Artificial intelligence tools are not just for autonomous driving. Dealerships can use this tech to grow and maximize their fixed ops department and revenue.
Dealerships have adapted remarkably well through the pandemic, including managing the impact of supply shocks that continue to limit inventories. The result has been an important, but temporary, margin lift. Combined with staffing adjustments and government subsidies, profitability has been better than feared.
As we contemplate sales recovery, we must recognize we’re entering peak auto. Yes, the pandemic is causing some consumers who otherwise rely on public transportation or mobility-on-demand services to consider the benefits of private ownership. But we should not make the mistake of believing this a long term trend. It is a temporary reaction to the virus.
There is too much momentum — technological, demographic, environmental, regulatory and economic — tied to shared mobility solutions. Recovery to two million units may represent our best case scenario. And, once supply chain issues are resolved, we should expect margins to decline to normal levels.
An early mentor at Nissan first explained that dealers have a unique business model, because they simultaneously operate multiple businesses. Given tougher conditions are coming in the sales department, dealers have other profit-generating levers to pull. The NADA Academy recently suggested that when we think of fixed operations, we should substitute the term “back-end” with “back-bone.” I couldn’t agree more.
We’ve reached a tipping point where these same predictive techniques can be applied economically and effectively within our service departments.
Other columnists have written on the subject of absorption, and how dealerships can cover a significant portion of fixed costs through margins generated in service and parts. I will make the case that the most profitable, thriving dealerships of the future will be superstars in the front and back of the house.
There are two reasons why dealerships must increase attention and investment in fixed operations:
- The market is huge: J.D. Power estimates the annual post-warranty market in Canada (maintenance and repair performed on vehicles four to 12 years of age) to be $9.2 billion in 2020. Dealer share, while increasing in recent years, is only 49 per cent of service visits. This means even a single share point gain is worth $92 million in incremental revenue, or over $26,000 a year for the average dealer.
- Quality no longer differentiates the way it once did: We’ve seen the quality gap narrow considerably, as documented in J.D. Power’s quality studies. It’s hard to buy a poorly made vehicle today. Retail experience is the loyalty battleground. Customer delight in service dramatically increases the likelihood we’ll sell that customer a new vehicle. And given how many 84-96 month finance contracts we’ve written lately, we need to stay close to these owners if we ever want to sell them another vehicle.
So how do we grow fixed operations without increasing overhead costs? How can we drive revenue and gross margin improvements with today’s pandemic-level headcounts?
Put technology to work.
No, we’re not talking about robotic technicians, though it’s true connected vehicles may mean not every customer needs to return to our shop. The good news for dealerships is that AI tools are available to maximize fixed operations performance.
What if we could shift our focus from the VIN to the customer? What if we could provide a more personalized experience, knowing how to engage with each customer the right way, based on their behavioural preferences for vehicle maintenance?
Our customers already know what this kind of “know me” experience feels like, because they’re receiving it from brands like Amazon, Netflix, and Spotify. These companies harness the power of machine learning to anticipate customer needs and preferences. We’ve reached a tipping point where these same predictive techniques can be applied economically and effectively within our service departments.
We should never engage with a loyal owner the same way we do with a customer who is about to defect. One size fits all is a lie. The days of service marketing by “carpet bombing” (everyone gets the same offer at the same time, in the same way) are over. We have new tools that allow us to engage customers with surgical precision.
A 2021 Gartner study of automotive industry Chief Information Officers revealed that other than cybersecurity, their second investment priority is data intelligence. A simultaneous PricewaterhouseCoopers study reveals why: businesses both large and small that invested in AI (pre-pandemic) to support business processes are now enjoying a widening performance gap — an AI divide — compared to companies who did not.
AI-driven dealer solutions use the data you already generate — DMS transaction data, customer data from your CRM, and CX feedback — to analyse patterns and provide predictive guidance to your BDC team and service advisors, so they can engage with each customer (not the VIN or license plate) the right way. It’s not about the tech; it’s what the tech can do to make your marketing and customer handling processes easier to execute, more personalized and more effective.
Early returns are very encouraging — dealers in Asia who have deployed AI tools in their service departments are seeing meaningful increases in revenue per client (higher service share of wallet), higher customer retention and better capacity utilization, which helps retain hard-to-find technicians — among other benefits.
So, it seems that autonomous driving is not the only automotive application for AI. There are a number of other possibilities that we must consider, and that are being considered.
We must innovate to prosper.
Darren Slind is Co-Founder and Managing Director, Clarify Group Inc. and a respected auto industry analyst. You can reach him at dslind@clarify.group
