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Online Lead Generation: A Good Way to Sell a Lead—but No Way to Sell a Car

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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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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.

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  • by T Tue Sep 1, 2009 via web

    The introductory paragraph is misleading - the rest of the article takes a different path that the introductory paragraph suggests. I also dispute the premise that the current methods of researching and negotiating online aren't productive and don't yield the desired results, although I appreciate the author wanting to promote his business.

    I used the sites he is likely referencing when buying a car last year. I selected which dealers from which to receive quotes, and negotiated everything online. I pitted one dealer against another using email. When I walked into the dealer, I had my price. Am I more likely to return to this dealer next time? No. I'll use the same method to negotiate price. For me, buying a car is such an infrequent occurrence - once every couple of years - I don't really have a relationship with the sales rep. So, car price and possibly service I've received at the dealer for oil changes, repairs, etc. will drive my selection of a dealer in the future.

  • by BrandojoEllie Tue Sep 1, 2009 via web

    The selling of the same leads many times over does seem pretty silly. It only benefits the lead seller, not the buyer or the end user. At the same time asking third-party publishers to provide a lead AND a sale is too much to ask. Anything over $39.95 a month is a tough sell.

    At Brandojo we work with advertisers to find out which customers historically turn into sales and then filter accordingly. That does require extra work, technology and strategizing but it can be done!

    I think it's the work of the brand to build loyalty and up to the dealer to live up to the brand. I agree with the previous comment, for most people buying a car is something that happens fairly infrenquently and people are unlikely to bond with a particular rep or dealer.

  • by Rick Thomas Thu Sep 3, 2009 via web

    The problem from a dealers standpoint (which I'm not, but have a product for the industry), is that fixed pricing models are flawed from the start.
    I've never understood the paying of $25-50 or more for leads. I guess if you look at the numbers and say I make for example $2000 on average per sale then I can absorb 40 leads at the $50 per lead model to break even. Most dealers, especially smaller ones come away from these experiments with a sour taste in their mouth.

    The reason I say it's flawed is simply this. The unknown in the equation is the trade-in. And it's the trade-in that causes a lot of heartaches on the lot, and I have personally seen this scenario play out way too many times.

    Here's the deal.

    You want to buy a brand new car, let's say it's a $20,000 automobile and the dealer decides he can live with just a $1000 profit, (that's his aim on every deal). Now the prospect gets the quote at the $1000 profit level and brings in a vehicle to trade. He expects a certain amount for his trade and for various reasons the dealer can't make the trade-in amount work so at the end of the deal he makes his $1000. The prospect gets upset and walks away.

    Why can this happen? One simple example. The person bought a car with a high interest rate three years ago when his credit wasn't all that great. He's now made inroads on his credit which allows him to purchase a new car. But his payoff on the vehicle is too high to make it a profitable sale for the dealer. In other words, let's say the car is only worth $5000 (resale value), but the guy has a $6000 pay-off. I think you'll see the problem. The dealer can absorb the pay-off but he looses that $1000 profit margin. In other words the dealer is going to break even on the deal.

    I know that's the reason why a lot of dealers are hesitant to provide price quotes over the Internet, without knowing the variables of the trade, the prospects credit worthiness and expectations.

    This is a very good article that outlines the challenges dealers have with the pay-per-lead model. In other industries the pay-per-lead or pay-per-click makes sense, but only when you can control the costs of the transaction. When a trade-in becomes a factor, then it's awfully hard to control the costs of the transaction.

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