Image by gobucks2 via FlickrOK – no big epiphany here, but I wanted to relay a story. This morning in Ludington, Michigan, on Route 10 (a busy commercial drag) there were two gas stations directly across the street from each other at a primary intersection. One was advertising gas for $2.59 a gallon and the other for $2.58. Both were self serve, clean operations with equally desirable access. Guess which one had a line at the pumps while the other one was completely vacant? You guessed it, people were lined up 2 deep, willing to wait and didn’t seem bothered just to save a penny a gallon.
For the typical fill-up, this might have amounted to a total savings of 13 to 20 cents. For this amount of savings, people are willing to wait? You can’t tell me that it’s mostly about perception and culture. I think that more than anything, people would just feel foolish standing at a pump that costs a penny more when obvious savings were in plain sight. This has to speak volumes about human behavior when considering much more expensive purchases where obvious savings range in the hundreds to thousands of dollars for the same product. Stop and ask yourself which operation you’re running.
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This happens all the time with gas stations. Not to go against your story here, but I always stop at QuikTrip gas stations because I prefer them, regardless of their price though. Could be 5 cents more and I wouldn’t care. But I might be the exception.
But Dale, what about if the other gas station had amazingly talented salespeople waiting to spin the difference in their gasoline and that of their competitors. Surely the people would be willing to pay more then, right? (tongue is planted firmly in cheek)
Dale,
Now just imagine if that low cost provider also provided theIr customers the most unique, memorable gas buying experience consumers had ever experienced?
They would probably tell a couple of their friends, visit more often & maybe even go so far to write an online review. Gasp…they might even tweet something about it.
Hmmm…seems like a decent idea to me.
Nice post…
Eric
LOL
Matt, Dale is talking about all things being equal…we both know rarely are all things equal though. For instance, QuikTrip is regularly recognized to have one of the better business models and customer service models in the entire business world (they are one of the top 100 companies to work for). This means that there is additional value knowing that the restrooms are clean, the employees are courteous, etc. I’m in agreement with you on QuikTrip btw.
Ohoh… Gas stations, Used Cars and Prices driving traffic. A favorite business observation of mine! No one’s going to read all this, but for those that dare… Hang on to you hat and bring your business imagination; we’re goin’ for a ride.
Has anyone noticed how gasoline prices move up and down while the gas station’s gasoline inventory was delivered last week? What drives gasoline price action? Back-in-the-day it use to be small operator vs. small operator reacting to each other. Not any more. Today’s gas stations are mega operators that have sophisticated pricing models that react to local competition, but, are more heavily weighted to reflect the CURRENT COST of buying the gasoline at wholesale.
Can you see any parallels to Used Cars?? Swap out the gas stations and add Used Car Dealers and see what the FUTURE may hold…
What drives Used Car price action? Back-in-the-day it use to be small operator vs. small operator reacting to each other. Not any more. Today’s Used Car Dealers are mega operators that have sophisticated pricing models that react to local competition, but, are more heavily weighted to reflect the CURRENT COST of buying the automobile at wholesale.
Hmmm… I smell a CARMAX model in there somewhere.
Let’s bring this back to today. Using this wholesale replacement cost pricing model, If you’ve competitively priced your Honda Accord to sell, but, the replacement costs are $500 higher than when you bought it, wouldn’t it make sense to move your Accord retail price up?
Woa… before you skewer me, look at the other side. If you’ve competitively priced your Ford F150 to sell, but, the replacement costs are $500 lower than when you bought it, wouldn’t it make sense to move your F150 retail price down?
These examples are why the Velocity dealer performance ROCKS in a down market (late 2008), but grind it out in an up market (early 2009). We’ve witnessed it 1st hand. Down markets reward aggressive retailing. When prices are falling, buying and turning inventory keeps your cost basis ahead of your competitors. On the flip side, in an up-cycle, the aggressive turning dealer has sold his unit and now has to replace it at a higher cost, there by giving up his cost basis advantage to his slower competitor. This is a great setup for reduced turns and margins getting compressed…. Until the market turns again…
IMO, a missing link in the Used Car business model is the input of replacement cost data.
NOTES:
I have been a big proponent on this topic and have posted this on Dale blog earlier: http://www.dalepollak.com/2008/10/14/manheims-used-vehicle-index/
Gasoline Futures Data FYI:
http://futures.tradingcharts.com/chart/RB/W
http://www.nymex.com/RB_pre_agree.aspx
OOOHHHH…Price does matter…As well as selection…Customer retention/relations…”perception”, doesn’t weigh as much as we thought…”Perception” does play in, less than ever though. Price weighs much heavier in the final decision…the decision that counts!!! As a dealer that sells primarily “Used”,that’s why we have “sets”…in addition to other “hooks”. The price-concious buyer is still a welcomed buyer…we need them as much as the “grape”. Point is…Each deal has it’s function…energy creates energy…an object in motion stays in motion… If a dealer markets effectively and makes it to a customer’s “shopping list” then it’s up to a sharp sales force to complete the process. If you have an acceptable profit margin and solid ROI, then go ahead and be the least expensive. The question is… Why do we need to sell everything for less than the competiton and continue to provide superior customer service if we’re not willing to complete the cycle of customer retention? Once the “voucher” comes in and the deal funds… most, move on to the next. Breaking the chain. I think it’s fundamentals and new stagegic ways of marketing that hold most dealers from a positive/acceptable financial statement.
We’ve made our beds…the vast majority of customers are not loyal to anyone, anymore!!! A very sharp man once told me “give them what they want and they will come”…High demand vehicles, priced fair, from good people…Bonus if you’re the lowest and the margin is still there…The one thing for sure, change. Dont be affraid of replacing it. You will and can…you just need to look harder and in different places…
Dale,
I am a true believer. It took a while for it too all sink in.
Lately I have been having discussions with folks who are adamant about pricing recon work at full retail. As you know, their premise is based on the idea that sales people are mediocre and simply sell a fixed margin from cost. This concept of retail for recon internal began in the late 70′s and was a direct result of state and federal law requiring OEMs to compensate for warranty work based on the same door rate as they charged retail customer. Dealers jacked up their door rate to capitalize. The service department became an even more important profit center. In the meantime, someone got the idea that not only could we add gross profit to the service department by doing the retail recon thing, we wouldn’t suffer in sales gross profit loss because sales people would merely continue to add their 3 – 4 K to cost and sell from there. Theoretically, dealers would pay service commission at 15% rather than 25% for front end gross.
The Internet obviously does not allow for that old type of selling. Do you think it is time for dealers to review their recon policies? I have seen vehicles wholesaled because it wasn’t possible to recon them and have any “room” left. I have seen dealers try to stand down from trades because of recon costs. I am told by many that the fastest moving used vehicles have to be “made,” which is impossible to do if the vehicle needs considerable work. I’m not pushing recon at cost. That would be absurd. But should the policy be reconsidered? I am told that CarMax does recon at cost, but they aren’t running a service operation.
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