I’ve spent the past three weeks traveling across the country to talk to dealers about Provision ProfitTime, a new metric and methodology we’ve introduced to help dealers better manage the effects of margin compression in used vehicles.
The discussions and meetings have been eye-opening, for both the dealers and me.
For dealers, ProfitTime initially stirs the emotions. The most profound reaction is disbelief, particularly from dealers who have invested their hearts and souls in Velocity principles. There’ve been some “Oh, sxxt” and “WTF?” moments, followed by a palpable sense of relief as dealers see the benefits of understanding, and managing to, each used vehicle’s investment value.
For me, the ProfitTime discussions and travels have brought me back to the earliest days of vAuto, when I was the only guy suggesting a different way forward for managing used vehicles. In some ways, ProfitTime feels like we’ve discovered a hole in the used vehicle universe, and figured out a way to fix it. I’ve also come to the realization that I’ll be a busy guy in the months ahead as ProfitTime goes to market.
I’ve met with enough dealers to understand the common, most-pressing questions ProfitTime presents. I thought I would share five of them here, with answers:
1. Does ProfitTime invalidate Velocity? The answer is an emphatic, “No.” ProfitTime is a path beyond Velocity, where your retailing strategy is based not on the number of days you hold a vehicle, but rather the investment value or profit potential each vehicle holds. Velocity metrics and principles help you discern a vehicle’s investment value, but they don’t precisely measure it for you like ProfitTime. I would also add that ProfitTime and Velocity are both rooted in my belief that while used vehicle management is, and probably always will be, a blend of art and science, the science itself is getting better all the time.
2. Will the transition to ProfitTime be as painful as the switch to Velocity? I wish I had a crystal ball to know the answer for certain. On one hand, dealers typically had a larger share of aged/distressed inventory when they adopted Velocity compared to today. At the same time, while the share of investment-distressed inventory in dealerships today might be smaller, the average cost per car is significantly higher. Ultimately, the correct adoption of ProfitTime will require that dealers reckon with their worst used vehicle investments first. This reckoning represents the short-term financial pain that will precede the long-term gain. I would also say that the degree of any associated pain will ultimately depend on how well dealers have aligned and calibrated their used vehicle age management and market pricing strategies to date.
3. Why do I have so many Bronze vehicles in my inventory? A quick point of context: In my discussions with dealers, I’ll show them their inventories through the ProfitTime lens. Invariably, we’ll find that almost half of their vehicles carry the Bronze designation in ProfitTime, which means these vehicles are the most distressed from an investment perspective. These vehicles also tend to have asking prices, or Price to Market ratios, higher than the individual vehicle’s investment value suggest they should command. These dynamics are nearly universal, which suggests two important take-aways:
First, the share of Bronze vehicles is a market condition. It’s perhaps the most compelling sign of how much margin compression and a more efficient, transparent market have combined to fundamentally alter the financial foundations of the used vehicle business. Front-end margins on some vehicles, particularly the bread-and-butter volume cars, are simply smaller today than they used to be.
Second, if these vehicles have less investment potential from the get-go, there’s less margin for error when it comes to buying and pricing them correctly. As I examine Bronze vehicles more closely with dealers, we typically see where some of the art of used vehicle management could be sharpened.
4. How does ProfitTime calculate each vehicle’s investment value? ProfitTime is built on an algorithm that draws from three principal data sets for each vehicle—the Like-Mine Market Days Supply, adjusted Cost to Market and recent sales volume. The resulting calculation then scores vehicles on a 1-12 scale, and assigns a Platinum, Gold, Silver or Bronze precious metal category to each vehicle. We’ve tested and re-tested the algorithm across millions of vehicles in dealer inventories to know, with utmost accuracy and confidence, that the ProfitTime valuation is sound.
5. Where will ProfitTime have the most profound impact in my used vehicle department? I believe ProfitTime will bring the most profound clarity and impact to used vehicle appraising and pricing decisions. When you examine a dealer’s inventory with ProfitTime, you’ll see what I call a pricing “inversion,” wherein the Platinum vehicles, or best investments, are priced lower than all the other vehicles. Meanwhile, Bronze vehicles, which represent the worst investments, are priced the most proudly. This condition is the direct result, I believe, of a lack of true investment value insight when appraising and pricing decisions are made. If we knew, for example, that a vehicle was a low-scoring Bronze vehicle at the time of an initial appraisal, I believe dealers and managers would be less inclined to price the vehicle, even though it’s “fresh,” at a 100 percent or greater Price to Market ratio.
As I discuss ProfitTime with dealers, many begin to see how the metric and methodology will help them improve sales volume, inventory turn and total gross profit in ways that weren’t possible before. The dealers also recognize that they’ve got some work to do with rethinking their management processes and retraining their teams.
I’ll be keeping close tabs on their ProfitTime progress, and relaying what I learn here. Stay tuned!