Dealing with the agency model

Andrew Smith
Jul 3, 2023
6 min read

When the coronavirus pandemic was in full force, national lockdowns firmly closed the doors on many activities that we may have previously taken for granted. This included visiting dealerships to view, negotiate and buy a car.

While lockdowns are now a thing of the past, our comfort with making significant purchases online has persisted. This has created an opportunity for car manufacturers, some of whom have decided to move away from the traditional franchise dealership model.

In its place, these manufacturers have established an agency model, in which emphasis is shifted away from the role of the dealer. In this scenario, cars are bought for a set price directly from the OEM, with vehicles remaining under manufacturer ownership until the sale is complete. This puts manufacturers firmly in control of the whole sales process, from pricing to post-sale customer service.

But where does this leave dealerships, who have up until now been a lynchpin in the car sales process? Are there any positives?

To find out, let’s take a look at some of the possible advantages and disadvantages of the agency model for dealers.

Pro: Reduced liabilities and outgoings

One of the biggest advantages of agency for car dealerships is that they will be absolved of many of the liabilities associated with selling cars.

Under the new model, it will be the manufacturer who has the legal responsibility to help a customer should they have a complaint or issue. This is because the contract of sale will be made between the OEM and the customer. This could take a huge weight off dealers, and reduce the cost of their customer service provision.

Dealers will also reduce their initial outgoings. In an agency structure, the manufacturer will provide stock and inventory. This will remove a significant portion of business risk from the dealer’s shoulders.

Con: Loss of the personal touch

Of course, with manufacturers taking control on pricing and the bulk of customer service, there is a very real danger that the car sales process will lose its influential personal touch. This could have very significant knock-on effects on customer loyalty: “Return business is important, but this will be less likely to happen if it is depersonalised,” warns Sam.

With negotiations taken out of their hands, dealers will not have the means – or incentive – to build a relationship with customers or to reward loyalty. Instead, every customer will have to be treated the same, whether they have been buying cars from that particular dealership for years or not.

This could considerably weaken customer loyalty and encourage customers to go elsewhere. “Someone who has been buying your cars for 20 years will pay the same price as a brand-new customer,” says Sam. “So why should they stay with you?”

Customer service post-sale will also be more centralised and remote under the agency model. If it is delivered poorly due to stretched resources or insufficient development, this could also result in reduced customer allegiance.

The vital role dealers have played up until now in supporting and rewarding customers is something that could easily be overlooked by manufacturers. Dealers themselves are already doubtful of OEMs’ ability to give customers what they need. Some research has reported that 31% of dealers consulted were unsure that manufacturers would be capable of running a consumer-facing business.

Manufacturers who are sticking with the franchise model are also uncertain about the ability of an OEM to fill in the gaps left by dealers in the sales process. In a LinkedIn post addressing their franchised dealers, Dale Wyatt, Director of Suzuki UK & Ireland, exhorted Suzuki’s franchised dealers to show their power by continuing to do what they do best:

“It’s time to unite and prove that the franchise model is the right place for the consumer to sell their car and buy a new one… You’ve built a local brand. You serve the mobility needs of a community and you do it well.

“Be convenient and easy to do business with, and be committed to put the customer first and do what’s right by them. That’s deals stacked on the ground, guided by technology and insight, but directed by you, skilled in the art of negotiating a sale at a price that meets the customer’s need and at a margin that rewards your time.”

Pro: Focus on becoming product experts

Just because dealers will no longer be negotiating sales does not mean that they will be operating without purpose – or be expendable.

Instead, they will be able to focus on their status as go-to product experts. This means that they can continue to offer a useful service to customers, providing multiple touchpoints in the sales process.

These touchpoints include providing a valuable showroom experience. In this setting, they can provide helpful information and offer test drives to seal the deal. They will also continue to have an important role in the final stage of the sales pipeline, when the car is handed over to the customer.

Trade-ins will also continue to be a key part of the car sales market. This means dealers will still be needed to determine the value of a trade-in and to finalise the subsequent price of a new car.

Con: Loss of control

Of course, by having the manufacturer set the tone when it comes to pricing, dealers will inevitably lose control of one aspect of their business.

“Power will move away from the dealer,” explains Sam. “The dealership is their own business and they should be able to set their own prices, but they become middlemen under the agency model.”

Dealers will also lose the ability to create demand in the market by offering exclusive deals and promotions. This could lead to flat or declining car sales that dealers are powerless to fix.

This can be compounded by the fact that the agency model is being adopted piecemeal. “A big issue is that it isn’t being universally adopted,” cautions Sam. “The majority of car manufacturers still aren’t doing it. This means that customers could be shopping around and get a deal on one car but not another. This could put them off and they could go with a competitor. And there won’t be anything a dealer can do to change their minds.”

Pro: Earn commission

With the OEM in the driving seat when it comes to sales pricing and strategy, dealers can stop worrying about margins.

Under the franchise model, there is a risk that dealers will enter into a race to the bottom in order to ensure they win business from another local dealer. According to research gathered by Accenture, franchised dealers have been undercutting recommended pricing by manufacturers by an average of 12% in order to secure a deal.

However, in the new agency structure, this is impossible. Instead, dealers can focus on supporting customers in the sales process. This will then be rewarded with a reliable commission.

Con: Loss of salespeople

With dealerships focusing on the product under the agency model, it is very likely that there will be an exodus of talented sales people from dealerships. “Their skills won’t be needed. They are there to build relationships and they love the thrill of the deal. The joy of this will be gone under the agency model,” states Sam.

With influential sales people exiting the dealership, it’s possible that car sales will be negatively impacted as a result, with customers going elsewhere to make their purchase.

This could explain why OEMs who have switched to the agency model are seeing a contraction in their market share and a drop in their sales figures.

In 2022, Mercedes’ market share stood at 6.2%. After introducing the agency model at the start of 2023, this dropped to 4.01%. Overall sales numbers have been impacted too. Over the same time period, they have fallen by a substantial 24.59%.

Affinity: Another way

As this article has demonstrated, there are certainly advantages for dealers within the agency model. However, it is also evident that there are drawbacks, which chiefly come in the form of inflexibility. This is because, under the agency model, there is a lack of wriggle room when it comes to rewarding specific customers or offering exclusive discounts to influence demand.

However, if our Affinity scheme is entered into the mix, dealers of all stripes can integrate this flexibility into their sales process. In addition, they can still benefit from the ease of an online platform while remaining in full control of pricing. “Our Affinity scheme fits in with either sales technique, hand in glove,” says Sam.

With Affinity, you can target specific customers with discounts that do not affect your retail offering. This can help to maintain brand loyalty and foster stronger relationships with your customers. These prices can be set by you, giving you complete control over your sales pipeline. “Dealers can sell what they want, at the price they want, to the customers they want. They can embrace the online sales while still selling to local customers,” explains Sam.

As a fully managed solution, dealers in both sales models can also benefit from our customer service and authorisation support. To help maintain satisfaction, we will provide both email and phone support to answer customer questions and assist with any problems, freeing up your staff to focus on other things.