Generally speaking, used car retailing involves a lot of maxims and rules of thumb. We all know the stories of car dealers “going with their gut” when making decisions about acquiring and pricing used vehicles. But even while a growing number of dealers understand the importance of using data science to guide their business, many continue to uphold other common industry catchphrases as truths when they’re really nothing more than myths — and they might be limiting your profitability potential.
To address these myths, vAuto Founder Dale Pollak published a book titled “Gross Deception: A Tale of Shifting Markets, Shrinking Margins and the New Truth of Used Car Profitability.” Although the book came out in 2020, its lessons continue to resonate. In fact, if you still operate according to the myths noted in the book, you’ll have a hard time overcoming the rise of market volatility and margin compression , and the pressure they create for your business, in the months ahead. Read on to learn the top three myths that might be impacting your gross profit margin.
Myth #1: You need to stock more cars than you sell to find success.
The pandemic debunked this myth by forcing dealers to operate with extremely limited inventory — and they succeeded, with many achieving record-breaking levels of used car sales. Even though used car inventory levels are largely stable, they remain low compared to pre-pandemic standards. But by now, you probably know you don’t need to keep inventory sitting around to meet your monthly sales volume goals. The key to sustained success in today’s market starts with maintaining inventory levels in accord with your rolling 30-day total of retail sales, while managing each vehicle’s unique investment value to optimize the profit potential on every vehicle. Dale Pollak and other industry experts will tell you that variable inventory management is the new guiding principle for ensuring used car profitability.
Myth #2: It’s better to walk away than overpay.
In recent years, we saw average wholesale prices soar above Manheim Market Report (MMR) value, so many dealers threw up their hands and turned to other sourcing options. These dealers assumed that if they paid top dollar at auction, they’d never make money when they tried to sell. But the dealers who went ahead and paid the higher prices were able to ride the rise in retail demand and still make gross profit. They found that even though they sacrificed front-end gross on higher-cost cars, they made up for it in volume and through reconditioning and F&I sales. You can do the same.
In fact, if you’re one of the dealers who’s been avoiding auctions lately, you might want to give them another try. Wholesale prices fell this past spring and summer, and while Cox Automotive predicts that more normal depreciation will prevail for this calendar year, used car sales were up in August — so the demand is there, at least for now. And, as Dale Pollak notes, it’s fine to overpay for a vehicle your inventory needs and your market wants — as long as you handle the vehicle the right way. He advises that if you do overpay, the vehicle should make its retail exit fast.
Myth #3: “I can’t replace the car for what I’ve got into it.”
We used to hear this from dealers who were trying to justify keeping a high-priced vehicle in inventory for more than 45 or 60 days. The problem lies in thinking about one car as a replacement for another. The used car market changes so rapidly these days that you’re better off acquiring and pricing vehicles according to the unique market conditions of the moment. And that might means if a vehicle’s distressed, you need to sell it faster to achieve what may little or no gross profit to allow you to invest the proceeds into the next car and the potential profit it holds.
How to Maximize Used Car Profitability
Many of yesterday’s dealership maxims have become nothing more than myths that simply don’t work in today’s volatile used car market. It’s important to discover if your dealership still operates under the guidance of these myths it’s time to course-correctacross your team as necessary. The best way to dispel all the untruths across your used car business is to adopt the Variable Management strategy and use ProfitTime® GPS from vAuto to execute it. With this strategy and solution in place, you’ll use data science to optimize the ROI on every vehicle, in every moment, rather than operating according to outdated operational myths. ProfitTime GPS has helped dealers across the country improve used car sales and gross profit, even in these uncertain times.
To learn more about how vAuto’s tools can help you maximize used car profitability, request a demo today.