About a year ago, a Chevrolet dealer in Texas decided the time had come to “get in the game of selling more used cars.”
The dealer had been selling about 60 cars a month and wanted to sell 100. The increase would come from two key operational changes — a larger inventory and an effort to price vehicles to the current market.
After two months, the dealer thought he’d made a big mistake. “Our inventory had ballooned, our sales hadn’t improved and we now had a big problem with aged inventory,” the dealer says.
This scenario is common at many dealerships. It’s a sign that today’s used vehicle marketplace is more challenging and nuanced than it used to be. In the past, dealers could stock up on more used cars, step up their marketing and expect to see increases in gross profits and sales volumes. Today’s market, however, requires a greater degree of circumspection to acquire the right cars for a given market and determine the right price to attract today’s buyers.
In fact, this is the lesson the Texas dealer learned after he and I examined why his plan to increase used vehicle sales came up short. Here’s a quick review of what we found:
1. The wrong cars.
The dealer admits his used vehicle manager “went with what he knew” as he acquired more vehicles to increase the size of the dealer’s inventory. This meant he purchased vehicles at auctions that he thought would sell well without analyzing market data to determine how easily and quickly the cars would sell. For example, the average market days supply of the dealership’s inventory ran well north of 120 days. (A definition: The market days supply measures the scarcity of a particular make / model of a vehicle in the market — a higher market days supply means a greater number of competing units. On average, Velocity® dealers aim to acquire vehicles with a market days supply of 70 days or less.)
Our examination of the dealer’s inventory showed another problem with the store’s inventory acquisition decisions: The average cost of the vehicles was about $18,000. By contrast, many Velocity® dealers aim for an average cost of inventory of $13,000. The reason: The lower figure means less direct competition for sales with the new vehicle department and more opportunities with budget-minded buyers.
2. A gross-minded markup.
Prior to the decision to increase used vehicle sales, the Texas dealer applied a standard $6,000 markup to every used vehicle. The markup provided enough room for salespeople to negotiate with customers and achieve the store’s average $2,400 front-end gross profit. As the dealer decided to sell more used vehicles, he lowered the markup to about $4,000.
But as we compared the dealer’s prices to the market, we found that the lower markup still resulted in vehicles priced too high above the competition to attract buyers. On average, the price-to-market metric for the inventory ran 115 percent — in effect, every car was priced 15 percent higher than the prevailing retail price point for competing units.
“We didn’t really have a sense for actual market prices,” the dealer says. “It’s no wonder our cars weren’t getting much attention.”
3. Market-focused pricing adjustments.
As noted above, the Texas dealer’s asking prices on vehicles were often higher than competitive cars in the market. In addition, our evaluation of the dealership’s inventory revealed that managers waited 30 days to revisit and adjust vehicle prices. The Texas dealer agreed that this interval meant his cars were more prone to age than sell quickly. “When I look back, I see why we really didn’t start selling cars until they were 40 or 45 days old,” he says.
By contrast, many Velocity® dealers examine their pricing at least once a week to ensure their vehicles are priced right in relation to the competition. This analysis often assesses the attention each vehicle gets from online shoppers — as indicated by the number of vehicle details page (VDP) views each car receives. These dealers will then adjust prices with two goals in mind — to sell the car quickly and maximize its profit potential in the current market.
I’m pleased to report that the Texas dealer is now firmly on track to achieve his goal for 100 monthly used vehicle sales. The dealership is consistently selling 90 units a month and, through the application of processes that ensure the right cars and right prices, he has eliminated the inventory age problems.
“In four months, we’ve only had two cars hit 60 days,” he says. “We’ve learned that if you get the right cars and price them for what they’re worth, the buyers will come in.”