Great sales tools?

Or history repeating itself?

General Motors, recognizing that many potential buyers’ credit is less than stellar these days and that funding sources aren’t readily available, have entered the subprime auto loan business. The goal, obviously, is to increase auto sales. Will it work?

To me it’s another example of how the leaders of large businesses are clueless about how to grow their businesses profitably. It’s not by making sales to people who can’t afford what you offer. It doesn’t matter if GM charges higher interest rates to these borrowers if they ultimately default on their loans which many will.

It’s not difficult to envision a GM executive calculating the price they need to charge their dealers and incorporating the ‘interest income’ from the financing in the calculation. And when you’re convinced that this is a great strategy, as I’m sure that GM is, you’ll be overly optimistic about the bad debt losses you’ll incur. That’s human nature. Yet history has proven that this optimism is ill-founded.

What should GM be doing? Finding ways of distinguishing its cars and the buying experience in ways that buyers want. It’s a simple matter of looking at what buyers don’t like about their cars or the buying experience and changing them to meet buyer expectations. These changes are typically simple, inexpensive and easy to implement. Contrast that with GM’s current strategy of taking on high risk borrowers who aren’t able to pay the original purchase price much less the higher interest rates associated with their loan.

I was wholeheartedly against the GM and Chrysler bailouts. Why? Between the early 70s, when the Japanese automakers began to make significant inroads to the U.S,. and the bailout, almost four decades, these automakers learned virtually nothing from their experiences. They were:

  • In denial about how poor their quality was – many of their cars required expensive repairs after only 50,000 miles.
  • Felt that the American buying public owed them allegiance by virtue of their American roots.
  • Blamed the unions for driving up their costs – as if they didn’t have the right to ask for productivity increases commensurate with the pay increases.

Not once did they ask themselves “What are we doing that contributes to our poor sales?” Their subprime loan strategy seems to me to be yet another example of GM being in denial about how they’re contributing to the lack of sales they’re experiencing. Instead of enticing buyers who can’t afford what they offer, they should be finding ways to entice those who can.

What’s the lesson for you? Spending time, energy and resources to attract buyers who don’t value what you offer or can’t afford it, will lead to the kinds of problems which precipitated the bailout. Will the government bail you out? I don’t think so either. Avoid these missteps and you and your customers will enjoy more satisfying and profitable relationships.