I’ve been in the car business for 30 years. Ten years ago, I discovered third party lead generation and thought I had found the holy grail of marketing. Perfectly predictable cost of customer acquisition. Combine that with non-prime and a client that is not price-focused and you have a recipe for some large scalable profits. But alas all good things must come to an end, and the glory days of third-party lead generation are dead, albeit it was a slow, steady and painful death, but dead and gone they are. Third party lead generation is still relevant, and prevalent, but the squeeze is on, and those predictable outcomes are far less appetizing.
I remember the very early years of non-prime, before everyone and their brother figured it out and there was business and profits in it, we had one of our locations in a relatively small market. Before everything moved online. There was still newspaper advertising that worked. We used direct mail flyers as a way to have our sales events. We would send out 50,000 flyers; a two colour, one page, eight and a half by eleven cheap ass crappy flyer and sell 25 plus cars on a weekend, and all with good gross. It was literally like shooting fish in a barrel. But you know what happened, other dealers started to figure it out, the market got more crowded, the customer more educated, and pretty soon it took 500,000 eight-page full colour flyers to have the same effect as those 50,000 did. And not long after that, flyers just didn’t pay. Then came third party leads.
I started buying third party leads eleven years ago. At the time, it was a new thing. An internet start-up was using generic digital ads to generate non-prime leads and reselling them to dealers. The internet start-up, a lead generation company, had the knowledge and ability to create leads at a much lower cost than an individual dealer could.
Online third-party lead generation grew very quickly as dealers who specialized in non-prime discovered it.
At the time I could buy leads at roughly $100 each and convert those leads at 15% to 20%. A cost of customer acquisition of between $500 and $700 a deal. Combine that with the fact that they were non-prime finance leads with a healthy average gross, and it was a pretty sweet deal. Online third-party lead generation grew very quickly as dealers who specialized in non-prime discovered it. So, what happens when demand goes up? The cost goes up. Just like those flyers in the old days, when it took 500,000 flyers to do what 50,000 did a few years before, now it takes 500 leads to do what 100 leads used to do. And it isn’t getting any better.
The trend of third-party lead generation is a trend to a higher cost of customer acquisition. What used to be a $500 cost of customer acquisition is now $2500, and not sustainable. If you think about it, those costs are really being borne by lower profits for the dealer, and also being passed onto the consumer. Dealers and credit challenged customers are bearing the cost of large internet-based lead generation companies flooding the internet with highly specialized marketing and charging a fortune for it. Dealers are having their margins squeezed by third party lead generation companies, and credit challenged customers are paying inflated prices to support the high cost of customer acquisition. That is the reality now.
The question is, why should you care? If you’re a dealer, and you're buying third party leads, and you're making money, why should you care if the customer has to pay more? That’s fair. But what you should care about are the hidden issues, the icebergs out there in the dark, the ones that will sink your ship. That’s what you should care about.
More and more lead generation companies are entering the market.
Ask yourself this. What has been the trend in your conversion rates over the last five years? How has that hurt your cost of customer acquisition? Are you paying more than you did before, and do you think that trend will continue? The reality is that there is no way for it to go, except for the cost of customer acquisition to keep going up. Why? Because more and more lead generation companies are entering the market. Good ones. Bad ones. Horrible ones. But lots and lots. New ones popping up daily like weeds. Let’s face it, the internet is endless, but the prospect base is limited, and more companies seeking out those leads means less quality leads to go around. Add to that the fact that as more and more dealers enter the non-prime space, demand will go up. I may not be a genius but even I can tell you that as more and more lead generation companies enter the market, and more dealers jump on board to buy leads, the cost of customer acquisition will continue to rise until it begins to squeeze dealers out of the market. If you’re too dependent on those third party leads, you could be one of them.
But guess what, that’s not really the worst of it. There are other pretty significant issues associated with third party leads. How about the simple fact that you don’t know what the lead generation company is saying in order to generate those leads. What if what they are saying is against the law? Unethical? I saw an ad the other day on the internet, that said there were 1500 new Ford trucks parked in an airport parking lot that had to be sold. I’m pretty sure that’s not true. I also saw an ad that said the customer could get $5000 back on their loan, guaranteed. I’m pretty sure I know a few banks that don’t allow that. How about no credit check needed? 0% loans for bad credit? The misleading messages are endless, and maybe you don’t care, and it’s not your problem, and maybe you're right. But maybe, just maybe, those misleading ads are getting connected to your brand when your staff are reaching out to convert them. After all, these prospects have not converted from your website, from your messaging, for all you know they want to buy a Lamborghini for $200 a month, and when you don’t have one, or can’t supply one under those terms, the customer feels they have been lied to. By you.
There are significant issues associated with third party leads.
The reality is that yes, the third-party lead company cannot exist unless you have some level of success with their product. It would be a pretty short relationship if you didn’t convert any. But the mission of the third-party lead company is to maximise profit by driving down the cost of lead acquisition while maintaining or increasing the cost to the dealer. The quality of the lead is tied to the cost of generating that lead. If I want to lower the cost of generating a lead, I just widen my messaging to include lower quality leads. I keep doing that until dealers complain, then I know where the line is. Then I keep moving it, just a bit while some dealers jump off and others, in a growing market, jump on.
The bottom line is this. Third party lead generation can still be a viable part of any marketing budget, particularly in the non-prime space. But the heydays of cheap leads and half-decent conversion rates are long gone, and the trend isn’t looking good. Better start planning for a life without third party lead generation or look at dying a slow death while you get the revenue slowly sucked out of you over the next few years. Pretty soon, those third-party lead generation companies will have taken enough money from you to open their own locations and go direct to the consumer! Better think about generating your own prospects if you want to be around to compete. Good luck and good selling.