When Can You Accept Over-Spending?

I am going to open Pandora’s Box. To all the people that have read my writings over the last decade and know my mantra is to manage by the numbers: I haven’t fallen on my head nor has my body taken over by aliens. Certainly, I still preach benchmarks and guides until the cows come in, and I am all about keeping operating percentages in line. I look for optimum conversion ratios. Yes, a tenth of a percentage of a large number still is a significant amount of money. None of that has changed.

So, I will say it. There are times when I believe it is OK to overspend your ad budget.

Before you think I have gone mad, realize that you can’t spend or deposit a “percentage.” I googled it and there is still no mention of a spendable world currency called a percentage or ratio.

This subject comes from conversations with a few dealers that I work with, along with some of the practices from my old stores. There are some very strong SF organizations around the country. Certainly, they are in the minority, totaling less than 10 percent of the existing dealerships in the country, but they do exist.

These stores understand SF from top to bottom. These dealers and departments have had their foundation in place for some time. They know how to work the green balloon-red balloon sales process, understand the intricacies of their many finance companies’ and banks’ programs, are able to structure deals adeptly, and have good funding systems in place. They behold all of the Ten Critical Components and know how to execute while holding benchmark gross profits. In short, they are shining examples of success and are selling a significant number of SF deals at a high level of gross.

If these dealers have an Achilles heel, it generally involves the conversion percentages on the many leads and opportunities they are already receiving. They are selling a lot of SF units, but based on the number of opportunities the benchmarks would indicate, they could do better. As a result, their cost of advertising, whether as a percentage of SF gross profit or as a cost per sale, is on the wrong side of outstanding.

Let me turn this into some numbers. Say the dealership is spending $20,000 per month on 500 SF leads. Additionally, the dealership has been converting 10 percent of those leads into sales over the past 90 days, which means they are selling 50 SF units per month from these leads. They are grossing $3,500 per unit, so the total gross profit generated for the department is $175,000. This translates into a cost per sale of $400 and adverting expense at almost 12 percent of gross profit (3 percent higher than the benchmark of 9 percent).

You can look at this situation three different ways. One perspective is for a dealer, CFO or GM to note that if the SF manager and department were doing their jobs, that they should have been able to either earn an additional $47,222 in gross or accomplished the same results with an ad expense of no more than $15,750. As a result, management cut the department’s budget by 21.25 percent the following month and told them to be more efficient. If that is your view, you might as well quit reading this article. In my opinion, you are crazy for not appreciating the $155,000 net (total gross less advertising) you added to the top end of your income statement, and being unwilling to part with the additional 21.25 percent to earn that gross profit if the department performs at the same level next month.

The second perspective is for the dealer, CFO or GM to appreciate the $175,000 in gross profit the department generated and to offer the department the same budget the next month, but to expect the SF manager to be more efficient in order to achieve an even greater return. If this is your perspective, I don’t really have a quarrel with you. Certainly, you are prudent to manage by the numbers that indicate you can do better, but you aren’t going to sacrifice what you are already depositing in the bank. The net $155K still spends the same even though the percentages might say you are being wasteful.

The third perspective, dare I write this, is to opt to increase your spending to drive even more opportunities to your department. Blasphemy? Not really. Please read on.

In this example, I stated that the department had been successfully and consistently converting 10 percent of the leads into sales. You can substitute with whatever number applies in your dealership—8 percent to 12 percent. What this simply means is that the department does indeed have the ability to turn leads into gross profit at a given percentage. Why not increase spending if the department is not receiving more leads than it can handle and you are confident that you can achieve the same conversion rate?

For sake of argument, let’s say you have to spend an additional $5,000 to achieve another 100 opportunities. That still would mean an increase of an additional 10 sales, $35,000 gross profit, and a net of $30,000 over the increased advertising expense.

Also, consider whether the additional advertising was branded messaging that not only created sales opportunities, but branded your dealership’s SF operation and image. This results in future traffic, as well as enhancing the ability of some other type of future marketing to be favorably received thereby causing the customer to take action.

No, I am not making the statement that throwing ad money at inefficiencies causes the problem to go away. Nor am I saying that ownership or executive-level management should settle for inefficiencies or the SF team’s less-than-benchmark ratios. I am also not suggesting you become a spendthrift. What I am saying is that if your team has the pieces to the puzzle in place to handle additional traffic, taking advantage of market opportunities while striving to improve operating efficiencies can make quite a bit of sense (as in dollars and cents).

In a world where we so often analyze by comparing percentages and ratios against operational benchmarks, we can’t lose sight of the fact that we still measure by cash in the bank and dollars earned. If spending a little bit more in advertising than normally recommended can mean netting significantly higher earnings, I am quite fine with that.

Until next month
Spend wisely!
 
Special Finance Insider Vol. 2, Issue 1