I’ve been getting the following question from dealers: “How can I reduce the number of aged vehicles in my inventory?” The smarty-pants answer is, “Don’t let your vehicles get old.” The real answer, as we know, isn’t that simple.
But the first step toward an age-free inventory is simple, and I can sum it up in a single word: Discipline.
I know. It’s far more fun to play hunches and hedge bets in used vehicles than to approach the business with a disciplined, zero-tolerance policy for aged cars.
But such discipline is absolutely essential to effectively manage the ups and downs of today’s more volatile market — one that appears destined to continually defy past seasonal trends.I recommend that dealers apply this discipline to four key best practices to effectively eliminate aging cars from their used vehicle inventories. Note: The following best practices assume you’re acquiring the right cars for your dealership and market.
Best Practice 1: A firm, 45-day inventory turn policy.
This policy requires discipline to say, “Any vehicle that reaches 45 days must go.” In the past, dealers allowed 90 and 120 days to retail their used cars. Given the current high cost to acquire cars, price competition, carrying costs and depreciation, most used vehicles today lose their front-end profit potential by 45 days. I firmly believe that the inability to sell a used vehicle in 45 days is a management failure — you either didn’t know the price point necessary to sell the unit in less time, or you weren’t willing to price it to move.
Best Practice 2: A market- and time-minded approach to vehicle pricing.
Velocity® dealers adopt disciplined pricing strategies that reflect two truths about today’s used vehicle business — fresh cars typically sell more quickly and deliver the biggest gross profit potential, and selling more cars in less time advances the broader “turn and earn” goal for the used vehicle department. Velocity® dealers use price-to-market metrics to guide these pricing decisions. For example, a dealer might price fresh cars (e.g., those less than seven days old) at 98–100 percent of the local market. If the unit doesn’t sell, the next seven-day pricing tier would align the vehicle’s price to 95–97 percent of the market. If the vehicle still hasn’t sold, the dealer would continue price-to-market based adjustments to ensure it sells within 45 days.
Note: The pricing adjustments are not always automatic; dealers should regularly evaluate each unit’s online performance (e.g., is it getting clicks from shoppers?) and online merchandising (e.g., is it missing pictures?) to discern if the unit’s price is the chief reason the car hasn’t sold.
Best Practice 3: Keep at least 50 percent of your inventory under 30 days of age.
This standard reflects the operational outcome of the vehicle pricing strategy noted above and a dealer’s desire to maximize the used vehicle department’s return on investment (ROI) and profitability potential by continually retailing fresh cars. Naturally, dealers who set more aggressive market-based pricing parameters have an easier time maintaining this 50 percent benchmark. The best-performing, most-disciplined dealers maintain 75 percent or more of their used vehicle inventory under the 30-day threshold — and rarely have cars that reach 45 days.
Best Practice 4: Mind your average inventory cost.
When I examine the vehicles causing age problems for dealers, I’ll often find that their oldest units have retail price points at or near $30,000. The problem? These cars create near-direct competition with new vehicles. To minimize this risk, Velocity® dealers track the average cost of inventory and aim for a $14,000 or less benchmark. Indeed, these dealers will acquire and retail high-dollar units, but they do so with caution, recognizing that their inventories should skew to lower-cost vehicles that attract more customers and sell more quickly.
When dealers apply these best practices with diligence and discipline, they soon find that aging inventory is largely a moot issue. For them, the big challenge becomes efficiently sourcing vehicles to feed the money-making, turn-and-earn-focused machine they’ve created in their used vehicle departments.