As new vehicle sales gather steam, dealers have an opportunity to ease some of their used vehicle sourcing pain: Keeping more trade-ins for retail.
This is easier said than done, of course, but dealers would be remiss to not re-visit their appraisal processes to ensure they aren’t letting opportunities to buy the right vehicles pass them by.
I asked several Velocity® dealers to quantify the difference between the price they would pay to acquire a vehicle via a trade-in versus an auction. Few actually track this number, but anecdotal accounts suggest dealers pay about $1,500 less for a trade-in than if they acquired the same vehicle at auction. The difference owes to the greater degree of competition at auctions, as well as the purchase and transportation fees dealers incur to acquire vehicles there.
To be sure, some of the vehicles today’s customers want to trade may head straight to a wholesaler. These cars should be acquired with this exit strategy in mind. In these situations, your appraisal amounts balance the need to satisfy the customer as well as provide some profit for the time and trouble it takes to turn the vehicle.
For other vehicles, the following four best practices will ensure you approach every trade-in as an opportunity to maximize profitability for your entire dealership:
1. Use the appraisal-to-auction differential to your advantage.
As you appraise a unit, do the math to determine what it would cost you to acquire the same unit at auction, assuming it’s needed to meet your inventory objectives. This differential can provide additional “leg” in the deal that balances the needs of the new vehicle department to sell a car and the used vehicle department’s need to maximize its ROI on the unit. Likewise, this differential may be viewed as an offset to additional reconditioning that the trade-in vehicle may require. To be sure, this balancing act may soften the potential front-end gross on the vehicle at retail as you price it to the market. However, this is a small price to pay to keep the wheels of the Velocity Method of Management™ turning and create an opportunity for service and F&I income.
2. Make appraisals market-transparent.
Dealers say third-party technology and tools, like AutoTrader.com’s Trade-in Marketplace (TIM), offer an effective way to minimize haggling on an acceptable trade-in value. When dealers take the time to physically appraise the vehicles with customers, and then use these tools to make an initial appraisal value, they find customers are often amenable to the number. Why? The process is more transparent and, in many cases, taps into the same vehicle valuation resources customers use to get a ballpark idea of what their vehicle is worth before they showed up at the dealership. “The key is to do the evaluation with customers every time before you put a number on the trade,” says a dealer who uses TIM. “It’s the best closing tool I’ve ever seen.”
3. Think beyond the deal at hand.
A Velocity® dealer in New York says he actively promotes his dealership as a place that will “pay more for trade-ins than other dealers.” He focuses first, of course, on the vehicles that are right for his inventory. Beyond that, though, he takes the long view: “Every trade-in gives me the opportunity to create two customers — the one buying the car and making the trade, and the customer who will buy the car I acquired. I’m also doubling my opportunity for additional gross in service, parts and F&I. All of this factors into our appraisals.”
4. Track your appraisal performance.
A key reason some dealers are consistently able to acquire trade-in vehicles for less money than they would pay at an auction owes to their oversight of the dealership’s appraisal processes. These dealers will track two important benchmarks for every individual who appraises a vehicle. First, they’ll assess an appraiser’s look-to-book ratio. By itself, this number has limited meaning. That is, if an appraiser’s putting too much money on cars, the ratio is likely to run over 50 percent. To balance this, dealers will evaluate a second metric: The cost-to-market ratio of the amount an appraiser offered to acquire a vehicle. The ratio measures the spread between the vehicle’s trade-in costs and its likely retail selling price. At most stores, this figure should run near 80 percent, which allows a 20 percent spread to cover for reconditioning, any pack and the unit’s expected gross profit.