In this episode of the Industry Pulse, Market Scan Information Systems Co-founder and President Rusty West discusses digital incentives trends and emerging pain points in the budding automotive e-commerce industry. To view the presentation, <a href="http://www.autofinancenews.net/wp-content/uploads/2020/11/November-2020_IndustryPulse_MarketScan.pdf">click here</a>. [toggle title="TRANSCRIPT"] <div class="transcript-scroll-box"> Joey Pizzolato 00:01 Hello, everyone, and welcome to the November episode of the industry pulse, a monthly market update on trends in auto finance. The industry pulse features a rotating Faculty of six industry experts that will give twice annual reports on crucial market topics such as credit quality, credit demand, residual values, regulatory compliance, macro economics and more. This month, it's my pleasure to introduce our speaker, Rusty West, co founder and president of market scan information systems which he founded in 1988. Alongside his father, Russel Wallace. Rusty holds a Bachelor of Science degree in mathematics, computer science and physics. Multiple degrees from the University of what of West Georgia. Rusty welcome. Rusty West 00:48 Oh, thank you, Joey. Let me share a screen real quick. And they'll kick. Joey Pizzolato 00:52 Thanks for joining us today. And you know, before we get started, I just want to, you know, wish you Congratulations on market skins 30th anniversary. I know that was a that was a big day for you guys. Rusty West 01:03 Yeah, absolutely. Thank you very much. It was. Yeah, it was an interesting thing. We had this big party planned. And, unfortunately, four days before the party was planned, our county got shut down again. So uh, so we had a big party, virtually and had 100 and something people on the zoom meeting, but it was still fun. We got to hang out and talk to some of our friends. So it was good. Joey Pizzolato 01:28 Well, that's good. That's good. Um, without further ado, I will turn turn it over to you. So the floor is yours. Is my screen showing Rusty West 01:35 up like it's supposed to? Joey Pizzolato 01:37 Yes, sir. You all set? Rusty West 01:39 Oh, perfect. Thank you so much. All right. Well, you know, Joey again, thanks. And good morning, everyone for allowing me to participate in this. And today's episode, right. As Joey said, I'm Rusty west from market scan. And I'm really glad to be visiting with all of you today. You know, Joey, when you reached out to us and asked if we'd be interested in speaking with everybody about digital retailing during a global pandemic, we instantly said yes. And on a personal note, again, I'd like to thank you and also think royal media's publisher, JJ, corn Blass for giving us this opportunity. And before we dive in, I'm going to talk about digital retailing in general, all this kind of shop using two main criteria, does the item we're looking for check all of our kind of quote unquote, needs boxes? And does the cost to acquire that item fit within our budget? If the answer to both of these questions is yes, we typically go forward with our purchase. And if the answer to either of these questions is no, we most likely won't? Certainly, if the answer to both is no, we'll continue shopping until we find a deal that fits for us or works for us, right. And in a free market environment, regardless of the widget, every manufacturer and retailer must buy the business they desire. If the price level of that widget is such that financing is necessary, then the lending institutions must buy the business as well. So the topic is how incentives and rebates influence digital retailing during a covid 19 pandemic. And this is kind of an interesting one, right? So rather than go through a long presentation to get to that kind of quote unquote punch line, I'm gonna give you the punch line up front, and then we'll back into it. So incentives and rebates are the currency manufacturers use to buy market share. That's the punch line. And this theory applies regardless of the level of inventory that's on the ground. in an environment where inventory is bloated incentives are used to increase sales volume. And in an environment where inventory is low like it is today, you know, a lot of the manufacturers are shut down at the earlier part of the pandemic, because everybody was building respirators. But when, when inventory is low, the incentives are used to maintain competitive positioning. But regardless of the reason, the approach is basically the same, analyze the competitive offerings, and try to come up with incentives that will influence consumer behavior. And this is the definition of buying the business. Right, the challenge is to not pay too much for that business. So it's interesting to note is manufacturers are currently spending more per unit than normal. However, due to low inventory and lower sales volume over the last several months, the actual amount of money they're spending on the sentences last. So put it in perspective, this is kind of a fun one, right? If a brand new Ferrari had incentives so large, that it could be acquired for $50 up front and 10 bucks a month, no one would drive a Prius, you know, we'd all be driving around a brand new Ferrari. The problem is Ferrari would most likely almost instantly go bankrupt because they paid way too much money for the business. So here's where it gets tricky. incentives and rebates are not the only influencer of consumer behavior. If we circle back to the shopping criteria we just spoke about, and we apply it to automotive retailing, there are three players in the industry that are aggressively trying to buy market share. And that's the manufacturers, the lenders, and the dealers. And each one of those sectors in the marketplace has its own currency per se, for buying the business. For the manufacturers, it's obviously the vehicle, right. But if we take that out of the equation for a minute, and we assume that each, each year make model trim, has a competitive your make model trim from a different manufacturer, it was similar cost. MSRP is equipment, safety ratings, all that kind of stuff. And the currency for the manufacturer is their rebates and incentives, which was the punch line we just talked about. For the lenders, it's their payments. And for the dealers, it's the overall transaction. So if the manufacturer, the lender and the dealer, get the formula, right, consumer behavior is influenced, and a car sold. Simple as that. So at the onset of the session, I gave you the punch line and committed to kind of back into it afterwards. In order to do so, I'd like to talk about the automotive industry kind of as a whole for a second, and market scans role within it. As Joey mentioned, we've been in the space for over three decades. And we feel kind of like the Farmers Insurance commercial, you know, we know a thing or two because we've seen the thing or two. And one of the most important lessons we've learned is the gateway to proper digital retailing, is getting the pricing and the payments right from the start. If we don't get that right, nothing else matters. And historically, the number one customer complaint on CSI scorecards has been the sales process took too long. Today, the data shows an increase in customer complaints stating that the payments quoted online, were much lower than the actual payments. And this is one of the biggest problems in digital retailing. You know, we've all heard the horror story of a customer getting quoted like 300 bucks a month online, when it should have been $4 a month. In fact, several of us have even lived that exact scenario. And once the customer makes that clicks to bricks transition, you know from being a virtual customer actually going to take delivery of the vehicle, that process falls apart. And the tragic part about it is this payment disconnect is rarely the dealer's fault. You see not all digital retailing solutions are created equal. And many do not properly represent the terms and conditions under which each individual dealership is willing to transact. And this is a big, big, big problem, right? And only half of this problem is in the forefront. We just spoke about quoting a customer payments $100 a month too low and all the problems that creates. But what about the consumer who gets quoted a payment that's $100 a month too high. Because the digital retailing vendor doesn't have access to each individual dealers most competitive programs, that dealer will miss business he rightfully should earn because he's not being fairly represented. The good news is there's a simple fix, right? In order for the simple fix to work, all we have to do is take absolutely everything into consideration. And simple kind of isn't always so simple. Right? So but don't worry, the hard part's already done. So listen, before we proceed, I'd like to give you a bit of foundation, or lay a little bit of a foundation if I may marketscan was formed in 1988. Even though we've been around for over three decades, we behave like a startup business by continually pushing the technology envelope. We're privately owned and operated. Our headquarters are located in Cambria, California, and that's about 50 miles northwest of Los Angeles. We like to tell everybody where to hills pass all the crazy people and if you spend your time in LA, you know we have our fair share of crazy people. We provide solutions for four different verticals within the automotive space. And that's retail dealers, lenders, manufacturers and then technology companies, both consumer facing and dealer facing and we've got tremendous coverage in all four verticals. So all of us at marketscan are big Simon Sinek fans, right I suspect several of the viewers today are as well. One of Simon's most popular books is entitled start with why. And he challenges all of us to define why we do what we do. And then followed by how we do what we do, and then ending with what it is we actually do, which is kind of backwards from the way most companies see the world. Simon's message has been a driving force for how we, as a company, approach solving big problems for our customers. So I'd like to share with you market scans why, how and why market scan lives to evolve automotive commerce, by combining science, technology and data to transform the industry. That is our why. And how do we achieve our y. We employ agile development techniques to electronically aggregate manufacturer, lender, municipality and dealership data. And we harness the power of cloud computing to calculate hundreds of millions of Penny certain payments every day. So what is it we do is we provide scientifically perfect solutions for any conceivable automotive transaction. Oh, I missed a click I'm sorry. All right, here we go. So in fact, our company was founded under the premise that there is only one scientifically perfect solution for any automotive transaction. And any solution that is less less than perfect, has a negative impact on four different sectors of the market. And that's the consumer, the dealer, the lender and the manufacturer. Now, from the consumer perspective, any solution that's less than perfect has one of three results. And that's the consumers either paying too much a month for what they're driving, they're driving a lesser vehicle than what they could afford, or they simply pass on the transaction because it doesn't fit their budget. For the dealer, any solution that's less than perfect, invariably results in lost revenues and overlooked opportunities. And for the lenders and the manufacturers, imperfect solutions result of lower profitability and lost market share. So in order to calculate a scientifically perfect solution, we must take five classes have data into consideration that's the manufacturer, the lender, the municipality, the dealer, and the consumer. For the manufacturer class, we track all the basics, which I'll rattle them off real quick is the same all the time. Your make model trim description costs, MSRP, shipping weight gas cars, or EPA mileage bore stroke number of cylinders, I throw in some of those little weird elements, because they're required to calculate residual value somewhere or maybe registration fee in some market. But there's also a whole complex set of data as it relates to rebates and incentives, and there's all these automatic rebates that apply to everyone. But they're dictated by the type of transaction right? Some of them are related to option package specific. Some of them are subvented, captive lender programs, affiliated programs or whatnot. And then there's also a whole bunch of conditional rebates. The four most common are college grad military, repeat customer loyalty, if you will, and then conquest. But there's literally billions of dollars of other conditional rebates are just waiting to be plucked, merican Quarter Horse Association, national Funeral Directors Association, a bunch of oddball ones. And one of the things that we've really seen a lot of during the pandemic is a lot of first responder rebates, and then also hardship rebates to try and help people maybe get out of a more expensive car get into a less expensive car, lower their payments, if they've been laid off or their income has been impacted because of the pandemic. So, if we look at the second class a data from the lending institution class, we have to track every parameter, policy and factor that can influence a lease of finance or Blue Note program for every New And Used Car from every lending institution in the country that has a published program. And this class of data. It consists of two segments as well, we refer to them as soft numbers and hard numbers, and the soft numbers are credit related. So we must take into consideration all the credit information and we can take as basic as a credit score to something as comprehensive as a combined three credit bureau poll, Experian, Equifax and TransUnion. And compare that against lending institutions published buying policies and practices to determine whether there are any hurdles that may prevent a transaction from being approved. And what those hurdles might be. They can be as basic as not enough time an area of high AUTO CREDIT, something is difficult to overcome as a non discharge bankruptcy, it could be a combination of several things in between. It could also be the customers got great credit and everything's easy. And then there's all the hard numbers. Now the hard numbers are everything necessary to calculate even the most complex of the transactions. So if you look at a lease, you've got rates, residual values, To create positive policies, you know standard multiple security deposits, zero security deposits, high mileage penalties, low mileage enhancements, maximum advance maximum downpayment, maximum rate markup paid reserve all of these parameters that have to be taken into consideration to make sure we're not only calculating the correct payment, but we're calculating a fundable contract that falls within the parameters of the individual lending institutions requirements. And then for the municipality class, we have to take everything into consideration right, so we track all the laws, rules, regulations, calculation methodologies, tax percentage rates, and registry, registration fee calculations for every inch of the country. Now, the the last class, which is the most overlooked class of them all, is the dealership class. And we empower every participating dealer to dictate the terms and conditions under which they're willing to transact. They can define what lending institutions they have available for their customers, what fees they charge, what their selling price rules are based on any level of granularity year, make model, trim, lot age, however they want to look at it, and also how they interpret tax laws. This one usually gets some funny looks. But if you count Washington, DC, there's 51 major markets in the United States. And each one has their own unique rules, right? of them. There's 13, markets that have very black and white, just cut and dry rules, right, California is one they tax us on absolutely everything out here. But the other 38 have some vague vagueness or ambiguity in the way that their tax laws are written. Some dealers will take highly aggressive approach about how they interpret those laws. And on the opposite end of the spectrum, there's those dealers who take a very conservative approach. Now the two different approaches may generate vastly different monthly payments. So you guys might be thinking yourself great. There's a lot of data that must be taken into account, and on sales or even a lease transaction. So what so let's list the pain points by class. All right. For the manufacturer class, almost every dealer in the country has experienced an inability to collect rebates and or incentive money from their OEM because of the misapplication or improper combination rebates. And when this happens, the dealership has only pretty much two options, they can call a customer and rewrite him, which always takes him off, or they can take the loss out of that gross profit. Oh, I'm sorry. But for the manufacturers, the manufacturers spend billions of dollars each year on a sense to move inventory. And traditionally, the OEMs go through a really labor intensive process to analyze the data that's related to the effectiveness and impact of the incentives and rebate programs are offering. This is done to determine how best precision themselves competitively and determine how much they have to spend to earn that desired market share. The process is time consuming, it's mechanical and sophisticated sometimes, and decisions are often made on gut without having all the facts right. Not only is this very expensive and seldom accurate, but it's also not timely, and provides offering or openings for competitors to kind of step in and take their market share. What's worse, it doesn't have to be this way. We've been kind of working with lending institutions with our engage product to help them throw some science technology and data at solving this problem. And most of the manufacturers are really kind of digging into figuring out how best to do this, either our tools or somebody else's tools. Because this pandemic has really brought to light some of the weaknesses, if you will, in, in the processes from the lending institution class of data. Without exception, every dealer in the country has had kicked deals or had contracts that were kicked for one reason or another, right? It's average for the common for the average size dealer to have hundreds of thousands of dollars of money just floating around in limbo, until these contracts can get sorted out. And the dealer's got the same two options, right? They can either rewrite and take out the customer or they have to lose gross profit. And much like the OEMs many lenders are challenged because they're operating without taking advantage of available analytics tools. And it doesn't have to be this way for them either. Right? They can use our products or other products out there to really throw a little bit more intelligence about how they structure their programs in order to position themselves in the market, gaining market share they want for the right price. municipality classes, another one right. And this one seems like it's not that big. Good deal, but it is right the average dealer writes dozens, if not hundreds of checks every single month and the refund checks because they overcharged some customer a little bit on their DMV fees. Now these checks might vary anywhere from 35 cents to maybe 1215 bucks. And it's not the dollar amount of the checks is the problem. It's the time and expense necessary to process all of them. And the last class pain point is a dealership class, right? When we ask dealers, what's their biggest source of heartburn in their online retailing efforts, they almost always tell us, their customers are quoted inaccurate payments online. Oftentimes, even the payments on their own website are wrong. And this regular leads to the customer feeling as though they've been intentionally misled by the dealer. I love this graphic. You know, I grew up in the car business, my dad was in the car business forever met my mom. And if you go way back 30 years ago or more, the consumer perception of car dealers was this guy, right? plaid polyester sport coat wearing bait and switch artists. Over the last three decades, car dealers have done a great job distancing themselves from this stigma. But we've kind of got reset 30 years ago, and unfortunately, that stigma is back because consumers are getting quoted incorrect payments online. And even though it's typically not the dealer's fault, the consumer doesn't care, right? perception is the same trust is gone. And then consumer confidence takes a big hit. So the cure, right, the combination of every class of data, and the ability to make sense of all of it is the cure for all of these pain points. So let's, let's talk about proper digital retailing for a second. For decades, little has changed in the way dealers sell cars to consumer. Conversely, advances in technology have dramatically influenced consumer shopping behavior. companies like Amazon and eBay have redefined how we buy things. They provide us with instant gratification, which in turn increases their expectations. If you look at Amazon is a great example. Right? Amazon literally has become the standard by which all digital retailing efforts are measured. I suspect everyone on this call has bought stuff from Amazon and I know I certainly do. And the process is near perfection. I I go on, I select the item I want, I instantly know how much it's gonna cost me. I click Buy it now, my credit card gets dinged the exact amount that I thought it was gonna get charged. And I'm on amazon prime. So item shows up most of the time the next day. It's obvious that this technology has made it easier for everybody to shop. But with that ease and convenience of shopping online comes a new standard, and a whole new set of consumer expectations. And mind you, the consumer has that expectation across the board no matter what they're shopping for. 23:09 So Rusty West 23:11 while we're nowhere near a 32nd Amazon buying experience for car, consumers expectations are much, much higher than they've ever been before. And this transit. This transformation, if you will, for the auto industry has been gradually underway for a very, very long time. But now it has been rapidly accelerated seemingly almost overnight right due to the shelter in place orders associated with the covid 19 pandemic. And as a result, nearly every company in our industry is focused on providing an Amazon type carbine experience. Many existing companies are devoting massive amounts of resources. And currently, there are more well funded technology companies entering the space than ever before. So if we look at all of this focus on digital retailing, that could kind of be considered the proverbial silver lining, if you will, in this COVID-19 Cloud. But there's a catch, right? Not all digital retailing efforts are created equal. Many digital retailing providers do not properly apply all five classes of data. Thus the process falls apart. Now I'm I'm kind of an old guy. I'm much older than Joey but, but I'm not quite old enough to be a Grateful Dead fan. But I do think the song touch of gray is apropos here. Right? And one of the lyrics goes every silver linings got a touch of gray. And the touch of gray is the disconnect between some digital retailing efforts in the real world. And in market scan, we've got this thing right we've been kicking around for a long time and it's big data without science is just noise and if we're going to thrive in The digital retail world, we must eliminate this touch of gray. In other words, we absolutely must combine science, technology and data to give the customers what they want. So over the years, many experts have studied how consumers shop, and ultimately acquired cars. And previously, the common thread was most consumers are price shoppers and payment buyers. And when they were price shopping and look at how much a car is what they can buy it for, they take all these big rebates, incentives, that kind of gives an idea of what it looks like, right. And while much of that holds true today, more and more consumers are payment shoppers and payment buyers. And at the end of the day, the consumer really doesn't care about all the complexities that go into the transaction. What they care about are the results of those complexities, namely, how much upfront how much a month, and for how many months. So I like to invite you guys to look at the ecosystem from a utopian point of view for a second, right? In a Zen environment, manufacturers would be able to create highly targeted incentives and rebates to position themselves exactly where they wish to be in the marketplace. The lending institutions will be able to craft highly complex targeted offers that position themselves exactly where they want to be as well. The dealers would be able to analyze all of this information, apply their unique terms and conditions, and offer transactions to consumers that they would find easy to accept. And finally, the digital retailing providers would be able to accurately present the dealer's offers to consumers in a consistent fashion. So it would kind of look like this. So imagine this scenario, manufacturer creates the perfect offering, with lots of complexities, all the right rebates, all the right incentives for all the right consumers you're targeting in the right marketplace, right. So we can check that one off. A lender crafts the perfect offer that's maybe even more complex than that of the manufacturer, we can check that off. A highly competitive, complex targeted offer gets the consumers attention, he says, Yeah, that'll work. I'll take it, consumer behavior has been influence, we'll check that off. And the dealer is able to exactly replicate that transaction. Once a consumer shows up to take delivery of the car. Check that one off. Also. Here's the good news, this utopian environment exists today, we welcome the opportunity to discuss this with anyone or maybe even demonstrate some of our products and show how our solutions as a result of combining science, technology and data can help. And I really appreciate the opportunity to present today's episode. And Joey, with that, I'll turn it back over to you my friend. Joey Pizzolato 28:01 Great, thanks, Rusty. I do have a couple questions for you. Um, you know, we talked about, um, you know, some of the changing trends in digital retailing, or you spoke about it, actually, and I'm wondering, you know, we're, you know, there's been a lot of news floating around a couple of vaccines are gaining some traction. So it looks like that's kind of coming to market Pretty soon, you know, within the next, you know, year, year and a half or half a year. So I'm wondering as that vaccine come, becomes adopted, and consumers get more comfortable with the return than normal, you know, how do you envision these digital retailing trends? continuing going forward? Rusty West 28:42 You know, it's, it's a great, great question, Joey. You know, first of all, I hope a vaccine gets here soon. I mean, the country obviously is hurting, and we're in need of some healing. I don't, I don't see digital retailing slipping back. Right. It's been a very long time coming. And I think once consumers get used to doing things with ease, convenience, trust, that they don't want to go back to the old process. And one of the things that's been really fun, is watching some of the dealers who really adopted it early on, seeing how rapidly they were able to progress and, and how well they're doing, you know, a lot of them are having some of the best month they've ever had, they're spending a lot less money than they did before. Their gross profits are up and their volumes up. And as important as all of that is the consumer satisfaction is through the roof with those stores. So I think it's here to stay. Joey Pizzolato 29:40 Great. Right. And, you know, on that note, um, you know, you kind of mentioned the silver lining line at the end of the tunnel. Um, so, you know, I'm kind of wondering if you'd be able to elaborate a little bit more on that and how you think, you know, the pandemic in the changes in the in the market, um, you know, might continue continue. to shape the industry going forward, what what sort of evolutions further evolutions might we expect? Rusty West 30:06 Yeah, another great question. You know, I, I have this philosophy, right? What is Necessity is the mother of all inventions and, you know, consumer desire and consumer behavior is I think what really drives the way the automotive industry moves. And there's been tons of companies that are coming into the space, we're in kind of a weird space, because we don't really market our own products much we power a lot of different consumer facing products and lender manufacturer facing products. And we're talking to dozens and dozens of really well funded startup companies that are coming into the space to provide really great digital retailing experiences for consumers. And I think we're gonna see a whole lot more of those. I also think we're probably, you know, as a as an organization or sales, we're going to see a lot more competition, a lot of other solutions providers coming into the space to help these digital retailing companies and manufacturers and lenders really progress, how they how they do sales online. So I think I think the the silver lining is a really bright future for a better experience for consumers to buy cars. Joey Pizzolato 31:17 Great, great. Well, last question for you. If you had to, you know, whittle, whittle down your presentation, top three takeaways for our audience listening in what would they be? Rusty West 31:29 Um, consistency, trust? and intelligence, I guess, right. I think consistency is the messaging that we give a consumer for every step of his buying journey. And no, no two consumers are the same. You know, you go buy a car, maybe different than when I go buy a car, certainly different than my neighbor might go buy a car. And regardless of which path we take, and which steps we take along the way, my pricing and my payments should be consistent unless my scenario changes. So I think that's important. I think if we can do that, as an industry, we'll create trust, and that trust trickles down to the manufacturer, the lender, the dealer, all of it trickles down to the consumer. So I think that's paramount. And then intelligence, right is looking at every element. It doesn't matter whether you're a lender, a manufacturer, or a dealer, obviously, municipalities don't care. They don't look at and say, Okay, how can we be more efficient, but from lender a manufacturing a dealership standpoint, figuring out how can we gain the market share that we want, at a price point that makes our customers happy, but do it in a manner where it's sustainable, right, where we don't have to overspend to buy the business? I think those are the three that I would want people to take away from this from our time together today. Joey Pizzolato 32:51 All right, fantastic. Well, thank you, Rusty, for joining us today. That is all the time we have. But please check back for next month's industry polls, which will feature feature Mark Adelman, member and chair of consumer financial services practice at McGlinchey. Meanwhile, Rusty will be joining us again in May. Finally, for all our viewers, we'd love your feedback on our series. You know what market trends are you most interested in? In? What did you think of the episode shoot us an email at info at auto finance news net. Thank you for joining us, and we'll see you next time. 33:27 Thank you for having me joy. Joey Pizzolato 33:29 Cheers. </div> [/toggle]
