The automotive industry has come a long way from the early 20th century when automotive manufacturers (OEMs) sold cars directly to consumers via mail-order catalogs. Today, the franchised retail model is the norm; Ford pioneered mass production in 1913 with the Model T. Yet OEMs are now considering digital tools to reach buyers directly, echoing the mail-order approach of the past.
However, it isn’t viable in every geography. In the US, switching to the agency model would entail navigating substantial state and federal regulations, and consumer awareness and demand vary by location. In this article, we explore the pros and cons of the agency model and compare its relevance to the franchise model in different geographies.
What is an agency model?
There are several forms of the agency model, but this piece focuses on the legally recognized genuine agency model. Agency models embody a direct-to-consumer (D2C) approach: the OEM produces the vehicle, sets the fixed price, and sells it directly to buyers. Within this setup, dealers act as the point of contact for test drives, handovers, and aftersales, yet far fewer outlets are required.
Dealers typically earn a fixed commission per sale and cannot employ past sales tactics, discounts, or price reductions to win business; they rely on the OEM to draw customers through marketing.
The two agreements explained:
Under a franchise agreement:
- The retail price of the vehicle is set by the dealer, so haggling is possible.
- The sale contract is between the dealer and the customer.
- Stock is owned by the dealer.
- Dealers can pre-register cars to hit a target.
- Specific costs associated with the brand, such as signage, are borne by the dealer.
- Dealers can discount cars by “giving away” some of their margins.
Under an agency agreement:
- The retail price of the vehicle is set by the manufacturer, so there is no haggling.
- Sale contract is between the brand and the buyer.
- Stock is owned by the manufacturer.
- Dealers can’t pre-register cars.
- Specific costs, such as signage, associated with the brand are borne by the carmaker.
- Dealers cannot discount models by “giving away” the manufacturer’s margin.
Pros:
Customer Experience
- Customers gain more control over financing options that fit their needs and aren’t limited to a single dealership’s offerings.
- The agency model offers a smoother, more direct experience for customers who prefer handling financing themselves.
- It enhances transparency around true pricing.
Market Approach
- Consumers can save money over the loan life by shopping for the best rates and terms. For lenders, this means the ability to offer competitive rates and attract new customers.
- Direct communication with consumers allows better transparency on rates, fees, and terms, helping informed decisions.
Reduce Costs & Dealer Risk
- Brand marketing and centralized advertising costs shift to the OEM, potentially easing dealer expenses.
- Financing-stock carrying costs reduce as retailers hold fewer new cars in stock.
- There is potential for multiple agency handling fees if dealers meet key performance points.
- High-end luxury brands can be costly under a franchise model; the agency approach shares costs, enabling dealers to deliver the service customers expect from such brands.
- Depending on the agreement, the dealer can manage part-exchange valuation and upsell finance and other products, such as service bundles.
- The manufacturer may provide demonstrator fleets or manage them via a third party.
Cons:
Consumer Complexity
- Some consumers may lack knowledge in securing their own financing and prefer dealership guidance. This can affect customers who want a one-stop shopping experience.
- Dealers typically offer a range of financing options from multiple lenders; the agency model may limit those options.
Regulatory Challenges
- In some regions, strong consumer-protection regulations safeguard buyers, aligning with established dealer practices.
- In places like the US, state and federal regulations can impede a smooth agency transition.
- Commission structures must be designed to comply with varying regulations by country.
- Some regulators view the agency model as anti-competitive, raising competition-law concerns for certain variants.
Lack of Knowledge & Flexibility
- Dealerships often offer add-ons like extended warranties, insurance, and protection packages that may not be as readily available or transparent in agency mode.
- Experienced finance and insurance professionals are typically available at dealerships; this support can be harder to replicate in an agency setup.
- Staff must understand regulatory frameworks, monitor changes, and comply with financial promotion rules as advertisers.
Agency model: learnings to date
Recently announced delays to planned introductions of agency models may reflect continuing legal issues, increased new car supply, and decreased demand.
Tesla and Mercedes-Benz announced price cuts on some models, with supply outstripping demand for the first time in several years. Sharp discounts contrast with the fixed-price agency model principle but point to a challenge for OEMs of holding excess production on their balance sheets, which they could avoid under the franchise model by offering such stock to their dealers.
Looking ahead
Agency sales are on the horizon. While some OEMs emphasize the franchise model, a growing number of brands are pursuing direct-to-consumer paths; the current launch delays seem more like refinement than a pause. Regardless of your approach, the SBS Financing Platform can support the full customer lifecycle, enhance the experience, and leverage global and local knowledge.
We design, build, and run agile digital lending platforms for asset finance lenders, empowering growth and market innovation. Click here to learn more about how the SBS Financing Platform can transform your organization’s processes and help you meet your strategic business objectives.
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Questions & Answers
What is the main difference between the agency model and the franchise model? + –
The key difference lies in who owns the inventory and sets the price. In the agency model, the manufacturer owns the inventory and sets fixed prices, while dealers act as agents earning commissions. In the franchise model, dealers own the inventory and can set their own prices.
Is the agency model legal in all US states? + –
No, the agency model faces significant regulatory challenges in the US. Many states have franchise laws that protect traditional dealerships and restrict or prohibit direct sales by manufacturers. These regulations vary by state and continue to evolve.
How does the agency model affect vehicle pricing for consumers? + –
The agency model typically offers fixed, transparent pricing with no haggling. While this eliminates the possibility of negotiating discounts, it also ensures all customers pay the same price for the same vehicle, promoting fairness and transparency in the buying process.
What happens to existing dealerships if a brand switches to the agency model? + –
Existing dealerships typically transition to become agents rather than independent retailers. They continue to provide test drives, vehicle handovers, and aftersales services but operate under different financial arrangements, earning commissions rather than profit margins on vehicle sales.