Special Finance Lead Providers Weigh In

Much of the talk regarding the slowdown in car sales and the recent difficulties in special finance has come from the viewpoint of either the dealer or the finance company, each looking back at the other. However, there’s another unique viewpoint to consider—that of the special finance lead provider. These vendors have their collective finger on the pulse of special finance and can observe trends on both the retail and the financing sides, so who better to offer some perspective on the market over the past year, as well as, the future of special finance? How has the changing market affected them and what are they doing to help both their dealer clients and themselves survive?

Recent trends

The slowdown in retail auto sales has had a ripple effect on special finance lead providers, many of which have observed their dealer clients cutting back on the number of leads they buy or the geographic area they want to cover – sometimes both – as well as changing the criteria by which their leads are filtered in an attempt to get more viable customers through their doors.

Steve Virgilio, managing partner of CyberLead, Inc., reported an overall slowdown in dealer interest in subprime leads and a significant decrease in requests for those leads from dealers still interested in them. Those dealers who are sticking with the business, he said, are now covering smaller areas, have increased minimum incomes and are limiting the number of leads they purchase each month.

Rory Holland, executive vice president of marketing for blueSky, has observed much of the same. “The biggest trend we have seen is dealers really reducing their special finance budget,” he said. “Fewer dealers are actively participating in special finance or are looking for us to more heavily scrub leads.”

DealerLink president and CEO Tim Parker agreed that dealers have become much more cautious about the amount of money being spent on leads. “It’s really changed most dramatically probably in the last probably six to seven months ... that’s when we saw dealers were starting to get concerned about watching their advertising dollars,” he said. “Most all of them have tightened their belts.” Dealers are more closely scrutinizing both the quality of leads they’re receiving and the cost per sale, he explained, “not necessarily what you’re paying for the lead but the results you get with what you bought … they are scrutinizing more than we’ve ever seen in the last eight years” Essentially, those that aren’t performing are being fired.

Mike Gargano, vice president and general manager of Car.com, agreed with some of these assessments to a certain point. “Almost all dealers are microscopically reviewing their marketing spend in this brutal economy to make sure that they are getting the highest rate of return on their marketing investments,” he said. However, he was optimistic that Internet leads are the last area of marketing a dealer would cut. “Internet marketing and programs are more targeted and cost-efficient...and are the most effective at reaching today's car and finance shopper.” A third-party study commissioned by Car.com revealed that 91 percent of dealers surveyed said they were either increasing or standing firm on their Internet marketing spend despite tighter budgets.  

Michael Snider, vice president of sales and marketing for CIQ/Voisys, echoed that sentiment somewhat, believing that dealers will begin spending less on traditional advertising such as television, radio and newspaper, “simply because it is not cost effective in this type of market and very difficult to track.”

Bob Harwood, director of client relations for Interactive Financial Marketing Group, said he has recently witnessed dealers falling into one of two categories: those who are worried about the future and those who are excited about it. The worried ones, he explained, are the ones cutting back on all their expenditures and are simply hoping to weather the storm. Dealers excited about the future of special finance are focusing on increasing market share and are ramping up the number of leads they are buying in an attempt to own their market when things rebound. He stated, “Dealers can either seek shelter from the storm, or learn to dance in the rain.”

Top-performing dealers

“There are not a lot of dealers growing [their special finance business] right now,” admitted Holland. However, he believes that now is the time for dealers to focus of special finance. “While many dealers are closing their doors to special finance customers, we believe now is the time to open your doors and be prepared for when … the credit markets open up a bit, because it’s going to be an opportunity to gain market share quickly.” He believed that dealers who keep after the special finance market through this rough patch will be better prepared when the market turns around, which he thought would be a rapid change when it finally occurs. “Those dealers … will gain a ton of market share because no other dealers in their market are going to be doing this,” he said.

Harwood agreed. “Charles Darwin said, ‘It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.’ We find that holds true in our current situation within our industry.” Dealers who are doing the best in special finance right now are the ones that have been able to rapidly adjust to changes in the market. He stated that many of IFMG’s dealers have sought out niche sources, regional banks and credit unions in order to adapt and survive.

“In addition to having an adequate number of lender relationships so that they can meet the increased demand from subprime customers,” added Gargano, “we believe that having consistent, professional and systematic follow-up on all leads is absolutely critical to dealer success. A positive, respectful, super-helpful attitude towards these customers –many of whom are probably finding themselves in the subprime situation for the first time – is very important and can turn these customers into repeat customers.”

Virgilio, Parker and Holland all agreed that having an immediate follow-up process for leads is essential for success. “[Dealers are] reacting to the leads in a much more timely fashion, which we believe has always been the essence of being able to have the greatest chance for success,” said Parker. Holland recommended having a dedicated individual or group for lead follow-up and an agreed-upon script to sell the appointment and get the customer to the dealership.

The changing face of subprime

The changes in the credit market can be viewed as both a blessing and a curse for special finance right now. Gargano said, “From a macro point of view, the credit crunch and general economic crisis [have] dramatically increased the number of consumers falling into subprime lending territory, so while car sales are down, that portion of the market is growing and most likely will continue to grow.”
However, the same credit market that has caused the increase in special finance customers has caused finance companies to tighten their criteria to the point that dealers are unable to get many of these customers financed. According to Gargano, the subprime mortgage fallout meant many consumers couldn’t keep up with payments, resulting in record numbers of loans defaulting. “This has driven lenders to raise limits on what constitutes a low-risk borrower; for example, 680 used to mean a borrower could get a good interest rate, while today that score has been raised to roughly 720. In March 2008, the average American's credit score was 692, and today that score falls into a subprime category.”

Snider said that while the number of consumers applying online has increased, overall closing percentages have dropped by roughly two percent due to the current market conditions.

“Without liquidity for lenders to be able to lend money, the tightening credit market makes it very difficult to get subprime consumers funded,” Holland pointed out.

Snider added that he believed many dealers would begin to look into offering buy here pay here and lease here pay here. “Far too many prospects are walking off the lot without buying simply because of the lack of financing available,” he said.  

Adjusting to a changed market

Just like dealers, special finance lead providers have made adjustments to their own business models in order to keep business flowing. At Cyberlead, Virgilio said, they have hired more salesmen to contact dealers directly. “Advertising isn’t what it once was,” he admitted, adding that in addition to advertising in some trade magazines they are relying on the use of SEO and pay-per-click to keep their presence known.

At Car.com, Gargano said, “We have continued to target large dealers that have the necessary wide spectrum of lending relationships to meet the increase in subprime customers.”

Voisys has made some price adjustments, according to Snider. “Dealers expect a good quality exclusive lead to be priced based on the current market conditions,” he stated. “Dealers grosses have dropped, therefore it is the lead providers’ responsibility to adjust the per-lead price accordingly… considering that our closing percentages have fallen slightly, we have reduced our price per lead accordingly.”

A helping hand for dealers
Staying in business as a lead provider means doing as much as possible to help dealers stay in business, and many lead providers are constantly looking for ways to help their clients survive and prosper. Some companies offer support and training in addition to providing leads. DealerLink boasts the availability of a support staff with years of prior dealership experience. “We’re not looking just to sell them leads,” said Parker, “We actually are doing our best to help them sell cars.”  

IFMG offers “dedicated relationship managers and trainers with real-world dealership experience to consult with our dealers on everything from process to financing,” said Harwood.tw

Snider said his company will work with dealers in any way it can to help them survive. “None of our dealer partners are under contracts,” he pointed out. “In some cases we assist with appointment setting.”

Car.com focuses on “helping dealers close the leads once they receive them,” according to Gargano. “For example, our team works with our member dealers to analyze their program on a monthly basis to make sure they are optimizing their territories and marketing programs. We also have a call center in place that works with customers … in the event of missed opportunities.”

The biggest part of helping dealers stay in business is undoubtedly striving to provide a better-quality special finance lead. One way to go about that is to get more aggressive in the filters that are applied to credit applications. DealerLink, for example, has raised the minimum monthly income requirement for applicants to $2,000. CEO Parker said the decision was made after talking to dealer clients across the country and learning that most of their mainstream subprime finance sources would not accept deals with an income below that level. He also stated that the number of people with repossessions has increased over the past year, driving down the quality of leads being generated, so DealerLink filters out applicants who’ve had a repossession in the past 12 months.

Similar changes have been made at blueSky. “The biggest thing that’s changed on the filtering is the income,” said Holland. “Where it used to be our average dealer was doing $1,500 to $1,800, I would say our average dealer now is more in the $2,000 to $2,400 range.”  Additionally, blueSky’s call centers can call customers right away for verification of data on the credit application. “Over the last 12 months we’ve actually tightened [customer verification] up even more … to make sure we’re getting customers that are actually intent on purchasing a vehicle.”

“We continue to find that focusing on generating high quality leads (leads from serious in-market buyers) for dealers is the touchstone of long-term success in the lead generation business,” said Gargano.

Harwood agreed, adding that he did not believe the current market would tolerate any vendor, lead provider or otherwise, that is not willing to work with dealers to help them succeed.

Low-budget lead providers

According to Harwood, dealers are placing more emphasis on getting leads that better fit their current financing capabilities rather than going for a high volume of low-cost, low-quality leads. As a result, he said, dealers are focusing more on how their leads are created and the filters applied to them. “Both with current clients and our prospects, we are hearing that they no longer have the time or resources needed to wade through the high volume of unworkable leads they were seeing from the low-budget providers, and that they are seeing a better ROI using established lead providers who provide high-quality leads. I think that the days of less scrupulous lead providers providing little-to-no value and moving from dealer to dealer in a market are over.”  

Tim Parker at DealerLink agreed regarding low-budget lead providers. “It’s going to be a flash in the pan.” He continued, “We know what it costs to generate a lead and there’s absolutely no way to generate a lead and sell it for the kind of money we’re seeing out there. What happens is these leads will be sold multiple times, without question, anywhere from three to five times. Some of the data is old data, customers who haven’t applied for anything in months.”

Gargano added that many low-budget lead providers “ operate under a different set of rules than the mainstream providers by selling low-quality, old leads and multi-selling traffic.”

Holland declared, “Most of the low cost generators are just that—they’re low cost generators. [They are] not in the dealer business, they don’t understand the dealer business, and they don’t really want to be in the dealer business. They want to get paid for leads they deliver.” Anyone can generate and deliver a lead, he explained. “It’s really what happens prior to the dealer receiving the lead and what kind of services he receives on the other side of that with guarantees, lead returns, lead verification, and just basically long-term relationships.”

What lies ahead

Most believed the pool of lead providers will decrease in the coming months, although some differed in the reasoning behind that belief. Several, including Parker, believed that the companies weeded out would be those that focus on providing a high volume of low-cost leads rather than placing an emphasis on quality leads. Gargano and Holland added that some companies would fail simply because they don’t have the ability to weather the market’s volatility.

“It’s a tough market right now, so the smart companies that have invested well in their businesses, invested in good product development, will be here when the market breaks,” said Holland. “The companies that had less of a focus on dealer services, research and development … probably will not be here, I anticipate.”

For those providers that do survive, many think there’s opportunity ahead. “At Car.com, we see a big opportunity as we head into tax season and pent up demand for used cars is released,” said Gargano. “We expect to see a positive impact from the government bail-out funds for lenders that purchase indirect loans for dealers, which will allow them to increase their business again and accommodate the influx of customers this tax season.”

Parker agreed. “I truly believe that there are going to be lending sources available once this thing gets sorted out,” he said. “It may be that some of these sovereign funds from overseas [will] provide the funding … that the various lenders need, and we may even see some new lenders come out based on what sovereign funds can do for them. The money’s going to come from somewhere. There’s just too much opportunity for return on investment.”

Harwood was perhaps the most optimistic. “Things already seem to be on the upswing. We have seen our dealers enjoy increasing lead conversion rates for two consecutive months,” he stated. “We are confident … that although the landscape has changed, our industry remains strong, viable and filled with opportunity, and we plan on helping our dealers grow regardless of what change awaits us in 2009.”

Vol. 6, Issue 2