Tight New and Used Car Inventories: Where Can We Cut?

Tight New and Used Car Inventories: Where Can We Cut?

Chip shortages and a stimulus-fueled increase in consumer demand have led to a wild start for automotive retail in 2021. Auction prices – driven higher by low new car inventory and the likes of Carvana and Vroom – have made acquiring adequate levels of used vehicle inventory a major issue for most franchised dealers.

With many dealers currently holding just 30-40 days of new car inventory and even lower levels of used car inventory, the question everyone in the dealership involved with automotive marketing should be asking is: “Where can we cut?”

Of course, with record profitability, many dealers may not see the need to reduce their marketing spend. “After all,” some might say, “that’s what we do when sales are down.”

This Won’t Last Forever

There will likely come a day in the next 18 or so months when most dealers are again sitting on excess inventory; when most dealers are selling new cars with little to no front-end gross; when margins are tight, and profitability is not at all time highs.

When this day comes, those dealers who spent thoughtfully and tactically on marketing during the boom of 2021 will have plenty of options available to “pull the levers” that can reignite their sales. (They’ll also have more money in the bank – money they didn’t waste on unnecessary marketing during the boom.)

I’m not advocating wholesale, across-the-board cuts to your marketing budget. Just that you do a comprehensive review of your current spend to ensure it aligns with what you need to sell cars today and especially tomorrow. For some dealers, there are always areas where their marketing dollars are being wasted; though for most dealers today, there are some easy, sensible cuts they can and should consider. For example:

Paid Search

Your paid search provider should have human beings you speak to on a regular basis. I’m not talking about the monthly review where some bored Millennial who never sold cars takes you through a bunch of pretty graphs and always recommends you spend more to “increase your impression share.” I’m talking about a real human being who actively manages your pay-per-click (PPC) efforts.

During times like these you should be holding quick, weekly calls with a human to review the current campaigns against your inventory. For example, if you’re a Chevy dealer and you have just one 2021 Malibu in stock, there should be no PPC dollars thrown at this model.

For automotive retailers, paid search is not for building a brand, it’s for driving instant results: A consumer searches for “2021 Ford Escape Prices,” clicks on your ad, visits your website, reviews your selection, calls you to verify availability, comes in and buys a 2021 Ford Escape. It’s tit for tat; and if you’re already selling every Ford Escape you can get your hands on, there’s likely no rational reason for bidding on this search term.

Other PPC efforts that deserve a closer look during times like these include high-funnel keywords (a Nissan dealer bidding on the word “Nissan”). When a dealer bids on high-funnel terms they are almost always competing with the OEM and Tier II for a consumer who has just begun their research. This might make sense when you have 90+ days of new vehicle inventory, but I cannot find a justification for it in today’s market.

Used Car Classifieds

If your used car inventory is half of what it was in 2019 and the turn has dropped to 30 or so days, it might make sense to pare back the number of used car classifieds providers you use.

I still find dealers advertising on all four primary sites (Autotrader, Cars.com, CarGurus, Carfax) while stocking fewer than 40 used units. The math on that just doesn’t work. My recommendation is to look closely at the ROI of each provider and consider dropping down to as few as one used car classifieds vendor – at least until your inventory levels grow to require additional exposure to used vehicle shoppers.

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This is an easy cut for most dealers, in my opinion. CarMax now owns 100% of Edmunds (story here). You should be able to do the math on how this one could impact everything from your sales to how your dollars might be helping a competitor collect and use in-market consumer data.

Third-Party New Car Leads

When you’re sitting on 90+ days of new car inventory, tactically using a provider like TrueCar to drive incremental buyers to your dealership likely makes sense for some dealers. Today, not so much.

If these services are subscription-based – that is, a flat fee every month – you might need to cut them completely until you need help moving new car metal. If the service is a pay-per-sale or pay-per-lead model, be sure you’re only receiving/buying leads for models with relatively high inventory levels.

Where I Would Not Cut

Because we know the chip shortage will be resolved at some point and that the current market dynamics of supply and demand will balance out, there are certainly marketing expenses you should continue to make, despite the low inventory levels. These are your branding campaigns – marketing expenses designed to keep your dealership top of mind for consumers in your market.

For example, if you’re paying Google directly for display advertising, your CPM (cost per thousand impressions) is likely around $1. This means you’re getting one million ad impressions for every $1,000 you spend. Using your Google Display budget to highlight your brand advantages (Family Owned, Everyone is Approved, Hassle-Free Shopping, etc.) will keep you in a consumer’s consideration set when they’re ready to buy.

Likewise, Facebook – with its hyper-targeting capabilities – should not be cut. However, you may want to ensure your current ad sets and campaigns match your goals. There’s no need to run ads for Models with low inventory levels – you may want to move that budget to branding yourself for the longer term.

Search Engine Optimization

Lastly, if you’re working with an honest SEO company to improve your website’s rankings on Google and Bing, you should never cut this expense. The work they’re doing for you today will pay dividends long into the future.

Of course, SEO is a dirty business, and for every honest SEO company doing great work for clients, there are likely a hundred others just taking your money each month and delivering you no value. (Of all the automotive SEO companies I’ve encountered over the years, there are only two I recommend to my clients – so do your homework.)

Final Thoughts

Depending on who’s speaking about the chip shortage, the predictions for continued disruption range from a few months to well into 2022 (and perhaps beyond). Additionally, publicly traded used car dealers like Carvana and Vroom will continue to overpay for vehicles at auction because they don’t need profits, they need growth. Once these “disruptors” stop showing growth to Wall Street, their stock prices will tank.

This means we could be stuck in the current situation (or worse) for a long time. The unnecessary dollars you’re spending on marketing today are dollars you can’t use in 2022 or use this year to target your owner database (to source vehicles from past buyers). Regardless, for most dealers, you’re selling every new and used vehicle you can source today. This begs the question you should always be asking: “Where can we cut?”

Good selling!

Automotive Sales Books by Steve Stauning:

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