate a quote on their trade-in – is aimed directly at the newly emerging and highly sought after Millennial consumer, a customer base expected to account for 40% of all new-vehicle purchases by 2020.
“Our OE and dealer partners know we know how to communicate with Millennials,” Krafcik says. “The industry is about 24% Millennial car buyers in 2014, and in TrueCar it’s about a third.
“And this is how they want to engage – on their phones,” he adds. “This is clearly the future of car buying. And we think we can bring the Millennial consumer, the dealers and the OEMs together in this ecosystem in a way that everyone benefits.”
