MARKET OVERVIEW

It’s been widely reported that the sales of new cars and trucks increased by 25% in January, following an 11% bump in December – normally slow times for new and used car sales due to the holidays and bad weather.

Several sources are now forecasting total U.S. sales of new cars and trucks to top 13 million in 2011. IHS Automotive increased its 2011 forecast to 13.1 million vehicles sold with both Ford and GM predicting a yearly total of 13.3 million.

Perhaps the best sign that the new and used vehicle market has begun recovering quickly are the nine auto companies running 18 commercials in this year’s Super Bowl program. This doesn’t include Ford’s pre-game spots for the Ford Focus and F-150 truck. Also excluded in this count are the ads run by cars.com and CarMax promoting used vehicle sales and Bridgestone for tires.

With 30-second Super Bowl spots costing somewhere in the range of $2.7 to $3.0 million each, the auto sector bought the most commercial time of any ad category this year while spending the most money.

Showing renewed confidence in both the economy and the domestic auto industry, this was the largest number of vehicle ads in the Super Bowl in several years according to Nielsen Company’s global automotive group.

While auto and truck sales are increasing, there’s at least one change in consumer behavior that is impacting the auto financing market. This change was reported by New York Times columnist Matt Richtel in his February 25 article “Consumers Hold on to Products Longer.”

Richtel writes that Polk, formerly known as R.L. Polk, a leader in automotive research and intelligence, found that “consumers are holding onto new cars for a record 63.9 months, up 4.5 months from a year ago and 14% since the end of 2008.” In addition, Polk reported that when used cars are included in the calculation, the average length of car ownership has also hit a record 52.2 months.

Bottom line, the length of time between paying off one loan and taking out the next loan may be increasing a bit. Such behavior is most likely due to our lingering recession with its slow recovery.

Still, with new and used vehicle sales on the rise, we can expect the demand for auto loans to increase as well. This bodes well for banks and credit unions focusing on purchase loans, the recapture market, or both.

What’s nice about the recapture market is many consumers later become candidates for refinancing – having had time to give more thought to their current monthly payment amount.

The key to success in the recapture market is reaching these prospective borrowers at the right time, with a personalized offer, using the most cost-effective marketing channel.

THE MOST EFFECTIVE MARKETING CHANNEL

On the direct lending side, whether your bank or credit union is focusing on originating purchase loans or refinancing existing loans, personalized direct mail is the most cost-effective marketing channel for reaching qualified prospects.

Consider it from this perspective, promoting your auto loan products via radio and TV spots, newspaper ads, and billboards is using the spray and pray method of advertising. You’re spending lots of marketing dollars communicating to everyone in the hopes of reaching those prospects either in the market to finance a new or used vehicle or of the mindset to consider refinancing their existing loan. All of these mass media channels preclude the use of personalized offers.

There’s tremendous waste using this approach to auto loan marketing.

Today, the availability of sophisticated software, experienced programmers, computer modeling, immediate access to huge credit files, and unlimited desktop computing capabilities all come together – enabling a few direct response marketing vendors to identify and pre-approve prospects most likely to respond to your personalized loan offers.

The end product of all this prospect identification effort is a highly qualified list of loan prospects most likely to respond to your offer who are best reached via personalized direct mail – the only marketing channel suited for personalized loan offers with their attendant disclosure requirements. Email marketing won’t work here.

With direct mail, every dime of your marketing money is spent identifying and delivering your personalized offer to only the most responsive prospects – those prospects with a high probability of responding. From a cost-effective perspective, personalized direct mail is the channel of choice if you want to maximize the dollar-volume of new auto loans.

THE IMPORTANT DIRECT MAIL FORMULA

The seemingly little-known formula is:

40% List
40% Offer
20% Everything Else (the creative, the timing, and the format)

Put another way:

40% List + 40% Offer + 20% Creative, Timing, Format = Direct Mail Success

Of these five components, your LIST is the most important component of the Direct Mail Formula – followed closely by your OFFER. Together, they account for 80% of the success of your direct mail campaign. Both will be covered in more detail below.

Your direct mail creative is very important as its job is to ensure your offer quickly grabs your prospects’ attention, gets them to read your sales copy, and causes them to respond by accepting your offer. Think of creative as your likeable salesperson who establishes a relationship between your bank or credit union and the prospect.

As for the timing, an auto loan recapture campaign isn’t timing sensitive like new car and truck sales which tend to have a seasonal aspect to them.

At any point in time during the year, millions of consumers are making their monthly auto loan payments and some large percentage of them are candidates for a lower payment offer from your bank or credit union.

Because of the required disclosures for a pre-approved or pre-qualified offer, the ideal format is the standard #10 window envelope package as seen in the sidebar to the right, below the GEICO envelope sample. Such a package consists of a #10 window envelope, a personalized 8 ½” x 14” letter with acceptance form, and a postage-paid business reply envelope.

When it comes to the direct mail formula, it’s important to remember the old saying: “A chain is only as strong as its weakest link.” This is why it is critical that all five components work together to deliver direct response synergy which results in maximum response.

Next we’ll take a closer look at the unique offer for the auto loan recapture program.

YOUR PERSONALIZED OFFER

Let’s assume for a moment that you, as a consumer, are currently making payments on an existing vehicle.

In other words, you are a prime candidate for a bank or credit union looking to lend you money to finance another new or used vehicle or refinance your existing car or truck loan in order to lower your monthly payments – again, known by bankers as the recapture market.

It’s your lucky day. On Tuesday, you receive in the mail three different auto loan offers from two local banks and one credit union.

Here are their offers:

Offer #1…

Rates as low as 3.75% APR when you refinance or open an auto loan with A B Bank

Offer #2…

You’re PRE-QUALIFIED up to $25,000

Offer #3…

If you wish you’d found better terms and a lower rate for your new auto loan – you’re in luck. Thanks to your good credit, you’re already Pre-Approved to refinance your auto loan at ACTON Credit Union.

Look How Much You Can Save

Here’s an example of the savings:

Monthly payment with current lender    $520
Monthly payment at ACTON Credit Union    $365
Your Monthly Savings    $155

Remember, you could save a similar amount every month for the life of your new loan.

Which of these three offers appeals most to you?

Hands down, it’s the third offer for a lower monthly payment that appeals to the vast majority of consumers. Any experienced consumer lending expert will quickly tell you that the amount of the monthly payment is the most critical piece of information used by a potential borrower when making a decision on which loan to accept.

Your first competitive advantage is the lower payment offer delivered in your sales message. Of course, a personalized offer like this is limited to the recapture market.

The very responsive prospects on your highly-targeted mailing list deliver your second competitive advantage.

YOUR PROSPECT LIST

Here’s one of the best pieces of marketing advice you’ll receive. When you’re working on a direct mail program, when in doubt, spend more time developing the absolute BEST mailing list.

The greatest opportunity for dramatically improving response to your auto loan marketing program lies in the list work.

If we were to plot list work on a continuum, on the left would be the basic rented list from a list broker. In the case of auto loans, it would be a list of car and truck owners living around your branches. Perhaps it would be a list of consumers whose current vehicle is four or more years old.

On the right end of the continuum you’d find the most sophisticated list...a highly refined list based on a proprietary predictive statistical model built exclusively for your bank or credit union specifically for sourcing new auto loans.

Between these two extremes you’d find basic lists that, after being acquired from a list broker, undergo some amount of additional processing. Everything from basic overlays of additional demographic and psychographic data to credit bureau prescreening with FICO scores appended.

In the ideal scenario, over time you want your list work to come from the right end of the continuum.

Remember, the ultimate goal of creating the best possible mailing list of prospects is to create a list that enables you to mail fewer pieces while achieving the highest response rate...in other words creating the most cost-effective, efficient list possible. There’s a point on the mail quantity curve beyond which the mailing brings you very few, if anymore, customers. Just before this point is what the list experts at ACTON Marketing call the sweet spot. You can see it in the sidebar graph to the right.

Some direct mail marketers use a hunting metaphor when describing the list selection process. They talk about choosing between a shotgun versus rifle approach to selecting your target market.

When firing a shotgun, a large number of small pellets are scattered over a fairly large area with the goal of hopefully hitting something. This would be like mailing to every vehicle owner living within a five mile radius of your branch. It's also known as the "spray and pray" approach to marketing.

Using a rifle focuses one projectile onto a specific target. This is a much more efficient approach to hitting your desired target. This would be like mailing only to current vehicle owners with an existing auto loan with a monthly payment higher than the payment amount you’ll be able to provide them by refinancing.

Referring back to the list continuum mentioned above, using a simple and unsophisticated list would be an example of the shotgun approach while using a sophisticated, proprietary computer model would be an example of the rifle approach.

Thanks to today’s high-speed computers and custom software programs, mailing lists have become more sophisticated – moving to the right along the continuum.

While you might be thinking that such list generation work must be expensive, with direct mail the cost that counts is the cost per new loan or cost per $1,000 in receivables and not the upfront costs of the mailing.

An excellent list delivers the greatest number of responses with the fewest number of pieces mailed, thereby allowing you to spread your direct mail costs over a larger number of new customer relationships.

While the direct mail list may be the least glamorous aspect of the direct mail formula, it certainly is the most important component.

Direct mail marketing experts will tell you that the most significant improvements in any direct mail program will come from a laser-like focus on list processing.

Therefore, if your bank or credit union is interested in launching an auto loan marketing campaign directed at the recapture market, make sure your prospect list consists only of those vehicle owners most likely to respond to your lower payment offer.

Creating such a list depends on partnering with a direct response marketing company whose list professionals coordinate with your institution’s credit underwriting managers and one or more of the three national credit reporting agencies – Equifax, TransUnion, and Experian.

This coordination requires seasoned data processing experts with experience in consumer lending criteria, credit bureau data and operations, computer modeling, and list processing software. Such professionals are usually available only at direct response agencies specializing in financial services marketing.

For example, with auto loan marketing, the list professional begins with his or her best practices input on what is already working best for other mailers. He then sits down with your credit manager to review your existing underwriting criteria in order to develop the criteria that will be used at the credit bureau. Additional decisions are made concerning your offer.

The next step is to interface with the appropriate credit reporting agency – extracting all the data required to begin the prospect selection process. What happens next determines the success or failure of your auto loan marketing effort.

Using proprietary software programs developed exclusively for auto loan marketing and customized for your bank or credit union, your marketing partner’s list professionals will process the accumulated data to identify only those vehicle owners with the highest probability of responding to your lower payment offer.

Frequently referred to as a black box by those unfamiliar with today’s sophisticated, proprietary software programs, such a list generation process delivers superior results. The few vendors successfully using such proprietary list generation programs can provide you with the test results of their lists tested against other types of direct mail lists – not to mention the results achieved by current clients.

ACTON Marketing is one of the few direct response marketing agencies in the country with a sophisticated auto loan marketing program using proprietary software and computer modeling for list generation. A brief overview is available here.

With a superior offer and a highly qualified, responsive prospect list, your bank or credit union will have a distinct competitive advantage when it comes to sourcing new auto loan customers either in the purchase loan market or the recapture market.

In today’s fiercely competitive auto loan market, having a competitive advantage isn’t an option, it’s a necessity.

RECAPPING

Most likely your bank or credit union is already making auto loans in the purchase market – either via direct loans, indirect loans, or both. It’s much less likely that you are also pursuing the recapture market.

Yet, the recapture market provides you with the greatest opportunity today due to much less competition.

While you can compete in the purchase loan market using rate ads in mass media channels and emails to existing customers, a better option is a pre-approved or pre-qualified offer marketing program using personalized direct mail. ACTON Marketing’s proprietary TASC predictive statistical model is perfect for this approach.

Competing in the recapture auto loan market requires partnering with an experienced direct response vendor with an expertise in auto loan marketing. Here, the list work will make or break your campaign.

Personalized direct mail is the most cost-effective marketing channel for sourcing both direct auto loans and recapture loans.

First, it allows for a personalized offer, not the more common generic rate offers used in other marketing channels.

Second, it is the only channel that can limit itself to using a qualified prospect list of those vehicle owners most likely to respond to a refinance offer. Email won’t work due to the disclosure requirements accompanying such personalized offers.

Third, traditional direct mail provides a higher level of confidentiality, privacy, and security not available via email. This is very important to consumers when borrowing money.

If you are ready to take your auto loan marketing program to the next level, your next step should be to find a direct response marketing partner with expertise in both direct mail and auto loan marketing.