There are two key challenges facing many used vehicle dealers: How to ensure competitive retail asking prices to attract buyers and how to hold grosses on these deals when buyers show up.
The solution to these challenges, I believe, rests with a rethinking of how dealers have traditionally set retail asking prices for used vehicles, and retraining sales teams to address your price and pricing strategy up front with customers. The end result: Customers will typically pay what you ask for, with only minimal discounts (typically less than $200) to close a deal.
Why Traditional Markups No Longer Work
As we all know, dealers have traditionally applied a standard markup of $3,000–$4,000 to the costs they incur to acquire a used vehicle from an auction or a trade-in. This approach to retail asking prices served the industry well, but it’s now become more of a burden than best practice.
“Just because we overpaid for a vehicle doesn’t mean somebody else will pay me for my mistake,” says dealer Marc Ray of Grogan’s Towne Chrysler Jeep Dodge Ram in Toledo, Ohio. “I used to be that guy who marked up vehicles $3,000 no matter what. Now I ask myself, ‘what the hell was I thinking?’”
Ray is among a growing number of dealers who have recognized that applying a traditional markup becomes a pricing death knell for today’s online buyers. These buyers have ample and easy access to online guides for used vehicle values and pricing. They simply won’t pay any attention to vehicles that appear to be priced $1,000 or more above what they perceive as a fair price.
Ray learned this lesson the hard way. He struggled for months trying to boost used vehicle sales, only to realize he wasn’t moving the needle. That ended when he changed his approach to pricing, using technology and tools to assess retail asking prices before he acquires a car. In this way, Ray can determine the wholesale acquisition price he can pay for a specific unit to provide enough spread to account for reconditioning and other expenses, achieve his gross profit goals andoffer a competitive retail asking price.
This foundational change to vehicle pricing — an extension of the market data Ray uses to focus on vehicles he knows will be strong sellers in his market — has helped the store nearly double its monthly used vehicle sales volume and meet gross profit expectations. “I’ve come to believe there isn’t a bad car, but there are bad prices for cars,” Ray says.
Using Documentation to Hold Gross with Price-savvy Customers
The second challenge for dealers selling used vehicles is holding gross profits on deals. A growing number of vAuto dealers have addressed this using a “documentation is the new negotiation” approach to working used vehicle deals with customers.
This approach results in dealers averaging less than $200 in discounts off their initial asking prices.
Why is this? First, these stores follow a market-based pricing approach similar to what dealer Marc Ray instituted. Second, these stores have retrained their salespeople to address a vehicle’s price up front, using market-based data to validate and affirm the initial asking price with customers.
This is a significant shift — one that upends tradition-based sales models that keep the lid on vehicle price as a tension-building negotiation tactic. However, today’s buyers are increasingly less interested in negotiation and more interested in simply getting a fair price for their next vehicle.
This more transparent sales works for two key reasons:
- It plays to what most customers already recognize. You have a vehicle they may want at a price that fell within the range they considered fair and reasonable based on their own online research and valuation.
- It helps salespeople build credibility and trust with customers in a less confrontational and more open manner.
This sales process change requires work on the part of managers to teach salespeople how and why a dealership uses market-based data to set asking prices. Tip: In sales meetings, incorporate side-by-side vehicle comparisons with a dealership’s unit and competing vehicle in the market to highlight your dealership’s pricing strategy and the inherent fairness and value it offers customers.
With that backdrop, salespeople can become adept at articulating why a vehicle that may not be the lowest price compared to similar, competing vehicles actually represents a good value based on its condition, history, mileage, equipment, trim, etc.
To be sure, some customers may still want and ask for discounts. In these cases, it’s important for salespeople and managers to hold firm and let the market data sustain the asking price. These customers, however, are not the majority. When presented with a transparent sales process and market-based pricing, most buyers today respond positively and accept the asking price for what it is — a reflection of what they found in their own online research.