It wasn’t all that long ago when most dealers really only worried about one or two things in their used vehicle departments: the average front-end gross profit, and the number of cars they’d sold to date in a given month.
As a result, the used vehicle manager would also focus on the same things. On occasion, you might find a used vehicle manager who truly focused on inventory age, but these individuals were as rare as the dealers who truly cared about aging units.
We’ve come a long way since then. While the average front-end gross profit and sales volumes still matter, many dealers now rely on additional market-based metrics to manage their used vehicle success.
As they acquire used vehicles, dealers examine each unit’s market days supply, cost to market and price to market to determine each vehicle’s destiny. The best dealers use these metrics to know, right up front, how quickly the vehicle should retail and the front-end gross profit it should generate if it sells within the expected timeframe.
At the same time, dealers have come to understand that they can no longer ignore inventory age the way they used to. In fact, the average age of a dealer’s inventory has become an essential fourth metric dealers must monitor to ensure they retail vehicles as quickly as possible to maximize their profitability potential for every unit and maintain the throughput, or velocity, of their sales volumes.
Here are three ways dealers and used vehicle managers apply this increasingly important metric as they make inventory management decisions to maximize profitability and volume:
Know the break-even point on every car. Unfortunately, the transparency and volatility of today’s used vehicle market have combined to shrink the window of time a used vehicle will generate a sufficient front-end margin. Depending on the market and specific vehicle, dealers tell me their front-end margins diminish fast after a car reaches 20 or 30 days in inventory.
“I know for a fact that we start losing money on most cars after they’ve been here 20 days,” said the used vehicle manager for a five-store group in the Midwest. “When cars get to 35 days or older, I’m at risk of losing front-end gross faster than I can make it up by selling fresher units.
To combat these market conditions, I recommend that dealers maintain at least 50 percent of their inventory under 30 days of age. But even this operational standard, I’m told, can be insufficient in highly competitive markets. The Midwest used vehicle manager sets his sights on maintaining at least 80 percent of his inventory under the 30-day mark to minimize diminished front-end margins.
Align your pricing to inventory age. Most dealers are aware of the relationship between inventory age and vehicle pricing: When cars are fresh, you can set asking prices that reflect each unit’s desirability in the market to maximize front-end gross profit. But, as cars age, your asking prices become the primary lever to attract buyers and retail the unit.
Unfortunately, dealers often do not apply the discipline necessary to consistently make these price adjustments at the specific age intervals spelled out in their pricing strategies. In addition, I would recommend that dealers reexamine their pricing strategies to determine if their age intervals should be shortened.
For example, the Midwest used vehicle manager used to make price adjustments after a vehicle had reached the 15-day mark. Now, the initial price adjustment occurs within seven days. Other dealers price more proactively, setting three-to-five-day age intervals.
Note: Dealers should assess the merits of price changes as vehicles hit their age-related triggers, rather than make them automatically. The assessment should include vehicle’s competitive position, recent shopper activity and other factors to determine if the time is right for a price adjustment.
Be firm about moving on. It’s sometimes difficult for dealers and used vehicle managers to accept the fact that when a vehicle hits 45 days or more in inventory, it represents a management failure. The traditional impulse is to continue holding on to the unit, waiting for a buyer.
But age-minded dealers resist the impulse and do their best to retail the unit, even at a loss, to create the opportunity to reinvest the money in a fresh car that offers a better return on investment.
These three inventory age-focused best practices, by themselves, do not guarantee the success of a used vehicle department, but they do underscore that less time in inventory means more money for dealers in today’s market.