Episode BAM010: “Spreadsheet Obsession and a $300 Million Dollar Button”
Today on the brick and motor podcast we’re talking about the behavioral economics of the car dealership. Why the intangible experience your customer has is one of the most important features of your business and why people don’t fit in boxes unless they’re dead.
Don’t think that I’m saying we should disregard the numbers completely. Far from it. The numbers are what help us measure our progress and if we are making progress or not. but we need to take a harder look at the intangible part of our businesses. The behavioral economics of our business and not just the Accounting part. It’s easy and more appealing to us to have everything lined up on a spreadsheet where we see our average acquisition cost per car , our average rehab cost, or administrative costs and then the most beloved number of all, Net Post Tax Revenue! MMMMMMM Makes you feel all warm and fuzzy inside doesn’t it?! That’s the stuff that makes it all possible day after day. The hard cash we actually make when every lender, bill collector, and tax man is done taking their part.
But in order to get to that number a lot of other things have to happen and I want to discuss a piece that all too often gets overlooked. If your successful in this business you’ve discovered some things that work and help you make sales. There are some things that you know work for you but if an accountant looked at it he or she may tell you need to stop buying Yellow ford mustangs with a V6 from 2002-2004 because they are your worst return on investment. But you know that even though you never made much or anything on those cars, you sold on average 3 other cars to people that stopped to look at the yellow mustang. This is why an accountant should never be a salesman and a salesman should never be an accountant. CPA’s and engineers have kind of a mild hatred for the stickiness of human behavior. It doesn’t fit on a spreadsheet and people don’t fit into boxes.
Albert Einstein had a sign above his desk in his office at Princeton that said “not everything that counts can be counted. And not everything, that’s counted, counts. ”
A great example of this is imagine your favorite restaurant. You walk in and you can smell the kitchen even before you hit the front door. In your mind you are already enjoying the food and you haven’t even sat down yet.
Now imagine yourself there on another day. Just as excited to sit down and have your favorite meal but as soon as you open your car door, you smell a god awful stench. You think its gunna pass if you can just get inside the restaurant and begin to smell the smells you expected. But it only gets stronger. As you approach the door of the restaurant you realize the smell is coming from inside the restaurant. you open the door and notice that since the last time you were here they quit throwing away the leftovers and they just started brushing them off the table onto the floor for the next person to sit down. You haven’t been there in a couple weeks so it’s nice and rancid.
My question is , can you still enjoy your meal? If by some miracle they convinced you to stay and eat, and they promised that the food is even better than your last meal you had there and they guarantee it or it’s free. Can you still enjoy the meal ? I would venture to say no. But why Not? You don’t want to sit in a dumpster and eat a Tbone. You wouldn’t even sit in a McDonalds and eat a cheap hamburger if the place stinks.
You’d have to ask them why they don’t clean up the floor? You don’t need the meal to taste better! You need the place not to stink like a hot diaper!
Now think about the presentation of your cars, your sales process, or the people you have selling them. This is the environment. How clean is it? How kind are they? How comfortable are you making them? This is something that I think the new car dealers or maybe the manufacturers have figured out and done a great job of for the most part. They have nice lounges, serve you coffee or tea, wash your car before they return it to you. All those things a CPA hates! The abiguity of life is frustrating to them. They hate that people need these things to make decisions to purchase. they would much rather do a quadratic equation than talk to someone about their feelings. But I think we have allowed the numbers and the numbers crunchers to reign from their throne of ledger paper and we have forgotten to some degree the need to serve the customers need for a proper environment to purchase.
Rory Sutherland from Olgvy Group in the UK argues that. “There is no distinguishable difference between the chef that prepares the food and the guy that sweeps the floor. One prepares the meal. The other prepares the environment where the meal can be enjoyed. ”
So ask yourself. What kind of environment am I preparing for my customers to experience my product?
Perception is a strong psychological bias. If you don’t believe me then maybe consider this, why does your bank and virtually all banks have huge buildings that are constructed of brick or marble with columns or substantial features? It’s solely to instill an unspoken trust in their customers. By the shear size and substantial nature of their buildings, you assume that they know how to protect your money on deposit with them. They don’t need buildings like that serve you. but if they didn’t have them, you would question their ability to take care of your money.
Perceived value vs real tangible value. Some people, me included, don’t believe that there is such a thing as tangible “real” value. This plays out for some of the vehicles in our market. Jeep wranglers. Chevy Silverado 4×4 trucks. These vehicles sell routinely over “book ” value. We all know it. We all participate in it. I’ve seen jeeps and silverados be sold to a dealer at an auction at or $500 back of full blown retail. I used to think those dealers were insane. But I started to ask myself, what’s going on here? The reality is that the market is so strong that there are plenty of these trucks being sold well over there quoted book value. So who’s right? Kbb, nada or the market? We all function on the basis of supply and demand. If supply is short and demand is up then the prices follow the demand and rise. The reverse is true as well.
Another inconsistency that we all participate in. Why do you pay more for franchise dealer trade ins? Was there a small bar of gold placed in every one? Are they guaranteed to sell ? Do your customers ask you all the time if the car is a new car store trade in? No! So why do you pay more? A 2005 Chevy Equinox in average condition should bring the same number no matter if the local Chevy dealer took it on trade or if it came from cowboy bobs used cars. So what changed? Your perception was that the new car store sells higher quality vehicles so you think they don’t want an old Chevy Equinox like this. Or you think that cowboy bob is a crook and you would never buy from him. He knows how to hide problems on cars until the next day when you discover what’s “really wrong” with the car.
I get it. I do the same thing. And I’m not suggesting you change your behavior in that area but realize that your customer is doing and thinking the same things about you. Good or bad. And you get to choose what they will think if you prepare the environment and expectation.
I and many others argue that all value is perceived value. Nothing can ever be sold too cheap or too expensive. Starbucks is a fantastic example of this. $5 for a miserable cup of coffee! But Bobby , it’s a grande mocha chia latte with skim milk and no whip?!! It’s a dang cup of coffee. So why are you paying a 10th of that price at the convenient store ?
Ingredients matter but so does environment.
Starbucks prepares the environment for you to enjoy that cup of coffee
If all you have is $5 , for a moment while you sit in there store and enjoy your coffee, you can be perceived by others to be a part of a higher social class than you really are. And you can feel that as well. And that’s part of the cost of that coffee.
So, Starbucks doesn’t sell coffee then. They sell an experience.
If value was linear which means runs on a straight line, then there would be no need for an auction. There would be no such thing as competition in pricing.
Now don’t take my argument for the mysterious emotion of decision making with your customers to be the only thing that matters. It doesn’t apply in all facets of your business. For example you may want your salesmen or marketing company to be creative with their solutions to company problems but you don’t want your mechanic getting a whim of creativity and saying , “Let’s put the wheels on backwards this time and see what happens.”.
What I’m saying is , your business can’t be solely conducted “by the numbers”. There has to be a human emotional element to it. The numbers matter but maybe we should take a little harder look at what can’t be counted.
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