Change is inevitable. If you go back to March 2020, no one in the auto industry could have predicted the supply-and-demand imbalance that would send prices skyrocketing during the heart of the pandemic. Now that COVID-19 has stabilized and the world has mostly returned to normal, car dealerships are facing a new reality that they must adapt to.
The secret to thriving in this new reality is excellent customer service.
Profitability will always be king in this business. As a dealership loses its margin, there is a temptation to trim staff or cut other corners detrimental to the customer. But a closer look at dynamics across the industry reveals that outstanding customer service is one of the best strategies for creating a competitive advantage, diversifying revenue sources, and maintaining or even growing profitability.
Continue reading to learn more about customer service’s outsized role in dealership success this year and beyond.
The Shifting Dynamics of Dealership Profitability
The industry will look back on 2020–2022 as boom years that are difficult to replicate in the future. Excluding 2008, historical EBITA margins remained consistent year-to-year at roughly 4%. Margins peaked in 2021-2022 at 7.1%, and remained above pre-pandemic levels in 2023 at 6.3%, but a return to normal is expected according to the DCG Market Outlook Report created with Kaiser Associates. The changing margins highlight the importance of refining operational models to minimize volatility.
The good news is that price increases have offset the volume decreases to continue driving revenue growth. About 25% of consumers have delayed auto purchases due to higher interest rates, and the promise of lower rates later in 2024 could turn that pent-up demand into buying customers for dealerships.
Manufacturers are responding to consumer preferences in a way that could also help boost margins. There’s increasing demand for larger and more expensive vehicles with technologically advanced features (as demand for electric vehicles cools). The margins on these vehicles are higher, which could help dealers if sales volume declines.
But the industry is also facing headwinds, including:
- Higher operating costs
- Increased competition
- An increase in regulation
Any dealership needs a competitive advantage to succeed in a challenging market. As dealerships target the same consumers with products that can only be differentiated at the manufacturer level, customer service is the best place to turn to develop the needed competitive edge.
The Role of Customer Service in Sustaining Profitability
Different consumers have different wants and needs when searching for a new or used vehicle. But they all want the same things from a dealership:
- Responsiveness
- Products and services that directly meet their needs
- Clear and transparent communication
- A willingness to go above and beyond
- Honesty
When you achieve service excellence in your market, you absorb more and more customers who see your dealership as a trusted advisor and a source of assistance no matter their automotive-related problems. With this approach, you capture more of the market for new and used vehicle sales while driving customers to other areas of your business like financing/insurance and parts/service (which our report suggests may become a “golden egg” for dealerships).
The opposite is also true. Poor customer service will lead to a deterioration in sales, declines in repeat business, and fewer customers to funnel to other areas of your business.
Playing the Long Game
Great service is a path to short-term success, but it can also be a catalyst for dealers to play the long game of cementing their roles in the future car-buying process.
Direct-to-consumer models have faced challenges in recent years, mostly related to the high cost of last-mile delivery, the complexities of title and registration processing, and difficulty reaching profitability. However, the direct-to-consumer (DTC) model could still emerge as a challenger to the dealer model in future years.
That’s why dealers today should embrace new technology and explore ways to create personalized experiences for customers. Dealers currently have a head start and an inherent advantage over the DTC approach. Use that head start and advantage right now to build operations that will remain relevant to buyers far into the future. Change is inevitable. You can use customer service to create a loyal following today as you build a business that can quickly adapt to changes in the future.
Keeping Up with Evolving Automotive Industry Trends
As you navigate the ever-evolving landscape of the automotive industry, staying informed about trends and changes is crucial for maintaining your dealership’s competitive edge. Our Market Outlook Report provides valuable insights into industry dynamics, helping you anticipate shifts and strategize for success.
Download our Market Outlook Report today to gain actionable intelligence on emerging trends, consumer preferences, and potential opportunities in the market. Arm yourself with knowledge to enhance your customer service strategy, diversify revenue streams, and sustain profitability in a challenging environment.