Many dealers have come to understand that if they price a used vehicle too high, today’s market-conscious used vehicle shoppers won’t give the car a second look.
This understanding has pushed some dealers in a positive direction. They are more market smart as they set retail asking prices for used vehicles. They do not automatically apply a standard $3,000+ markup to every vehicle they put up for sale.
But while they may be seeing more customers and selling more vehicles, many of these dealers believe they are not as profitable as they should be. "I’m selling vehicles but I’m not making any money" is a common refrain.
As I’ve discussed this with dealers, I’ve found two common problems.
First, dealers have a hard time looking beyond price as the chief way to drive used vehicle profitability. This is a case of old beliefs and habits that are difficult to break. It’s hard to accept that, in today’s marketplace, price is mostly a means to drive shopper interest and traffic. It’s not the dealer’s chief mechanism to control gross profits the way it used to be; the market is what it is.
Second, and perhaps most important, is that many dealers haven’t addressed the profit-draining inefficiencies in their used vehicle inventory management and sales processes. In effect, they are leaving money —and opportunity — on the table at each stage of a used vehicle’s lifecycle.
The following are three guiding principles to address these inefficiencies and improve used vehicle profitability:
1. Keep inventory fresh.
Dealers all recognize that the freshest vehicles hold their markup and offer the greatest potential profit. Yet, many dealers remain undisciplined about managing the age of their inventory to offset the profit-eroding effects of depreciation and lost opportunities. In today’s environment, it’s essential for dealers to maintain at least 50 percent of their used vehicle inventories aged 30 days or fewer. Today’s technology and tools can help dealers make the acquisition decisions that ensure a fast turn, fresh inventory and profits for the dealership. The exciting part for dealers is how faster inventory turn rates build even greater profitability potential. When this cycle of the right inventory at the right price repeats, dealers see both used vehicle sales volumes and profitability increase, and a larger departmental contribution their dealership’s bottom line.
2. Manage your inventory acquisition and add-on costs.
Today’s competitive used vehicle marketplace means greater risks when dealers put too much money in a used vehicle. But here’s the good news: Technology and tools are available to help dealers avoid making this mistake. These tools offer management metrics to ensure a vehicle’s acquisition price is right for a dealership (its cost-to-market ratio). This figure shows the spread between a vehicle’s wholesale acquisition cost and its most competitive retail asking price. With this, dealers can account for other potential drags on a used vehicle’s profitability — auction / transportation fees, reconditioning costs and packs. Of these, dealers have the most direct control over reconditioning costs and packs, and should manage these diligently to ensure neither erodes a vehicle’s investment and profit potential.
Another profitability booster: Acquire vehicles from your customers. More dealers are discussing new vehicle options (leases, in particular) with customers who own late-model vehicles that would be right for their used vehicle inventories. These discussions occur during BDC calls and customer visits to the service department. From a profitability perspective, these vehicles have excellent potential, particularly if a car’s history includes a single owner and regular trips to the dealership’s service department.
3. Be price transparent to “hold gross.”
As noted above, today’s customers are price savvy. They’ve shopped around and landed on a vehicle, at least in part, because of its price. More and more, dealers are openly addressing the story behind their pricing, using real-time market comparisons to demonstrate why a $12,750 sticker price really is “the best we can do for you on this car.” Velocity® dealers who incorporate this transparency-minded approach into their sales processes rarely discount their asking prices and, if they do, the discount is typically less than $200 to close a deal. I believe such transparency is a more compelling proposition for today’s buyers — and the dealer’s profitability — than four square and other traditional forms of selling.
Taken together, these principles will help those dealers achieve the return on investment (ROI) they seek from their used vehicle operations. As noted above, in today’s market, used vehicle profitability is more about management, metrics and process efficiencies than price.