Pros and cons of the agency model

Stick or twist? OEMs and the agency model

by Andrew Smith

More car manufacturers are falling for the seductions of the agency sales model. But what exactly are the pros and cons? And how can our Affinity scheme steer a middle way? Our Managing Director, Sam Shah, investigates.

After the Covid-19 pandemic, even the most technophobic among us became acclimatised to making purchases online. This experience has shaped our collective buyer psyche, and driven a demand for greater efficiency and faster decision-making.

This change has given car manufacturers a new opportunity. Until recently, the car sales process was almost universally driven by franchised dealerships. But now, increasing numbers of manufacturers are testing the waters of an agency model.

In an agency model, it is the car manufacturer who controls the sales process, both online and in the showroom. The cars remain under their ownership until a sale is complete, which means they can be sold for a price that they have determined. The dealer becomes more of a customer service touchpoint, offering test drives and product information instead of sales negotiation. They will earn commission from any sales facilitated by their employees. 

Under a true agency model, there is no haggling. No matter which dealer you go to, customers get the same deal at the same price.  

It sounds simple, but it’s important for car manufacturers to be cautious, urges Sam Shah. “It looks great on paper but it’s not straightforward in reality.”

Let’s get a clearer picture of what the advantages, and the disadvantages, of the agency model are for OEMs.

Pro: Pricing and profits

One of the biggest arguments in agency’s favour is profit. 

Under the current franchise model, there is always a risk that dealers will initiate a race to the bottom in order to win a sale. According to research gathered by Accenture, franchised dealers have been undercutting recommended manufacturer pricing by an average of 12% in order to secure a deal. By optimising pricing under a new sales model, it is estimated that manufacturers could reduce their retail costs by up to 4%

Insight from management consultancy Roland Berger has also suggested that there are efficiencies to be made with centralised pricing and control. Indeed, it has predicted that car manufacturers with a direct and online-focused sales model could achieve a Cost of Distribution of less than 10% of their gross revenue. This compares very favourably with a current COD of 25-30%.  

Having a centralised vehicle inventory could also pay dividends when it comes to profits, with the ICDP (an automotive distribution and retail consultancy) estimating that this could increase net profits by a healthy 2.8%. 

Con: Just a margin grab?

However, it’s this focus on the bottom line that could lead manufacturers to overlook the influential role of dealers and underestimate their value in the sales pipeline.

It also cannot be denied that there are significant costs associated with moving to an agency model, costs that were formerly taken on by the dealerships. This includes the cost of stock, which is a particularly vast expense that will now have to be shouldered by the manufacturers.

Another disadvantage of the fixed-price model is that flexibility is difficult, if not impossible. 

In recent years, demand has significantly outstripped the supply of vehicles. This market condition has created an environment ripe for the introduction of a fixed-price agency sales model.

But the winds are changing. Buyers are becoming more cautious due to the economic climate, and supply is already beginning to level up with demand, if not outweigh it. In a buyer’s market, price flexibility is key for controlling demand. But this flexibility is hampered under an agency model, which will only be able to reduce retail prices across the board. Sudden price reductions can encourage buyers to wait to see if there will be further drops, as has recently happened with Tesla. All of this can harm a manufacturer’s bottom line.

“You can lose customer confidence with price reductions,” says Sam. “What if you buy a car, and then a month later there is a big reduction in price?”

Perhaps most pressing of all is how competition regulators will evaluate the situation. Competition laws in the UK mean that fixed pricing is illegal under a franchise model, something that car brands have been pulled up on before. But under an agency structure, where the sale contract is made directly between the consumer and the manufacturer, setting a fixed price is possible.

However, if more car brands move in an agency direction, it is very likely that the competition regulator will sit up and take notice. A removal of intra-brand competition has a definite impact on customer choices, and questions are likely to be raised about whether this is negative for customers. These legal questions can become even stickier if a non-genuine agency model is adopted, which allows dealerships some say in the transaction price.

Sam also warns that if agency does get adopted by all car manufacturers, the freedom of deals and discounts will be impossible to reintroduce: “Once everyone goes down the agency route, we won’t go back. That competitiveness will be gone and there won’t be any research to do or negotiation.”

This lack of competition can already be suspected to have put customers off brands that have adopted the agency model. Take Mercedes-Benz’s sales figures as an example.  Their agency model went live on 1 January 2023, with Car Dealer Magazine then reporting that their resultant sales were down by 20% compared with January 2022. Their market share also dropped by 31.5% between December 2022 to January 2023.  

Flexibility without a race to the bottom

Clearly, both the agency and the franchise approach would benefit from a solution that would allow them to offer the flexibility of discounts, without creating a downward spiral.

Fortunately, there is a solution open to both. “Our Affinity scheme fits in with either sales technique, hand in glove,” says Sam. “It enables brands to target specific people with timed offers and allows flexibility within the agency model without affecting their retail or fleet sectors.” 

In other words, it can act as a vital safety valve should discounts be needed to control demand without wholesale reductions being implemented.

With the manufacturer in complete control of pricing, rapid price drops can be avoided too, allowing them to preserve valuable margins. “We give the manufacturer control over the pricing so there isn’t a race to the bottom,” explains Sam.

Pro: Getting to know you

One of the other key advantages for OEMs under the agency model is that they can finally build a closer relationship with their customers.

Putting the manufacturer in the driving seat of the sales process means that, for the first time, they will know exactly who their customers are. This can provide them with valuable data that will help to inform everything from their sales strategies to designs for new vehicles. This can only be a benefit to customers and the future of the car brand.

However, there are lots of questions about how the agency model will support customer relationships, loyalty and service. 

Con: Providing a service

Under the agency model, the car manufacturer, not the dealer, will be responsible for dealing with customer complaints and issues. 

This means that personal, face-to-face customer service will fade away in favour of a centralised, remote customer service provision. To cope, manufacturers will have to do a considerable amount of “beefing up” when it comes to this service and their online platforms, says Sam. Failing to do this properly, and on the right scale, could damage customer relationships, perhaps even irrevocably. 

However, this will take time to establish. And significant investment.

In addition, manufacturers mustn’t forget that they will be left to foot the costs of shouldering legal liabilities that were formerly handled by dealers. This will be another huge undertaking, particularly for the larger car brands, and will require the development of software and websites that can cope with high demand. 

A way to reward loyalty

With our Affinity scheme, manufacturers don’t have to rule out the possibility of rewarding loyalty or offering discounts. With our platform, you can target specific customers and provide them with discounts that do not affect your retail offering. This can help to maintain brand loyalty and foster a stronger relationship.

We can also help to relieve the burden on manufacturers when it comes to customer service. As a fully managed solution, we will take care of customer service, providing email and phone support to answer questions and assist with problems.

The fact that our Affinity platform can also be fully integrated into existing CRMs is just yet another bonus that can also lessen the pressure on manufacturers to invest heavily in IT. The back-end can be entirely managed by us, which can also reduce demands on manpower. 

A platform for all possibilities

When it comes to the agency model, there are some particularly shiny attractions for OEMs. The potential for improving margins and boosting profitability is something that cannot be ignored. 

However, as this feature has shown, these benefits cannot be viewed in isolation, and attention must be given to the costs of setting up and maintaining the new model.

Only time will tell when it comes to the potential success or failure of the agency model. But whether you are contemplating taking the leap or want to see how others fare first, we can help you to create an online automotive affinity scheme that works for you and your end customers.

Get in touch with us today to book a free demo, so you can see how a tailored platform could help you to achieve your goals, whatever your sales model.

    Want to discover more? Complete the form or call one of our experienced staff on 01508 579824.

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