How much should dealerships spend on 3rd party websites?
As I’ve mentioned in earlier posts, the most debated item on most dealership budgets is spend on 3rd party websites. Digital advertising campaigns that drive traffic to dealership websites have higher return on investment (ROI) potential as shoppers are exposed to the dealership’s entire inventory plus additional products including service, parts, and accessories without the presence of competitors. For dealerships with strong websites, a visit is brand experience.
On a 3rd party website, an individual shopper may see only one vehicle from a dealer’s inventory, and depending on their level of spend, there may be factory ad or ads for other dealerships on their vehicle detail page (VDP). Despite these distractions, 3rd party websites can be efficient in terms of reach. When comparing total traffic, 3rd party websites have a significant advantage, outpacing OEM (original equipment manufacturer, i.e. factory) and dealership websites with 79% of car shoppers using 3rd party websites in a vehicle search vs 49% using dealerships websites and 29% using factory websites.[1]
In this post we will explore several different approaches to determine the correct 3rd party budget for your dealership.
Approach 1 - Compare your dealership to industry averages for advertising spend and gross profit.
National Automobile Dealers Association (NADA) reports show that overall advertising expenses for dealerships are between 6-7% of total gross profit. If we isolate pre-owned advertising expenses and compare that to pre-owned gross we would know how your dealership compares to others across the country.
Clearly, used gross profit varies based on local competition, inventory supply, and consumer preferences. So, if your dealership is part of an auto group, it’s helpful to compare dealerships to establish targets that are right for an individual dealership.
Below is a breakdown of 3rd party website marketing spend for several dealerships in a dealership group. Dealerships vary widely in used gross profit based on their location and their mix of inventory, but the dealership group comparison below is helpful because it allows us to determine an efficient spend level based on cost as a percentage of gross profit for a range of similar sized dealerships in the same market.
Dealership Categories
Mid-Volume (Dealership A) 30-60 used cars per month
Exotic/Luxury (Dealerships F, G) 40-70 used cars per month
Volume Luxury (Dealerships B, C, D) 60-100+ used cars per month
In this example we see that cost as a percentage of gross varies widely from 3% to 25% with a 5.7% overall average for the group. If we remove Dealership A as an outlier, the average drops to 5%. Considering that dealerships also spend on paid search, display, and retargeting advertising to sell used cars, a 4-5% of gross spend on 3rd party websites would be on target to hit industry averages of 6-7% of gross profit total spend.
Approach 2 – Compare 3rd party website costs to other marketing channels based on cost per VDP delivered and sales effectiveness of VDPs.
To establish a baseline value for a VDP, it’s helpful to use an estimate from dealership vendor like LotLinx that sells VDPs to dealerships. LotLinx conducts omni-channel marketing campaigns that include paid search, social media and 3rd party listings, but they only charge dealers for VDPs from unique shoppers that they deliver to the dealership’s website. Their fee is $3.99 per VDP. LotLinx has calculated that the average quantity of VDPs on a dealership website to sell a vehicle is 30.
As we’ve already established, a VDP on a dealership’s own website is worth more than a VDP on a 3rd party website, but how much more? One way to estimate the difference in value is to analyze VDP lead production by comparing the ratio of VDPs to leads on both a 3rd party website and a dealership’s own website.
By averaging the statistics from dealerships A and B from my previous post “What’s the Value of a VDP?” we see that VDPs on a dealership’s website produce 2.3 times the leads or a VDP on a 3rd party website.
Dealership A – May 2020
Dealership website - 8393 VDPs / 145 leads (email + phone leads) = 57.9 VDPs per lead
3rd Party website - 13,005 VDPs / 76 leads = 171.1 VDPs per lead
Dealership B – May 2020
Dealership website - 9821 VDPs / 232 leads = 42.3 VDPs per lead
3rd Party website - 6782 VDPs / 99 leads = 68.5 VDPs per lead
Totals
Dealership websites - 48.3 VDPs per lead
3rd party websites – 113.1 VDPs per lead
If the market value of a dealership website VDP is the $3.99 value set by LotLinx, and this value is 2.3 times the value of a 3rd party VDP (estimated by the difference in lead production), then the value of a 3rd party VDP is $1.73 or 43% of the value of a dealership VDP.
With these ratios, a dealership could estimate the spend required for a monthly sales goal. For example, if a dealership expects to sell 15 cars per month from a 3rd party website, the following would be an estimate for an efficient level of spend.
30 VDPs (VDPs needed to sell a vehicle on a dealership website) x 2.3 = 69 (average 3rd party VDPs needed to sell a vehicle)
69 VDPs x 15 vehicles = 1035 total VDPs needed
1035 x $1.73 = $1791 minimum required monthly spend
Of course this analysis doesn’t account for the fact that VDPs won’t be distributed evenly among a dealership’s entire inventory. Also as I discussed in “The Mystical VDP”, only VDPs within a dealership’s Primary Sales Area should count. Ultimately a dealership’s hope is that over a month or two, vehicles receive enough 3rd party and dealership website to produce a sale. Using the respective values of 3rd party and dealership VDPs, will give dealerships a target for the exposure needed to sell their inventory.
Recommendation – Dealerships should use both percentage of gross profit and estimated VDP values to determine the proper level of 3rd party spend. As I’ve mentioned before, there are many factors that impact a specific dealership’s performance on 3rd party websites including vehicle preferences within individual markets, competition, and inventory. Applying the methods discussed here with local data will give dealerships a solid guide for determining optimum 3rd party website spend.
[1] https://b2b.autotrader.com/app/uploads/2020-Car-Buyer-Journey-Study.pdf