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A growing number of dealers say they’re having a hard time turning a profit in their used vehicle departments.

The problem isn’t that these dealers aren’t selling enough vehicles. In most cases, these dealers have increased their used vehicle sales volumes. They’ve adopted inventory management technology and tools to help them acquire the right cars and price them competitively to attract today’s online used vehicle shoppers. Even so, the dealers say they’re closing more deals, but “we’re not making anything when we sell the car.”

As I’ve worked with these dealers to diagnose their profitability problems, I’ll typically find three trouble spots that undermine their used vehicle profit potential. These are revealed by examining key inventory metrics to discern the precise points in a used vehicle’s lifecycle where profit erosion occurs. Once identified, dealers can directly craft and control a more profit-positive outcome.

1. You paid too much for the car.

Every dealer knows the theory: You make your money when you buy a used car. The problem is applying this theory consistently when a) there’s increased pressure to feed cars to a used vehicle department that’s selling more units and b) the wholesale market’s more volatile than it has been for much of the past two years.

I’ve long advocated that dealers take a more retail market-focused approach as they appraise and purchase vehicles from auctions and trade-ins. That is, they should determine the maximum they’re willing to pay for a unit based on the amount they’ll likely get for the car when they sell it at retail. This is the way grocery, hardware, clothing and other retail store owners determine what to pay for the products they put on their shelves. They do not determine their acquisition costs based on what they might get if / when they offload slow-moving stock to resellers.

Velocity® dealers use the cost-to-market metric to identify the right amount to pay to acquire a used vehicle. The metric measures the spread between the acquisition cost for a car and its prevailing retail price points. A benchmark: The most successful Velocity® dealers acquire cars at an average 80 percent cost to market, which means they have a 20 percent spread to absorb reconditioning and other costs, as well as generate front-end gross profits as they retail the unit. If they step up and acquire a vehicle with an acquisition cost to market higher than 80 percent, these dealers recognize they need to more carefully manage the spread to achieve their front-end gross profit expectations on the unit.

2. You spend too much on reconditioning.

Five years ago, it wasn’t uncommon for dealers to spend a minimum of $1,000 to recondition used vehicles. Many dealers wouldn’t even think twice about these costs as they believed "that’s what it takes" to get a car ready for their front lines. In today’s more margin-compressed marketplace, dealers are rethinking these reflexive decisions. They’re finding ways to lower reconditioning costs without sacrificing the quality and reliability of the vehicles they decide to retail. On a day-to-day basis, this means they’re using non-OEM parts when appropriate, replacing tires and brakes only when necessary and reviewing the necessity of body / interior work more carefully.

Velocity® dealers say their average reconditioning costs run $500 to $700 per vehicle, and they’re far more willing to wholesale vehicles that, upon closer inspection by technicians, will require significantly more money to stand tall as a retail unit. Why? Because they recognize the unexpected costs will erode the vehicle’s “spread” and their expectations for front-end gross. As one dealer recently noted, “we’re done putting lipstick on cars that end up as profit pigs.”

3. You give away too much at the sales desk.

I recently worked with a Wisconsin dealer group that did a stellar job acquiring vehicles for the right money. They were also extremely careful about preserving and protecting each vehicle’s spread as it moved through reconditioning. Even so, their front-end gross profits fell below expectations. As we took a closer look, we spotted the problem: The sales department routinely discounted vehicles by $500 or more as they negotiated with customers.

To address this, the dealer group has adopted what I call “documentation as the new negotiation” with their used vehicle customers. Now, salespeople share market reports with every customer, demonstrating why the dealer’s asking price represents a competitive and fair deal. Further, they underscore how the asking price is likely the reason the customer landed on the car in the first place.

These efforts have effectively eliminated the practice of discounting prices at the dealer group’s sales desks. “We’ve seen a $350 improvement in our front-end gross profit average,” the dealer says. “We don’t run away from our prices like we used to.”

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