Agency sales model Part 4

How long will OEMs remain competitive without a sales transformation? An investment case

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The introduction of the agency sales model does not just require changes in structures, processes, and systems. Above all, it needs willingness to make a large financial investment. In this blog article, you can find out which cost and revenue positions will be most affected by this change, and when you can expect to reach the break-even point.

In our first blog post we highlighted the opportunities and challenges of introducing the agency sales model and presented the Capgemini Invent Agency Sales Model Framework that we have developed. Our second article focused on the importance of retail, and our third article showed how to successfully scale the agency sales model.

This time, we will show which factors lead to sales increases and cost reductions in the long term, and when break-even can be expected. This discussion is based on the Step up dimension of our framework.

Figure 1: The Capgemini Invent Agency Sales Framework

New drive systems, decarbonization, autonomous driving, new forms of mobility, and new competitors: The challenges of the coming years will be manifold. At the same time, automobile manufacturers are in the middle of the digital transformation. The investments they are having to make in their own economic sustainability are immense. But can the current business model keep up with the challenges?

It is a fact that established car manufacturers today still maintain a very cost-intensive three-step sales and distribution model in which approximately 25-30% of the costs of buying a new car are attributable to sales. This is a major competitive disadvantage compared to new market entrants such as Tesla, Byton, Genesis, and Nio, or even spin-offs of established manufacturers such as Polestar or Cupra. From the very beginning, these companies have been relying on new sales models such as agency sales and are realizing significantly lower sales expenses with their greenfield approach. But it is not only in terms of costs that these new concepts differ from the traditional sales approach. The direct access to customer data in the agency sales model also enables new earnings potential to be realized on the revenue side.

Of course, there are two sides to the coin here as well: To transform an established sales organization sustainably, considerable investments in organization, processes, and IT systems are required. In addition, there are usually organically grown, heterogeneous structures in the individual national sales entities. The introduction of the agency sales model can be seen in this context as an opportunity to establish harmonized processes and systems. However, this requires additional effort. Decision-makers should examine both sides and evaluate the long-term cost reduction and sales potential in addition to the one-time investment costs.

The agency sales model as a lever to increase sales

We estimate that the introduction of the agency sales model will lead to a long-term increase in sales of 1-4%.

Increase in transaction prices

Transaction prices, i.e. the actual sales prices achieved, are one of the biggest profit levers for car manufacturers. An increase in transaction prices has a 1:1 effect on the profit of the sales organization. In the classic three-step sales model, the dealer acts as an independent vendor and ultimately determines the transaction price. The maximum level for the lower price limit is determined by a fixed retailer margin plus situational sales promotion measures for a specific model or customer group.

Every year, OEMs and importers (markets) invest hundreds of millions of euros in sales promotion measures and thus have a negative influence on the transaction prices in the markets affected. Due to a lack of data, however, it is not possible to systematically monitor success and optimize the measures. This leads to the fact that sales promotion measures are usually used reactively to achieve short-term sales stimulation.

In the agency sales model, the importer determines the transaction price in a market. In addition, centralized sales systems and data management across all sales levels make it possible to strategically plan transaction prices and sales promotion measures dynamically in order to achieve the highest possible transaction price. In addition to the optimization of sales promotion measures, uniform prices in a market prevent intra-brand competition. In the long run, both effects increase transaction prices.

Higher sales volumes

The wealth of data provided by the agency sales model makes it possible for the importer to move away from short-term measures aimed at selling certain vehicle models, towards holistic customer lifetime value management. The new data can be used to evaluate, in a targeted manner, how customers behave, how high their willingness to pay is, or how loyal they are to the brand, in order to generate the decisive motivation to buy at the right moment. As a result, new customers can be acquired, the turnover rate can be increased, and the churn rate reduced. All this adds to customer lifetime value and increases sales volumes in the long term.

Upselling potential

In addition to increasing transaction prices and sales volumes, upselling potential can be realized, and new business models can be implemented more efficiently. Whereas vehicle sales and digital services were separated in the traditional sales model, they are offered centrally from one source in the agency sales model. This can create a closed ecosystem in which customers can be retained throughout the entire customer life cycle. This ecosystem can also make it much easier for importers to offer customers additional products and services, digital services, and new mobility formats.

The agency sales model as a lever for cost reduction

As already mentioned, almost a quarter of the costs of car sales can be associated with distribution. The costs here are split across all three steps of the value chain. Altogether, the agency sales model can save approximately 4-6% of costs across all stages.

Cost reduction through centralization

In the traditional sales model, many functions have so far been organized in a decentral manner, with each dealer having its own dedicated resources for marketing and customer service. Cost-intensive online sales solutions are also operated in a decentralized manner by the individual dealers. While the importer’s focus has so far been more on the administrative management of the dealer network, in the agency sales model the importer takes on an operational role requiring more diverse competencies. This includes, for example, the operation of central online stores, central lead generation, and the establishment of central customer service and marketing departments. These shared service centers reduce redundant functions in the sales organization and realize economies of scale. In addition, quality can be increased by bundling competencies and setting standards.

Cost reduction through lean and digital processes

In addition to the centralization of competencies, the leaner sales processes in the agency sales model and the harmonization of the IT system landscape also contribute to cost reduction in the sales organization. In our experience, a digital and lean agency sales process can eliminate approximately 40% of administrative tasks at dealers and importers. This is due to the fact that time-consuming price negotiations and complex manual approval processes and system changes are no longer necessary. The expected increase in online sales and the provision of self-service functionalities will also reduce the burden on retailers.

Cost reduction through resource relief

Transparent and uniform prices also indirectly contribute to a reduction of effort in the retail trade. As our study revealed, an average of 2.5 retailers are visited due to price negotiations before the purchase is concluded. This results in resource expenses for the trade organization, which are avoided by the provision of uniform prices in the agency sales model. In a medium-sized market, a potential saving of €20m per year can be realized through this alone.

Break-even relevance

Figure 2: Long-term cost and revenue overview after introduction of the agency model

In order to make a sound investment decision, the initial implementation costs and the potential long-term costs and sales must be compared. In our experience, the investment for a medium-sized market pays off after approximately four to five years.

Fair distribution of the expected profits is crucial for the success of the investment. To this end, decision-makers should develop a transparent remuneration and bonus model together with retailers when designing agency sales and setting up the investment case. Only with an equal partnership can the agency model successfully contribute to mastering the challenges of the coming years.

What’s next?

In addition to significant investment costs, the introduction of the agency sales model requires, above all, a deep commitment from all partners across all sales channels. A long planning horizon is essential for a sustainable and successful introduction of the agency sales model. The main drivers of the investment case are summarized below:

  • Increase in transaction prices through standardized pricing across sales levels and dynamic sales promotion measures
  • Increase in volumes through data-based and customer-specific approaches throughout the entire customer lifecycle
  • Utilization of upselling potential through the customer data acquired and the offer of vehicles and services from a single source
  • Reduction of costs by centralizing functions and minimizing redundancies
  • Use of leaner sales processes to relieve the burden on the sales system and resources

This blog was co-authored by Fabian Piechottka, Oliver Straub, and Nepomuk Kessler. Please get in touch if you have questions or need further information. We look forward to exchanging ideas on this particularly current topic.

For more insights, please also read our recently published Agency Sales Model Point of View.

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