Car Sales Lead Generation: Broken for Consumers, Broken for Dealers

Imagine going to Amazon.com, finding the book you want and being asked for your phone number and told to wait for a call from your local bookstore with the price of the book.

Sounds ridiculous, right? You want the price in the moment, while you’re online, while you’re still anonymous. But that’s exactly what happens to many people shopping online for a new car.

Consumers now have access to robust, anonymous, almost perfect product information online. 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 automotive lead generation Web sites, which turn around and sell it to multiple dealers. So, in the end, consumers must relinquish control over the transaction to a traditional salesperson.

Is Lead Generation Dead?

As a business model, lead generation is profitable for a number of players — the major search engines like Google and Yahoo, which are selling the clicks, and “infomediary” Web sites that attract consumers turning to them for objective product information, like Kelley Blue Book, Edmunds and others. Both consumers and dealers are going online in droves, and they’ll continue to do so.

But the lead-generation experience for both consumers and dealers is broken. It will likely only get worse, and it will affect the business overall. Two trends are already in motion that will ultimately kill lead generation as a viable business model:

  • Upfront pricing: The underlying bargain in lead-generation is that a consumer trades his or her anonymity in exchange for the promise of a price. What ultimately changes the power in that equation is getting an upfront price with no strings attached — no bargain necessary. Some dealers are already offering upfront prices, and the industry is fast approaching a tipping point. Once that happens, consumers will no longer need to rely on lead generators as an intermediary for getting a price quote.
  • Dealers will demand a shift to paying for sales and not leads: The interesting dynamic here is that the lead generation system is incrementally working itself out of business. Because the system is designed around quantity, not quality, the value of its own product is diminishing. Lead generators have to sell more leads to more dealers, thereby decreasing the quality of each lead they sell. The economics of this will only survive to a certain point — why should dealers pay good money for low-quality leads? Dealers will look for more efficient ways of finding buyers online or elsewhere, and a pay-per-sale model is an increasingly viable option.

The Business of Lead Generation: Fundamentally Bankrupt

Over the past decade there’s been a fundamental sea change in how people shop for cars, because of the evolution of the product itself and the Internet’s ability to provide anonymous access to robust product information. Customers, as a general rule, simply do not walk into the local dealership asking for a brochure anymore. The “walk-in” was the entire foundation upon which the franchise system was premised — dealers pay for geographic exclusivity under the assumption that they’ll gain a built-in customer base of everyone in that area. But things are changing.

According to the 2007 Dealer eBusiness Performance Study, 83 percent of consumers use the Web for research before visiting a dealership. That number is likely much higher — in fact there’s reason to expect that number will be close to full penetration in the near future, given that the anonymous access to product information is so compelling for buyers looking for new cars.

To complete their research and get a price quote from a dealer, shoppers are asked to offer up a name and contact information. This exchange reveals just how badly consumers want to know price — to the point at which they’ll surrender their online anonymity to get it, and they’ll seek out what they dread: an introduction to a salesperson. As with any commodity, searching for a new car without being told the price is akin to going to Amazon.com and being referred to a local bookstore. Without a price attached to the shopping experience, the system sets up a natural need for the consumer to be connected to a dealer — giving leverage to the lead generators that are paid to make that connection.

Who Said Anything About a Better Customer Experience?

A lead generator’s incentive is, naturally, to generate more leads — which is not in line with an online shopper’s goal, which is to remain anonymous, conduct research and get a price. This misalignment of incentives often frustrates potential buyers.

In order to be successful, the lead generators are not optimizing their sites to be consumer-friendly — they must optimize their sites to obtain a consumer’s e-mail address or other contact information as soon as possible, often on the home page or within one click. Such sites remove friction between the consumer and their request for a price quote. The friction they’re removing is the qualifying shopping process that would otherwise be a filter for identifying who is likely to buy and when.

Consumers relinquish their contact information for a price quote — but there’s no contract between the seller of a lead (lead generator) and the buyer of that lead (the dealer) that forces the fulfillment of the consumer’s expectation. Most dealers are reluctant to give a price in that return phone call or e-mail, because it’s intuitively a weak negotiating position to surrender price before getting the buyer into the dealership. Only 38 percent of dealers say they provide a price quote in the first e-mail response.

Consumers think they’re getting a quote, but they’re actually being sold to the highest bidders — their contact information is often sold to between three to seven separate competing car dealers. The consumer, who probably went online to avoid the salesperson at this stage of the game, has just invited multiple dealers into his or her home.

The Internet, which was supposed to help shift the information balance of power from dealers to buyers, has, in fact, facilitated the loss of consumer anonymity — the very dynamic that once made it such a powerful tool.

All Roads Lead to a Light at the End of the Tunnel

Lead generation has become an end in itself. It doesn’t work for consumers, and it doesn’t work for the dealers investing their highly coveted advertising dollars. It ignores the consumer’s demand for a true knowledge advantage through upfront pricing, and convolutes the online information-gathering process by making promises on which it doesn’t deliver.

A new system based on both upfront pricing and a pay-per-sale — or sales-generation — model aligns incentives and works for both the consumer and dealer. As such, it’s the model most likely to put things back in a positive direction, 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.

Scott Painter is founder and CEO of Zag, which operates an online no-haggle car-buying platform that connects ready buyers with certified dealers. Painter pioneered the fledgling online car-buying sector nine years ago with the launch of CarsDirect.com.

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