Now Is The Time To Stop Paying For Favorable Reviews

Recently sued an online reputation company that posted reviews to its website, and other websites such as Yelp.  The lawsuit alleges that the company, Humankind, posted fake reviews on behalf of dealership clients that showed the dealerships in a favorable light.  Last year, Yelp began flagging reviews that it believed were paid for by businesses hoping to boost their popularity on Yelp.  These actions by and Yelp highlight a growing concern that the parties are trying to manipulate ratings on review websites in order to attract additional business.  Many dealers do not understand that services that offer to post reviews on a business’s behalf for a fee may breach state and federal consumer protection laws.

According to guidance issued by the Federal Trade Commission (“FTC”) on paid reviews:

The revised Guides also add new examples to illustrate the long standing principle that “material connections” (sometimes payments or free products) between advertisers and endorsers – connections that consumers would not expect – must be disclosed [emphasis added].

A favorable review posted online about a dealership’s services would fall within the definition of an endorsement.  It is likely that the FTC would find a material connection between dealerships that pay for reviews and the individual endorsers or businesses that compile these endorsements.  If material connections exist between your business and the endorser, the FTC requires full disclosure of this relationship.  In case above, full disclosure would mean each review stating clearly what consideration the dealership paid for the review.  Even if you do not contract with a vendor to submit reviews, you have to comply with the FTC’s rules.  For example, if you give a consumer a gift card in return for a favorable review, the customer must disclose he or she received the gift card in exchange for the review.  Failing to make the necessary disclosures may result in significant fines and penalties.  In one enforcement action, the FTC levied $250,000 in fines against a business for failing to disclose it compensated reviewers for favorable reviews.

If your dealership pays for favorable reviews, you should reconsider this practice.  Failing to disclose material connections between the dealership and the reviewer may result in enforcement actions and significant fines.  If you contract with vendors to provide this service, you are responsible for their conduct.  It is not enough to plead ignorance regarding the vendor’s practices.  When selecting a vendor offering “reputation management” services, you must ask whether or not the vendor pays reviewers for reviews.


CFPB Issues Regulations Affecting Dealerships in 2013

The Consumer Financial Protection Bureau (“CFPB”) has issued regulations pertaining to several matters affecting dealerships.  The first is a revision of the Consumer Rights Form used by employers who perform background checks on employees.  The Dodd-Frank Act designated the CFPB as the primary rule-making and enforcement agency for issues relating to background checks performed under the Fair Credit Reporting Act (“FCRA”).  Previously the Federal Trade Commission (“FTC”) was responsible for these actions.  Under the FRCA, an employer must obtain permissrion from applicants and employees prior to requesting credit reports or performing background investigations.  The employer must obtain permission in a form that contains no other substantive information.  Before the employer may take an adverse employment action against an employee or applicant based on information obtained from credit reports or background checks, the employer must provide the individual with notice of this decision.  Such notice must include the document the employer relied upon in making the adverse employment decision as well as a document known as the “Summary of Consumer Rights.”  As of January 1, 2013, the CFPB has modified the Summary of Consumer Rights form to clearly show that it, and not the FTC, is the agency tasked with enforcement.  Employers who incorporate background investigation procedures into their employment practices must use the new form, which may be downloaded here.

The CFPB also announced new thresholds for the Truth in Lending Act (“TILA”) and Consumer Leasing Act (“CLA”) that go in effect in 2013.  TILA and CLA regulate the practices and disclosures that dealerships use when entering into retail installment purchases or leases with consumers.  For many years, TILA and CLA only applied to extension of consumer credit totaling $25,000 or less.  The Dodd-Frank Act increased the threshold to $50,000 and also indexed the threshold to inflation, meaning that the threshold may be adjusted upward as inflation increases.  Including the inflation index, the threshold for TILA and CLA, effective January 1, 2013, is $53,000.  Any extension of credit or lease for $53,000 or less will be subject to TILA and CLA and can trigger liability for dealers that violate requirements of those laws.

Some Tips From A Private Seller’s Video On YouTube

I hadn’t checked out my Tumblr account in a while so I decided to log on and look around.  I found this advertisement posted to YouTube in 2010 that I reblogged.  At the time, I was struck that this private seller (a term we use in the auto business to describe individuals who sell their vehicles to other individuals and do not go through dealerships) came up with an effective advertisement for his BMW.  I think the video and the lessons car dealers can learn from it have held up well over the years.  Here are my takeaways:

  • Full Disclosure:  The seller clearly communicates what shortcomings the car has, any mechanical defects and anything else that a potential buyer may find material.  When sellers provide more information, buyers are likely to feel more confident in selecting one vehicle over another.  Are you effectively disclosing the good and the bad (if any problems exist) with your inventory? 
  • Creativity:  The seller certainly thought outside the “fifth concentric box” to make this ad stand out.  Everything from narration, shots of the vehicle, clever ways to highlight features/issues (see: signs) and music make this video very memorable.  What are you doing to try to cut through the clutter?
  • Contact Information:  The seller provides his contact information in the video itself and the listing.  Potential buyers would have no difficulties understanding how and where to contact the seller.  Do your ads clearly notify how buyers may contact you?

FTC Revises Green Guides: What Dealers Should Know

Earlier this month the Federal Trade Commission amended its “Green Guides,” which address claims made by marketers of products’ environmental attributes. Since dealerships fall within the types of businesses regulated by the FTC, it is important that you are aware of the Green Guides and take them into consideration when creating and placing your advertisements. The Green Guides are not new laws or rules created by the FTC. Rather, the Green Guides outline what kinds of additional trade practices the FTC considers deceptive and/or unfair under Section 5 of the FTC Act.

Advertisements that fall within the Green Guides include claims made about products’ environmental attributes or claims made regarding your dealership’s sustainable business practices or certifications such as “LEED” (or Leadership in Engineering and Environmental Design). Sustainable business practices include recycling initiatives, reductions in water and energy consumption, and utilizing renewable energy like solar and wind. Generally, the FTC considers broad, unqualified general environmental claims like “green” or “eco friendly” unfair and deceptive trade practices. To avoid claims that an advertisement is unfair or deceptive, advertisements claiming a vehicle is “eco friendly,” for example, will need further disclosure of specific environmental benefits that are clear, prominent and specific. Statements made regarding your dealership’s sustainability practices or certifications also trigger compliance with the Green Guides. If your dealership has received certifications or “seals of approval” for sustainable practices or for the property, and you chose to advertise such certifications or seals of approval, the FTC may consider such advertisements endorsements, thus requiring additional disclosure. Dealerships will need to disclose any material relationship between the business and the organizations granting the certifications or seals, and disclose the basis for the certifications.

 The FTC has demonstrated it is willing to actively pursue claims under Section 5 of the FTC Act against businesses that engage in unfair and deceptive trade practices even when consumers do not initiate complaints against the businesses. The FTC’s recent enforcement action against dealerships advertising negative equity claims is one example of this trend. You should consult the Green Guides to see whether the FTC may consider your current advertisements unfair or deceptive.  

Are Stickers Really No Dicker Nowadays?

Keith Crain proclaims in this week’s Automotive News that the “no dicker sticker” (or fixed pricing) has made a comeback.  “No dicker sticker” usually refers to a sales practice whereby dealerships establish a firm selling price and will typically not negotiate from that price.  Carmax is an excellent example of a company that sells its vehicles by a “no dicker” process (as was GM’s Saturn brand).  In the past, dealerships adopted fixed pricing to differentiate themselves in the market and cater to consumers who do not wish to negotiate the price of their car.  The movement peaked in the late eighties and early nineties and never found widespread acceptance.  Fixed pricing today has made its resurgence for other reasons.  According to Mr. Crain, savvy shoppers and pressures on margins created by reductions by manufacturers in suggested retail prices have established a de facto no dicker sticker policy at many dealerships.  There is simply not enough margin between cost and the manufacturer’s suggest retail price for the dealership to profitably discount the price further.  I think Mr. Crain is on the right path regarding margin compression and what that has done to sales processes at dealerships.  However, I am hesitant to declare that we are about to enter a “golden age” (depending on your feeling about fixed pricing models at dealerships) of the no dicker sticker.  I think something else, which is more subtle, is going on.

It is easy to blur the distinction between what I will call “market pricing” and fixed pricing.  Market pricing, espoused by Dale Pollak of vAuto and others, uses data driven processes to establish prices that are close to market pricing for a particular vehicle.  For example, if the MSRP on a Mitsubishi Lancer is $20,000 and Lancers in a particular market are selling for $18,500, a market pricing model would establish a price for the Lancer around $18,500, with differences in price determined based on equipment, color, miles, condition, etc.  Normally, the market price will still have some flexibility in terms of additional discounting, depending on the cost of the vehicle.  So, if a customer wishes to buy this Lancer at $18,400, the dealership may opt to sell it for that price because the deal is still profitable.  Also, by benchmarking the price against the market, the price of the vehicle should adjust as market conditions change.  Say gasoline prices go to $5/gallon and that drives demand for our Lancer up.  The market price may now increase to $19,800, so the dealership would then change the price accordingly.

Fixed pricing processes establish a bright line price that cannot be crossed in any circumstance.  This fixed price may or may not be determined based on the market for the particular vehicle.  So in the example above, if the dealer uses a fixed pricing model and offered Lancer for sale at $18,500, the dealership would forgo the sale if the customer was unwilling to pay $18,500 for the vehicle.  Like market pricing models, dealerships that use fixed pricing will usually adjust the price up or down to accommodate changes in demand, the age of the vehicle, etc.  What will not change is the price a particular customer will pay at a particular point in time.

I think that progressive dealers are adopting market pricing on new and pre-owned vehicles and how savvy they are with market pricing directly drives their sales.  Fortunately many tools exist to aid dealers with pricing their inventory to market and monitoring pricing realtime.  These advances are crucial to keep pace with demands of customers, who are turning more and more to the internet to research and price their vehicles of choice.  While margin compression probably has facilitated the growth of market pricing, I think that we would see this trend regardless because of the vast amount of information available online and consumers’ willingness to research vehicle purchases in order to find the best deal.

I don’t believe many dealerships would wish to adopt a fixed price model based on my own experience.  I instituted a market priced model at my former dealership and priced my inventory close to or below market averages.  I found that such pricing drove traffic, and reduced the amount of haggling over the price that customers wanted to do.  When I asked customers why they were willing to pay the posted price, or very close to the posted price, they said that the saw the value in what I offered for sale, and could easily verify by a quick search online that my pricing was very competitive.  On a margins, fixed pricing would lead to lost sales in cases where my price was slightly at odds with the customers’ expectations.  Based on the competitiveness of the auto industry, that inflexibility is something I would not want.

Have you adopted a market pricing model or a fixed pricing model at your dealership?

Image Source Courtesy of AOL Autos

Online Advertising Compliance…It’s Not That Complicated

Today I perused the table of contents for Automotive News, as I try to do every Monday, to see if any articles caught my attention.  For those who may not be that involved with the automotive industry, Automotive News is the trade publication of record, more or less.    While typically focusing on news related to manufacturing, Automotive News has lately broached topics more pertinent to what’s on the mind of many owners of dealerships these days; online advertising and sales.  Today was no exception, and the article, titled The Wild West of Online discussed how new efforts to advertise online were running afoul of state and local laws in many jurisdictions.  The dealer quoted in the article, Mike Duman of the Duman Auto Group, hails from my home state of Virginia.  The Commonwealth (as many Virginians like to refer to the state) has particularly stringent laws regarding automobile sales and advertising.  For example, sales associates in Virginia are licensed by the state’s Department of Motor Vehicles.  Virginia also does not allow ‘bird dog fees’ which, in industry parlance, are fees paid by a dealer to an unaffiliated or unlicensed third-party as commission for a referral.  In contrast, my adopted state of New York forgoes such requirements, neither requiring sales associates to obtain licenses nor forbid bird dog fees.  As one may expect, variances between state to state regarding what is and is not permissible gives dealers and vendors problems.

To me, this issue really isn’t that complicated.  Unless otherwise stated by applicable law or administrative rules,  you should evaluate the legality of online advertisements in the same manner and using the same tools you would for advertisements placed in “traditional” media such as television, radio and direct mailing.  If you’re talking about a particular deal in a Facebook post, you should be prepared to offer disclosures required in your state.  If it looks like an ad, and it sounds like an ad, your state’s regulatory agencies are probably going to treat it like an ad.  Don’t rely on the vendor to tell you what is and isn’t kosher.  Merely doing something online does not shield you from requirements to comply with the law.  To the contrary, as more state and federal agencies catch on that the real action is happening online, they will examine your online activities with close scrutiny.  Don’t be caught unaware of what kinds of advertisements vendors are placing on your behalf and whether or not these advertisements comply with the law.

Worth noting, but largely absent from the Automotive News article cited above, is what happens with disputes arising from cross-border sales and what actions trigger your dealership finding itself within the jurisdiction of another state’s courts.  The circumstances triggering conflict of law and jurisdictional questions are not as far-fetched as you may think.  Suppose you have a dealership in Virginia and advertise a vehicle on eBay, a national listing website.  A customer in Illinois sees the vehicle and contacts your dealership.  You exchange emails and telephone calls, and the customer eventually agrees to purchase the vehicle.  What happens when the customer takes the vehicle back to his home in Illinois and a problem arises?  Do you answer to Illinois courts now regarding jurisdiction, or would the plaintiff have to bring suit in Virginia?  The answer is, as most are, complicated and depends largely on the facts of the transaction.  Needless to say the law is in a state of flux as more and more people shop in different states than their home states.  But, that’s a discussion for another post.

Source:  Automotive News

Image Source:  SheKnows

Why Aren’t Millennials Into Car Ownership?

The other day I noticed a tweet from David Kain of Kain Automotive Idea Exchange that linked to Lindsey Kirchoff’s excellent blog.  Ms. Krichoff discussed her take on why Millenials are not purchasing vehicles much as their generational predecessors did.  For your reference the link to the post is cited at the bottom.  In short, Ms. Kirchoff believes that technology such as mobile devices and high speed connections have effectively given Millenials the ability to conduct their lives from the comfort of their homes or in the homes of peers and not in public places. As such, the Millenials place ownership of devices such as iPhones, other smartphones or tablet computers as “more essential” than car ownership.

So, do Millenials really not care about cars, or is there somthing else going on?
Several industry publications and news outlets have grappled with this question. The gist of the argument is that Millenials do not care to own vehicles because of a host of reasons like environmental awareness, preference for public transportation, economic circumstances, and so on.  Instead, they value the products cited above more than they do automobiles.
I think that many observers downplay the impact that the current state of the economy has and what it has done to Millenials’ purchasing power. There’s no question young people are collectively worse of, economically, than when I graduated from college in the late 90s. Upon graduation I had a great paying job that afforded me a comfortable, self-sufficient lifestyle where I had discretionary income after savings and student loan payments. Many Millenials unfortunately cannot say the same today.

I also think people generalize the urbanization of Millenials and the subsequent reliance on alternative transportation such as ZipCar and public transportation. Outside of a few urban centers, these transportation alternatives to car ownership just aren’t viable. I also question whether any of these observations account for Millenials that may have access to a vehicle from family or may already own a vehicle.

There is no question that overall the light vehicle fleet is the oldest it has been in many years, because of improvements to long term quality and economic circumstances that preclude acquisition of a replacement vehicle.  What no one can say is whether this is a short term issue that will be resolved as the economy improves or if a sea change has occurred, shifting prior preferences for transportation by car to other modes.  In any event, I welcome this spirited discussion and how our industry can better serve all of our customers, not just those that fit within a certain mold.

Source:  The Real Reason Millennials Aren’t Into Car Ownership and David Kain