Some time has passed since my last article about the Apple Car and the implications for the industry and a lot has happened in the world of mobility. Today, as promised, you will get the article on what the changing online marketing landscape means for carmakers. Certainly a very complex topic with an uncertain outcome; however, my impression is that most OEMs have this topic hardly on their radar, but the topic brings a certain explosive force with it, especially if you look at the current developments in the automotive industry - for example the Direct Sales trend which means that OEMs will have to perform a more focused marketing in the future to stay competitive. So, let us get started with the obstacles of marketing.
The marketing formula and platforms
The Marketing Formula
Starting with the basics, the marketing formula these days looks something like this:
(V x CR x CLTV) - VC = $ ,where
V = Visitors = Traffic
CR = Conversion Rate
CLTV = Customer Lifetime Value
VC = Variable Costs, like Advertising
You can look at Visitors/ Traffic in different categories: physical and digital (paid and organic). Today, we exclude physical traffic, for example at the car dealer, and focus completely on digital traffic. This is where the most is happening right now.
So, the healthier a brand operates, the more organic traffic will be generated. But today, OEMs are very dependent on the category of paid advertising.
Conversion rate (CR) means how many visitors become customers. Tracking is still a big problem, especially when online and offline channels mix, as is typically the case with a car purchase. Yes, marketing agencies see it differently, but let's keep it simple here: it's still an unsolved challenge to track the right numbers.
The lifetime value of the customer (CLTV) is also not easy to measure and coping with it is a challenge for the company itself: Brands work off cash flow. In sum, however, it can be used well as a hypothesis to realise that customer loyalty also makes a lot of sense in automotive sales. There is still huge potential here as you know from your last car purchase.
Variable costs (VC) are all costs that are necessary to convince the customer to buy. In our case here, variable costs are mainly the costs for advertising.
Ad Platforms
You can understand here that among other things the increasing competition and with that the pressure on cost of sales led in the past to more competition on advertising platforms such as Google and Facebook.
Since these marketing platforms do not sell visibility for fixed prices (such as ads in the newspaper), but - highly simplified and also not entirely correct because of quality factors and so on - auction it off against bidders' highest bids, higher competition for visibility leads to higher costs. This correlation is relatively simple and backed up by many studies and causes many marketers headaches.
But, higher ad spendings wouldn’t be a problem as long as conversion rates increase just as much or even more as you can understand from the marketing formula:
(V x CR x CLTV) - VC = $
—> Increasing variable costs (VC) can be compensated (partially in most cases) by higher conversion rates (CR).
—> It would be possible to compensate higher variable costs also with -for example- higher CLTVs. But the current crisis does not allow increasing car prices and with higher costs for fulfilling the regulator’s expectations, there is not enough scope for additional price increases.
It may be surprising, but in fact, this compensation strategy worked well so far for the OEMs, because the technical possibilities became better and better in the past. Technical options like Cookies enabled retargeting and even programmatic advertising. And with these possibilities, conversion rates increased even for OEMs with lower maturity in this field. So, if you're an OEM and your marketing agency hasn't been able to increase conversion rates every year, you should fire them.
So, this was (as I said: simplified) the marketing recipe of the past:
Compensate higher marketing spendings because of increased competition by targeting customers more effectively through improved capabilities using the best possible ad technology.
And exactly this idea has an end. I'll try to explain it simply.
Decisions by Google and Apple
As you know, big advertising platforms like Google and Facebook are always in trouble with consumer protection and data privacy. Most recently, Apple was also forced to impose some restrictions on the tracking of Facebook. One result - and to be clear: a very surprising one - was that Google recently announced in a blog post that it was moving away from cookies. But let us start with some basics about Cookies, because it might be important for you to understand, why they are so powerful to derive the shifts in the industry.
Cookies and FLoCs
Quite simply, a cookie is a small text file that is stored by a browser on the user’s machine. Cookies are plain text; they contain no executable code. A web page or server instructs a browser to store this information and then send it back with each subsequent request based on a set of rules. Web servers can then use this information to identify individual users. Most sites requiring a login will typically set a cookie once your credentials have been verified, and you are then free to navigate to all parts of the site so long as that cookie is present and validated. Once again, the cookie just contains data and isn’t harmful in and of itself. (Source)
With that, Cookies enable marketers to aggregate data around single users. Cookies are identifiers and they are absoluteley necessary for better targeting, higher personalization and as a result: higher conversion rates.
So, let’s get back to Google and their blog post:
It’s difficult to conceive of the internet we know today — with information on every topic, in every language, at the fingertips of billions of people — without advertising as its economic foundation. But as our industry has strived to deliver relevant ads to consumers across the web, it has created a proliferation of individual user data across thousands of companies, typically gathered through third-party cookies. This has led to an erosion of trust: In fact, 72% of people feel that almost all of what they do online is being tracked by advertisers, technology firms or other companies, and 81% say that the potential risks they face because of data collection outweigh the benefits, according to a study by Pew Research Center.
Today, we’re making explicit that once third-party cookies are phased out, we will not build alternate identifiers to track individuals as they browse across the web, nor will we use them in our products.
Google kicked Cookies which fuel the conversion rates. That’s bad. Now you might object that Google has also already presented alternatives (test of "Federated Learning of Cohorts"/ FLoCs), explained in the video below.
But these are based on the idea of enabling tracking in the browser, which in turn causes providers of other browsers not to allow precisely this tracking in their applications. I assume there will be some improvements but within the next years it simply will not work.
Data Privacy is good for customers. Where is the problem?
Data protection and privacy is good, so what's the problem? Well, if we look at our marketing formula, we see that an increase in variable costs first reduces the profit of car manufacturers. In the past, this could be compensated because specific tracking technology (which was largely cookie-based at its core) led to more specific offers and thus higher conversion rates. As the competitive pressure will not change (it will gain much more momentum through direct sales because now the OEMs have to generate the leads themselves), the variable costs will not change either. If the technical possibilities of targeting now deteriorate for the first time, the profit of the car manufacturers will come under pressure and the RoMI (Return of Marketing Invest) will fall.
The result is obvious; it is only a question of how much this will happen. One could also object to my theory that variable costs follow exactly the hypothesis of already being priced at a certain conversion rate. Here, however, comes the restriction that a) there is a time lag and b) as described above, the tracking possibilities online/offline are not yet so mature that there could be a 1:1 relationship here. In the best case, there is only the time lag, in the worst case, there are problems with tracking and delayed reporting. Both will have negative consequences.
With the decisions at Google (turning away from cookies, test of "Federated Learning of Cohorts"/ FLoCs), the technical possibilities of customer targeting are getting worse for the first time. The lower the targeting becomes, the higher the cost of sales will be. This is true for all industries, but especially for the automotive industry because there are long conversion times (people typically buy a car after a long decision-making process) and there is a transformation in the industry that increasingly relies on direct sales. For this sales model, it is imperative to have the best possible data, and the quality of this data is at greater risk than it has been for a long time.
Consequences
What does it mean, then, especially if every OEM goes direct in the future?
1/ Perhaps Elon Musk will no longer be completely overpaid as a marketing layer for Tesla, as he is currently
2/ All OEMs will (have to) become real media brands. Selling direct means communicating direct.
3/ There will be a lot of disappointments in terms of costs of sales. DTC sales models will only reduce these costs if the OEMs find a clue to compensate lower conversion rates seen in my formula.
4/ It will be more than ever about offering customers a specific experience that cannot be copied (sales models can be copied, CX-based culture not).