Posted on: February 25, 2019

Automotive Paid Search Waste Approaches $1B Per Year

 

The automotive industry is wasting nearly $1 billion per year on ineffective Paid Search (SEM) advertising that doesn't lead to vehicle sales. This amounts to 2% of the profits of the top 4 OEMs in North America (General Motors, Ford, Toyota & Chrysler.)

 

To put the magnitude of this problem in perspective, Ford's share price recently dropped 8% after announcing a 4th quarter earnings warning of 6%, so a 2% impact on earnings is significant both in terms of stock price and market capitalization.

 

For several years now I've been mildly obsessed with the idea of measuring quality rather than quantity in the automotive industry. One of the first things we built at Wizely is a tool called "Dollars and $ense" that measures the quality of ad spend by relating it to vehicle sales and revenue. As adoption of the tool has increased, the size and scope of the Paid Search waste in our industry has become increasingly alarming.

 

To be clear, I'm certainly not suggesting that ALL Paid Search / SEM is wasted spend. In fact, Paid Search is the strong foundation on which every good digital marketing strategy should be built. When managed correctly and monitored well, it works. However, I am suggesting that a significant portion of SEM money spent at the automotive dealership level is wasted.

 

Wizely's Dollars & $ense tool defines "waste" as spend that impacts ZERO sales.

 

One group client has used the tool to identify more than $40k per month in waste across across 10 stores, or just under 30% of their paid search spend.

The results from this group have turned out to be fairly representative across all of our clients, so we decided to calculate the impact across the entire industry...

  • Waste Per Franchise Dealership = $4,000 per month
  • Number of Franchise Dealerships in North America = 18,000
  • Wasted Spend Per Month Across Industry = $72M
  • Wasted Spend Per Year Across Industry = $864M

We then decided to look at this waste as a percentage of net income (EBIT) reported by the top 4 automakers in North America for 2018.

 

 

All of this begs the question of what exactly is going on here, and what can be done to fix it.

 

1. Lack of Good Measurement Tools


  • Problem : Few tools exist that allow dealers, OEMs and agencies to measure their activities against sales & revenue.
  • Solution : We've tried to address this problem at Wizely with the creation of "Dollars & $ense" but we're certainly not the only company working in this space. Regardless of what tool or company is used, everyone in the value chain should have a methodology for measuring financially meaningful results like sales and revenue rather than the more traditional and far less useful metrics like click-through-rate, bounce-rate, form submissions & time on site.

2. Too Many People Incentivized by Spend Level


  • Problem : Too many people are incentivized by spend rather than results. Companies that manage digital programs on behalf of OEMs are all too often paid a significant percentage of SEM spend. A typical automotive agency business model is to be paid a percentage of spend and kickbacks from Google to the agency for meeting spend targets are often the only thing allowing them to be profitable. Virtually every sales person in the value chain is compensated based on spend. All the incentives at play in the ecosystem encourage wasteful spending.
  • Solution : It's my belief that changing this situation will have to start at the OEMs, who are ultimately paying most of this bill via their co-op programs. They need to change the way vendors and partners "in the program" are compensated to incentivize them to deliver results rather than spend. For their part, dealers should start asking their agency for business models that fairly compensate the agency for their time, effort and expertise in the form a monthly fee and let the spend be what the spend needs to be to deliver results. I know of several agencies that have models like this available already for clients.

3. Co-Op Programs Need Revision


  • Problem : Co-op programs favor Google Paid Search spend. Although there are a lot of products and services that are theoretically co-op eligible, it's FAR easier to get co-op reimbursement for Google Paid Search spend. Google has encouraged the creation of "turn key" programs that make it easy for agencies to submit and get approved and the money gets credited to the dealer with little or no effort. I've been told over and over by clients that they'd love to shift some of their spend away from Google SEM but they're concerned about their ability to reliably and easily get co-op reimbursement for other products.
  • Solution : Again, it's my belief that this one needs to be fixed by the OEMs. "Turn Key" co-op approval ought to be a requirement for any vendor or solution to be co-op eligible. In some cases, the OEMs need to fundamentally modify their co-op submission and approval processes for today's digital marketing products rather than shoe-horning digital approval into a process designed for print and TV.

4. Lack of Coordination Through Value Chain


  • Problem : There is a fundamental lack of coordination between paid search spend at the Tier1 (OEM), Tier2 (Regional) and Tier3 (Dealer) level. This causes competition for the same keywords which drives the price up for everyone. In addition, it creates a fundamentally confusing experience for consumers to have ads driving them to multiple different websites with the same brands all over them, trying to accomplish many but not all of the same objectives.
  • Solution : Everyone in the value chain can help with this one. Google's "Micro Moments" concept provides a decent blueprint for a solution here. The basic idea is that your paid search strategy should be tailored to answering specific questions that consumer are asking through their purchase journey. For example, "Which car is right for me?" "Can I afford it?" and "Where should I buy it?" Some organizations have synthesized this into a cohesive strategy for automotive that makes a lot of sense. Taking "Jeep" as an example, it would make sense for the OEM to be bidding on terms like "Jeep" and "Jeep SUV" and for the dealer to be bidding on terms like "Jeep Grand Cherokee Lease Deals" or "Jeep Dealership Near Me."

In summary, the problem of wasted capital in automotive paid search is a massive one, closing in on $1B per year and accounting for ~2.5% of corporate profits for the top four car companies in the USA. In addition, there are concrete and practical steps that everyone in the value chain can take in order to begin to address this problem and recapture and/or redeploy that capital.

To learn more about measuring your ad spend against sales & revenue in Google Analytics, check out Wizely's Whitepaper on the topic.

Dollars & $ense White Paper

As always, I'd love to hear your feedback either in the comments or privately via james@wizely.us.

 

James Grace is the former head of Analytics Products for Cox Automotive, and currently the Founder and CEO of "Wizely" which helps clients navigate the complexities of the Automotive Industry. www.wizely.us

Get the latest from the Wizely blog — straight to your inbox.