If there’s one thing that dealers might conclude from the used vehicle market through much of this year, it’s that if you’re not paying close attention to vehicle values and retail prices, you’re likely missing opportunities to make more money.
I say this following several conversations with dealers who have adopted the Investment-Based Method of Used Vehicle Management available through the ProfitTime 2.0 system. The system uses data science to deliver in-the-moment retail pricing recommendations that enable dealers to optimize turn and gross at the same time.
To an individual, the dealers have been struck by how fast, and by how much, the market changes, particularly when every dealer has had the good fortune of retailing cars in an environment of limited supply and strong demand.
“If the competition has an Equinox for $20,000, and it’s the cheapest on the market, and mine is next for $21,000, and they sell it today, it changes the investment value and price position of my car,” says Steve Jackson, pre-owned manager at Shaheen Chevrolet, Lansing, MI. “ProfitTime 2.0 literally gives me a minute by minute view of what’s going on in the used car business in my market. It’s almost a live thing, like it has a heartbeat.”
In the current market, the up-to-the-minute view of the market means that dealers who are paying close attention recognize the need for more pricing discipline than they’ve exercised in the past. They are reviewing vehicles that fall in/out of alignment with ProfitTime 2.0 pricing recommendations at least once, if not several times, a day.
When I spoke to Jackson the other day, he started his morning by increasing prices on 17 vehicles in his inventory based on ProfitTime 2.0 recommendations. “I wasn’t raising prices by $100,” he says. “It was a lot–$500, $600, $1,000, $1,200. This is a daily thing.”
The same is true for Bo Johnson, pre-owned manager at White Allen Chevrolet in Dayton, OH. “I go in daily and look at the recommendation for a vehicle and decide if I need to raise or lower the price,” Johnson says. “I don’t know that I’d be raising prices the way I’m raising them, or even raising them, like I’m doing now if I wasn’t using ProfitTime 2.0.”
In addition to underscoring the need for what might be called ultra-vigilant pricing, dealers who use ProfitTime 2.0 shared five other take-aways from their experience of managing their used vehicle investments in the current market.
Take-away 1: Patience pays off with Platinum vehicle investments
In the ProfitTime 2.0 system, Platinum vehicles rank as the highest investments. The vehicles are blessed with the combination of low Market Days Supply, relatively low Cost to Market percentages and solid retail sales volumes. The general manager of a Midwest Honda store shared that he recently faced questions from an Internet consultant about a 60-day-old Platinum BMW priced to deliver a $6,000 front-end gross. “They were asking, ‘what are you doing with this car? It’s been here 60 days. It doesn’t have any VDPs. You’ve got to move on it. You should reduce the price by at least $2,000. You’d still make $4,000,’” the GM recalls. “I told them, ‘I’d love to do that, but we just sold it two hours ago for all the money.’”
Take-away 2: Bronze vehicles are still Bronze vehicles
ProfitTime 2.0 ranks a dealer’s least-valuable investments as Bronze vehicles. For most dealers in the current market, their Bronze vehicles often consist of the vehicles they’ve purchased at auctions because they absolutely need the vehicles to meet their overall goals for sales volume and to satisfy factory-set targets for certified pre-owned sales. When you effectively pay retail money to acquire an auction vehicle, it can be tempting to price the vehicle higher than ProfitTime 2.0 recommends to get gross profit you believe the vehicle should produce.
I asked Johnson at White Allen Chevrolet about this temptation, and he’s not falling for it. “They are Bronze cars for a reason, and mostly it’s your Cost to Market position,” he says. “You can’t fall in love with anything. This week the wholesale market is starting to dip. That’s why I’m trying to get rid of the Bronze cars in less than 30 days because they won’t look any better tomorrow.”
Take-away 3: Knowing each vehicle’s investment value protects profit potential
Virtually every dealer is focused on how they appraise vehicles. The focus primarily owes to the need to ensure that the used vehicle department doesn’t miss an acquisition opportunity. At the same time, customers with trade-ins know that their used vehicle is worth more now than it might have been three to six months ago, and the new car department is likely to be hungry to make a deal without discounting the new vehicle.
It’s a confluence of circumstances that can create more pressure on used vehicle managers to bump appraisals to make deals. But used vehicle managers say that vehicle investment value ProfitTime 2.0 generates from the initial appraisal offer helps them manage the frequency and size of requests to give the customers more for their trade-in.
Here’s Jackson’s approach: “If I’ve appraised a car and it’s Platinum, and I get a request to bump the appraisal, I can usually put more money into it, because there’s a much higher chance we’re going to make money,” he says. “But I’m not going to hurt myself. If we need the car, we’ll put the money into it that we need to make the deal, as long as it stays the same metal in ProfitTime 2.0.”
I would also add that, when a bump or over-allowance on a trade-in gets charged to the used vehicle, ProfitTime 2.0 helps dealers understand the impact and manage the vehicle’s lesser investment value appropriately.
Take-away 4: Discounts requests are easier to handle
If your sales team is well-trained to explain how you arrive at your market-based prices for used vehicles, the current market is ready and ripe for you to hold on your price with customers who want a discount. Why? Dealers say customers, whether they are looking to buy a new or used vehicle, are well-aware of current market conditions. In used cars, they’ve seen prices for vehicles increase during their online research and shopping. They can also see that your new vehicle inventory has far fewer cars than normal. As a Southeast dealer put it the other day, “if you can’t hold your price with customers now, you’re doing something wrong.”
Take-away 5: Turning every car fast isn’t everything
When dealers adopt the investment-based method of inventory management, they soon recognize that their ability to turn inventory doesn’t go away, it just looks different. Rather than apply a standard policy of reducing vehicle prices as vehicles age in inventory, ProfitTime 2.0 dealers simply ensure individual vehicles are priced according to their investment designations. As such, the turn rates of individual investment classes are different. Bronze cars are priced to move quickly to optimize their ROI, while others, like the Platinum vehicles noted above, are priced to command their optimal ROI by maximizing gross profit.
Dealers who follow the investment-minded strategy find that their overall turn rates don’t suffer–and they marvel at dealers who maintain a strict turn-and-earn strategy in the current market.
“If there’s a dealer turning their inventory 18 to 20 times, they are missing the boat and missing money,” Johnson says.
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