A Scientific Approach to Profit – The Point of Diminishing Return

How do you go about finding the Point of Diminishing Return when it comes to marketing for an Automotive Dealership?

First of all, you have to determine how many vehicles you would sell based on just your location and time in business along with the brand you represent.  I’m going to do this the only way you can, by referring to your market share and by doing it quarterly using averages.  The reason for this is that each month the amount of vehicles sold in a market area varies depending on demand.  Over the course of 3 months (or a quarter), that average mitigates, to an extent, those variances.  The reason to do it by market share is also part of the scientific method.  If there is an average of 10,000 vehicles sold in your area per month over a three month period and you sell an average of 200 a month during that quarter, you have a quarterly average market share of 2%.

To do this in an even more scientific way, you would do what I’m describing here annually or over a 6 month period to further mitigate fluctuation caused by other market inconsistencies such as brand demand, inventory mix and elements out of your control.

When I use AutoCount to determine the market, I focus on the new cars and used cars sold by franchised dealers only because most of our clients are franchised dealers.

So, let’s say that you determine that you would sell at a rate of 2% market share each quarter without the expense of marketing.  You come to this conclusion because you are currently averaging 3% market share with marketing dollars spent and your contention is that you would sell 66% of what you currently sell without any dollars spent on marketing.

Over the period of a quarter, you spend $50,000 ($150k over the 3 months) on marketing per month.  That $50,000 yields an increase of 1% market share.  That’s very good, by the way.  The next three months, you spend $75,000 on marketing and the result is that you now are averaging 3.6% market share (or 360 vehicles sold per month when the market is yielding 10,000 vehicles per month on average). The additional $25,000 in marketing yielded you .6% market share.

The next quarter you spend an average of $100,000 on marketing and the result is a market share of 3.9%.  That additional $25,000 only yielded you .3% market share.  The following quarter you spend an average of $125,000 and the result is a 4.1% market share. You have exceeded the Point of Diminishing Return. You can summarize from this that somewhere between $75,000 and $100,000 is that point.  Logic would tell you that it’s closer to the $75,000 mark.

At this point, we would now look to what consists of the most efficient way to use that $75,000 or $80,000  to bring down the monthly costs and still achieve market share strength.  You want to spend the marketing dollars where your message is Consistently in front of the most Likely Buyers.  If you make the backbone of your marketing efforts a direct marketing strategy that does this, then you will find that the point of Diminishing Return can cost less than $75,000 a month, perhaps even $55,000 or $60,000 a month.

How is this done?  By deploying direct marketing (using mail, email, social media, etc.) to the Most Likely Buyers based on their actual behavior and doing so in a manner that approaches those people of which the vast majority have no history with your dealership (Conquest), you will fine tune your strategy to not only strengthen your market share, but lower your costs in the process.  This would mean hundreds of thousands of dollars in additional net profit per year, even millions.

The scientific approach is not really complicated when you mitigate variances by using market share and by extending the period of time being measured.  Quarterly is good, 6 months is better…and so on.


About dealerite/in association with AP Level 4

National affiliations of professionals who are engaged in changing the culture of the automobile retail business. Associated with AP Level 4 and Edifice Group. These companies are bringing sustainable marketing which has proven quantifiable improvements in a dealer's market share performance
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