It’s been a long-standing practice for dealers to mark up a used vehicle by $3,000 or more to provide enough room for negotiation with customers and a gross profit as they close deals.
This pricing practice accounted for the belief that customers will want to negotiate, and salespeople typically don’t “hold gross” when discussions turn to price. Therefore, dealers viewed the markup as a way to hedge these risks and ensure a profit margin.
In today’s highly competitive and price-sensitive used vehicle environment, however, this pricing strategy is no longer an effective way to achieve profitability or build sales volumes in used vehicles. This is because traditional markups effectively put these vehicles “out of play” for the majority of online used vehicle shoppers.
This new pricing reality is driven by three key factors:
1. More dealers have dumped traditional markups.
These dealers recognize today’s used vehicle shoppers respond best to vehicles priced to reflect the market, rather than their own goals for profitability. For example, if these details acquire a vehicle for $12,000, and retail asking prices for competing units run $14,300 or less, they’ll use this figure to calculate a competitive asking price that fits the vehicle’s condition and mileage, as well as their own profit goals (unless their car truly stands tall compared to the other vehicles). Meanwhile, the more traditional price-minded dealer would list the same vehicle at $15,000, with little or no regard for its relationship to the competitive set in the market. In this scenario, the market-priced unit will likely get more shopper attention.
2. High-price outliers get less attention from shoppers.
We know for certain that price is a top priority for 20 percent of used vehicle shoppers today; AutoTrader.com says 20 percent of shoppers sort vehicle search results pages (SRPs) to view the lowest-priced cars first. Beyond that, it’s fair to say price is also a top, if not the most important, consideration for the remaining shoppers. This means traditionally priced vehicles, like the $15,000 unit noted above, stand apart from vehicles priced to fall within “the market” in the eyes of shoppers. That’s not to say the $15,000 unit won’t get their attention. But, as a general rule, the vehicles that fall within competitive set will get more shopper action as measured by SRPs and vehicle detail pages (VDPs).
3. Customers expect pricing transparency.
Let’s assume the same customer called the dealer with the $14,300 vehicle from our competitive set, and the traditional dealer with the $15,000 unit. The customer asked one question: What would it cost to buy the vehicle today? The first dealer says, “$14,300. It’s a fair price and good value, based on other vehicles like it in the market.” The second dealer says, “It’s priced at $15,000 online, but we’ve got an in-store special. How about you come on in and take a look?” To me, the first dealer’s response will resonate more effectively with today’s buyers. It conveys a level of transparency and ease that the second dealer’s response can’t match. Furthermore, the second dealer didn’t answer the customer’s question.
In this environment, I believe dealers should place a greater emphasis on efficiency, rather than a profit-reflexive markup, as the pathway to profitability. Why? First, as noted above, the traditional price-focused dealer probably won’t see as many customers. They’ll likely find themselves with aging inventory and wholesale losses, due to pricing consumers view as too high for the market. Second, these dealers typically use only one of the multiple levers at their disposal to control used vehicle department performance and profitability. Chances are pretty good they won’t recognize or regard inefficiencies in their inventory acquisition, reconditioning, turn and merchandising processes as a significant problem.
By contrast, efficiency-focused dealers view every stage of a used vehicle’s lifecycle, and the processes around each, as an opportunity to improve their overall profitability. In other words, they’ve got their hands on all the levers of their used vehicle department machinery — including pricing — to maximize their return on investment in each vehicle.
In the end, when efficiency-minded dealers put a vehicle on the market, the chances are greater that the unit’s acquisition and reconditioning costs are lower, it is priced right for the market and, consequently, it will sell faster than vehicles with traditional pricing. Furthermore, this cycle repeats faster for efficiency-focused dealers than their tradition-minded competitors, boosting sales volumes and createing incremental profitability in F&I and fixed operations.
I recognize it’s difficult for traditional dealers to make the shift from profit-reflexive to market-reflective pricing, and to take the additional steps of addressing inefficiencies in their used vehicle operations to build profitability.
As these dealers contemplate this choice, here’s a quote to consider from a successful, efficiency-focused dealer: “My pathway to profitability is paved with operational efficiencies and painted with price.”