At the Sonic Automotive Dealer Academy in 2003, we began using, as a teaching tool, an article titled, “Simple Techniques to Grow Your Business.” This article was authored by Duane “D.J.” Sprague who, at the time, was the president of Dunning Sprague Marketing & Advertising, a full service agency specialized in generating and retaining customers for the retail automotive dealer. All of us that were exposed to “D.J.’s” metrics took them at face value. I think many of them, particularly those listed below, still apply today. I’d like to know what you think!

• In the retail automobile industry, it costs approximately $450 on average to acquire a new customer. And yet an existing customer can be retained and re-sold for less than $100. Therefore, research shows that retaining just 5% more of our existing customers can boost profits by 25% or more.
• If they are handled properly, our existing satisfied customers could represent a much higher percentage of our business. Loyal customers buy more, spend more, and refer more. With loyal customers, transactional gross is higher, and closing rates are higher, therefore management and sales productivity is higher.
• Based on the economies of retention vs. acquisition, long-term success then depends on building repeat sales and loyalty among customers. However, customer loyalty and retention is diminishing at an alarming rate. And it’s mostly because the customers that defected say they felt neglected by the dealership they used to patronize. The vast majority of dealers fail to invest adequate resources and develop effective processes to maximize the return on their most predictable and profitable business asset…their database of existing and past customers.

 “D.J.” then posed the following questions:

1. If we have 5,000 customers, and if it costs $450 to acquire a new customer, then it would cost us $2,250,000 to replace our current customer base. Does that then mean that our current customer base is “worth” $2,250,000? If so, what are we doing to leverage that investment?
2. Most dealerships have some type of follow-up program in place, but do we really believe that every customer (and prospect) is being contacted in a timely and effective manner? Isn’t the best way to prevent customer defection by ensuring their satisfaction and loyalty through frequent, value-added communications of all types (direct mail, email, text, and telephone)?
3. And what about referrals from our loyal customers? Do our salespeople even know how to ask an owner for a referral? Every one of our owners has at least 50 people in his “Circle of Influence (COI)” (family members, close friends, neighbors, co-workers, church members, walk-of-life interfaces, etc.) Doesn’t the math then predict that there are 250,000 people that our customers can influence (5,000 customers  x  a 50 person COI)?

So to grow our sales volume, we must a) acquire new customers (at a cost of $450 each) at a higher rate than our defection rate or b) retain more existing customers, re-sell them more often, and maximize referral business. Which is “easiest” and makes the most financial sense?

And as a subject matter expert in dealership compensation planning, implementation, and management, I think we need to take it a step further. Maybe it makes sense to incentivize our salespeople to get at least half their business (deliveries, not “ups”) from repeats and referrals! Think about how this approach would smooth out your sales process! Think about the predictable revenue you would generate! Would a similar strategy to influence behavior be effective at your dealership? Behavior is tough enough to manage! Why not let your compensation plan do some of the heavy lifting? Please share your thoughts with me!