Tesla Motor’s insistence on selling directly to consumers has caused the media to flood the airwaves and internet with erroneous information about the franchise dealership model, creating a unique challenge for dealership owners and managers looking for ways to increase their market share.
Several manufacturers have tried the direct-to-consumer model in different ways and in different places all over the world, and each time the effort resulted in costly failure. GM tried to sell direct in California’s San Fernando Valley and nationwide in Brazil, for example, only to abandon both efforts to cut their losses. In five U.S. cities Ford tried to turn dealerships into passive delivery locations for cars ordered online, but not only did the experiment lose money, the brand lost market share in each city as a result of it.
The Media’s Version
Rather than report this history, while covering Tesla’s direct model the media has turned a 2009 report by the Department of Justice into a sort of gospel truth – despite the fact that it contains outdated and now-inaccurate information. Written by a single author who relies heavily upon a Goldman Sachs paper published in 2000, it says that the cost of the U.S. auto distribution system somehow constitutes 30% of a vehicle’s price. And while making an extensive claim that cars should be manufactured and sold like Dell computers, it concludes, with little substantiation, that eliminating dealerships would reduce the cost of a new car by 8.6%.
As you certainly know, since 1998 profit margins on new car sales have ranged from negative 1.04% to a high of 0.92%, belying the 8.6% statistic. As for the rest of it, NADA created a set of resources to counter the misinformation.
But the media continues to refer to these two numbers as if they were proven fact, suggesting that legal protections supporting the dealership model ought to be abandoned so Tesla and other manufacturers can sell directly to the consumer.
Charisma and Money Warp Reality
Elon Musk, Tesla’s charismatic billionaire CEO, also argues that Tesla needs the direct sales model because of its unique product, which just won Consumer Report’s best car of 2014 and which earned extraordinary safety ratings (largely because it has no engine sitting between the passengers and a front-end impact).
Musk insists that since dealerships make most of their profits from servicing gasoline-powered cars they will not promote electric vehicles to their customers. He points out that when other upstart electric car companies, most notably Fisker and Coda, tried to sell through dealerships, salespeople failed to promote them. How much sales people contributed to those companies’ demise is debatable, but it is true that the adoption of alternate powertrain vehicles by dealerships has been spotty. When Cadillac introduced its luxury ELR plug-in hybrid, for example, half of its dealers refused to sell it. On the other hand, 85% of Chevrolet dealerships sell the plug-in Volt.
In her report for NADA, Maryann Keller writes that what makes Tesla unique isn’t just its powertrain – it’s that its base model costs $69,000, with the actual price easily hitting $80,000 or more. She suggests that at that price point Tesla’s customers may not need a dealership because they “…do not relate to the car buying experience of the vast majority of Americans who cannot simply write a check for their cars.”
What You Can Do Now
On Main Street, where your customers live and work, they hear this media hype about egregious dealership mark-ups that mean they’d be better off without you. You need to prove your value, but you can’t do it by arguing points with every customer that comes in the door.
You have to follow-through on customer service so they can experience your value for themselves. When more than 60% of purchases involve a trade-in and when many of those trade-ins are worth less than their outstanding loan balance, the transaction can become enormously complex. Customers in that situation need you for many reasons, not the least of which is to have you explain the particulars to them.
And when it comes to value, nothing beats helping a customer get the vehicle they need and want. Don’t send them away disappointed when you could have closed them with a simple offer to let them pay some or all of their up-front costs with a multiple - or hold-check option. And while you’re explaining that you can let them write two to four checks to be deposited over the course of the next thirty days, be sure to let them know that you’re happy to handle the complexities of their purchase and that you’ll be there for them in the long term.
Sometimes it’s that last creative effort on your part that will establish a long-term relationship with an entire family’s worth of car buyers – and their friends. Let each customer’s experience with you give them better understanding of why manufacturers have relied upon dealers for nearly a century. Learn how here.
