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The Internet was expected to dramatically change the way we buy and sell new cars by offering consumers better information and the opportunity to be in control of the process, and, by extension, giving dealers a more effective, targeted channel for finding buyers. But what's emerged instead is quite different.

It's a system based on withholding the main thing consumers want—a bottom-line price quote—and turning the request for that quote into a commodity for sale.

Certainly consumers have access to robust, anonymous, almost-perfect product information online. According to the 2007 Dealer eBusiness Performance Study: The New Buying Influences by the Cobalt Group, Yahoo, and R.L. Polk & Co., 83% of consumers use the Web for research before visiting a dealership. And J.D. Power and Associates says 89% of those online car shoppers use a search engine during their buying process.

But, in most cases, to get a price quote—or, more accurately, the promise of a price quote—they're forced to submit their contact information to third-party (lead-generation) websites, which turn around and sell it to multiple dealers in the form of a lead.

The No. 1 frustration people generally have when shopping at a dealership is the pressure they feel from the salesperson. Lead generation magnifies that problem in every case because the very thing that customers are looking to avoid, or to at least gain an advantage over—the salesperson—not only still has the advantage but also has their personal contact information and can pursue them at home. The salesperson has now been invited to chase consumers in larger numbers.

In this case, then, neither the consumer nor the dealer makes out. In the auto-retailing space, the truth is that the only winners, consistently, are the automotive lead-generation websites.

How is it that the dealer loses? Lead generation is flawed for dealers because it's the opposite of targeted. Given that nearly all car shoppers are using the Web to gain access to product information, the mere fact that someone asks for a price is no longer a leading indicator of who's actually in the market to purchase a car soon.

What's more, the lead-generation business is predicated on driving the highest quantity of leads to dealerships without regard to whether those leads become sales. The lead generator must sell more leads to more dealers to make money—but that's also what's devaluing the leads and driving down prices (and profits).

At last count, there were more than 50 companies providing automotive lead generation. They buy the clicks and sell them to aggregators, such as Dealix, Autobytel.com, and AutoUSA.com. The aggregators then sell those leads to as many of the 39,708 new car franchised dealers nationwide as they can.

Dealers currently spend $18 to $23 per lead, and online leads convert to sales roughly 1% to 3% of the time. Put simply, the dubious business practice of shotgunning leads has resulted in conversion and close rates that no longer work for dealers.

Beyond that, the lead-generation experience for both consumers and dealers is broken. That's because a lead generator's incentives aren't aligned with those of consumers and dealers. A lead generator's incentive is to generate more leads, whereas an online shopper's goal is to remain anonymous, conduct research, and get a price. This misalignment of incentives frustrates potential buyers.

Compounding the problem is that just 38% of dealers provide a price quote in the first email response, per the J.D. Power and Associates 2007 Dealer Satisfaction with Online Buying Services Study. Their motivations focus on getting customers into the showrooms, so they surrender the price only when forced to do so by the customer. This tug-of-war adds to consumers' distrust of dealers.

Suddenly, lead generation looks more like a problem than a solution. And it may get worse before it gets better.

Two trends are already in motion that could seriously undermine lead generation as a viable business model:

  • The first is up-front pricing. Many dealers are already offering up-front prices, and the industry is fast approaching a tipping point. Once that happens, consumers will no longer need to rely on lead generators as intermediaries for getting a price quote.
  • The second trend is dealers increasingly demanding a shift toward paying for sales—and not leads—as they begin to ask themselves why they should pay good money for low-quality leads.

Because of those developments, dealers will look for more-efficient ways of finding buyers online or elsewhere, and pay-per-sale is an increasingly viable option. It is an emerging business model based on the philosophy that dealers should pay only when a sale closes—a model that aligns incentives among buyer, seller, and intermediary to create a system that changes the game to benefit everyone.

The alignment of incentives in this model motivates the lead generator to deliver the highest-quality leads possible: consumers who are ready to buy. To accomplish this, the lead generator is encouraged to give the consumer as much information up front as possible, including the vehicle price. This lets the lead generator know that those consumers who request a contact are serious about purchasing a car.

To the extent that dealers are introduced to in-market customers who end up buying cars a higher percentage of the time, they'll treat those consumers with special care, thus building customer loyalty. Consumers who receive up-front pricing and thereafter have a haggle-free experience at the dealership are more likely to buy and become repeat customers. As Forrester Research stated in its 2006 report, Auto Site Designers Must Rethink Price Info, "Consumers who understand car prices are happier with their vehicles and their dealers. Price knowledge affects dealer loyalty."

To replace the malfunctioning cost-per-lead model with a performance-based model, a best-of-breed lead-generation company will need to possess deep roots and established relationships within the industry, state-of-the-art technology, a business process that instills trust between buyer and seller, and a commitment to promoting a new sales paradigm to an industry that is reluctant to embrace change.

The pay-per-sale—or sales-generation—model aligns incentives and works for both the consumer and dealer. As such, it's the model that is most likely to thrive by making the car-buying process more enjoyable for consumers and more effective, efficient, and productive for car dealerships—a win-win situation for all involved that delivers, at last, on the promise of the Internet.

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ABOUT THE AUTHOR

Scott Painter is founder and CEO of Zag (www.zag.com ), which operates an online no-haggle car-buying platform that connects ready buyers with certified dealers.