21st Century Used Car Department Pay Plans

Recently I received the following note regarding used car pay programs from Will Nolen of the Golden Circle Auto Group in Tennessee. The following letter from Jim Porter of the Bobby Rahal Group in Harrisburg, Pennsylvania, sets up the answer in the most elegant manner.

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Dale,

I wanted to let you know that John Griffin and Erik Nelson were in our store last week. They did an outstanding job. John was a hit Thursday with our general managers. He did a smooth job explaining and persuading some of our guys to more seriously consider “turn vs $4000 fantasy”. Erik cleared up quite a few misconceptions about the system and went through the pricing and target approach for several vehicles. He was able to get a couple of the used car managers to engage where I never could. Anyway, your team seems to be top notch.

I am curious what you recommend as far as pay plans for used managers and even GMs. Do you tie bonuses to turn? Do you spiff quick turns? or Do you just set a standard and just enforce it? Tommy Gibbs helped me understand ROI several years ago, but I never got all of the balls in the air at the same time.

Will Nolen

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Dale-

I hope all is well with you.  Well, it happened, we have become a picture perfect VAuto dealership!  It took a while—for two reasons.  One, I was “extra” patient with Tim Yeich my used car manager who I knew would be the “right guy” once he bought-into the VAuto way of managing our “used car portfolio”.  Tim was reluctant to change because according to his pay plan “he” was already a very good used car manager thru management by conventional wisdom.  Unfortunately, his pay plan did not take into account the loss of dealership revenue due to a lower turn-rate, increased holding costs of stagnant inventory (mostly due to improper pricing),  and the out-right losses associated with the disposing of aged inventory.

The second factor in our slow transformation ties directly to your article that I just read, entitled- “The Core is Rotten”.  Last fall, according to the “core inventory” formula, we stocked-up on 4×4 SUVs and trucks anticipating a normal winter market that never happened.  We paid little attention to the Days Supply of these vehicles and thought that we would sell our way out….  Next, came escalating gas prices—to keep it short, we made some tuff decisions and cleaned up our mess.  This situation proved to be a valuable learning experience for all of us because we embraced VAuto as an informative analytical tool that guided us to the decisions that got us out of trouble with minimized damage and enabled us to react faster than the rest of the market.

Jim Porter

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Yes, let there be no doubt that used vehicle inventory turn is the most important metric for assessing used vehicle departmental success.

As I’ve come to understand the problem, most dealers continue to be focused on average gross profit as opposed to total gross profit. Yes, I’m aware of the fact that I’m out on a limb and exposing myself to criticism from others, but please consider the following justification and rationale. Let’s first understand how large gross profits are not made in today’s efficient market. They are not made by sitting across the table from a prospective customer and trying to convince them to pay more than they need to. This is because the internet makes it too easy for that would-be buyer to find out where other vehicles are for less money that are identical to yours. While this approach worked well for the first 100 years, and may even occasionally work today, it simply is not a winning strategy going forward. This is not to say that respectable average gross profits are not important or obtainable because they are, but they’re going to be consistently achieved in this efficient market using a different strategy.

The only strategy that will reliably produce respectable average gross profit is a strategy that emphasizes fast turn, or as I call it, velocity. Simply stated, those that have the freshest vehicles purchased right can price them for less and still make more. Think about it, if you and I are competing against each other in the same market with the same vehicle, and I bought mine 50 days ago and you bought yours 20 days ago, you can probably price yours for less and still make more gross profit. That’s right, more times than not the fresher vehicle will generate a higher profit.

As Jim Porter noted in his letter to me, it is not always an easier fast philosophy to adopt or implement. The first step is to recognize total variable gross as king rather than average per unit gross profit. This will give you the leeway to get the existing inventory off your lot and replaced with fresh units that are purchased right. Maintaining this philosophy will create velocity in your inventory and velocity will produce higher gross profits. This is a new market and it justifies a new approach. Recognizing this reality we should all reconsider the fundamentals of our compensation plans and place the priority where it belongs, on velocity and turn.