Top 10 Used Car Department Mistakes

November 21, 2008

Below I have listed the Top 10 violations of what I consider to be used car management best practices. Along with each I have provided an explanation as to why it is damaging to good departmental health and prosperity. Do any of these offenses look familiar?

1. Keeping vehicles over 60 days–­ A firm aging policy has always been considered to be best practice. However, today it is imperative. The volatility of the market assesses a severe penalty to any vehicle in stock beyond 60 days with respect to its value and market desirability. While there are plenty of legitimate excuses, such as no title or being hung up in the service department, you must bite the bullet and institute a zero tolerance policy no matter what the circumstance. Once you take a few bullets and feel the pain, you can begin to address the root causes that have led to the condition of justifying a policy exception.

2. Unchanged vehicle pricing ­­– All of us were taught that it was ok to put a price on a vehicle for the first 30 days. Then, if the vehicle was still in stock after 30 days, we would begin to back it down. Today this policy is never acceptable. Each and every vehicle has a highly visible set of identically-equipped competing vehicles in the market place that are steadily depreciating in value. Fresh vehicles are always coming in for less while older ones are being marked down. Your marketplace is judging the relationship between your vehicle’s price and that of competing vehicles to determine where they are going to shop. The bottom line is there’s no justification to believe that a price on any vehicle is valid for more than 10 days.

3. Pricing based on cost – Establishing retail prices based on your cost is both arbitrary and ineffective. What you own a vehicle for has absolutely no bearing on its proper retail market value. Today, you can no longer believe that customers will pay you thousands, or even hundreds, more than they need to for the same vehicle. Keep in mind that within seconds any shopper can go online and find vehicles identical to yours, know where they are and how they are priced. Your skills of persuasion and negotiation are simply no match for the visibility and transparency that the Internet provides shoppers. In other words, believe that a car is basically going to bring a price based on what the market will bear. What you own it for has, therefore, nothing to do with the market. Today your profit is 100% completely made on the buy.

4. Dropping prices periodically – If you ever catch yourself saying or hearing someone else say, “let’s drop the price”, it is wrong. “Dropping” prices suggests that you are starting from your present price. Your present price is irrelevant to the market place. The only relevant point in considering your next price is the average price of the highly visible identically-equipped competing vehicles in your market place. Whether you price your vehicle at the average, or above or below the competitive set, price should be determined based on knowledge of the vehicle’s physical qualities, the relationship between its supply and demand in the market and how long you’ve owned it. Instead of dropping prices, try “resetting” prices using the above considerations.

5. One person responsible for pricing – All of us know that it is wise to have at least two managers involved with every appraisal. This is because there are multiple considerations in determining a vehicle’s proper wholesale value. Exactly the same principle applies when pricing a vehicle. Keep in mind that the person who decided to purchase the vehicle has their own judgment, ego and emotion involved in determining its proper retail value. This is a classic case of where two people working together will always be better than one.

6. Every car gets a pack – Let’s be clear, there are only two reasons that we pack cars. The first is to fool ourselves about our costs so that we can extract a higher price from a buyer. The Internet makes it very difficult to fool anyone including customers and our own staff. The days of getting more money for a vehicle than the market will bear are over. The second reason that we use packs is to reduce the amount of commission paid to managers and/or sales people. The better approach is to adjust the compensation programs.

7. Stocking based on historical performance – Today, the used car market is more like Wall Street than Wal-Mart. What vehicles are hot and what vehicles are worth changes week to week if not day to day. As discomforting as this may be, it is dangerous to assume that anything that worked in the past will work today or tomorrow. Simply stated, past performance is no guarantee of future results. The used car market today is an efficient, rational market. All efficient and rational market places are governed by principles of supply, demand and price sensitivity. You must stock vehicles that have the greatest demand and lowest supply given their year, make, model and exact equipment configurations. Yes, technology exists today that can identify and locate these vehicles in your market.

8. Maintaining brand specific inventory – A common belief among dealers is that their used car lot has to be stocked with a high concentration of vehicles of their new car franchise brand. There is a need to have brand specific, switch vehicles and general selection consistent with the new car franchise brand. However, do not commit an excess of your inventory to your own franchise brand if it is not the hottest product in the market. If you are a Chevrolet dealer in a community that prefers Ford trucks, be sure to stock Ford trucks. Don’t let your own new car bias interfere with your judgment about stocking brands that your market demands.

9. Customers’ cars take precedence over used-car vehicle reconditioning – Today the worst enemy of the used car department is time. The toll that time imposes on a vehicle’s value and market demand is severe. Therefore, it is no longer acceptable for a dealership to make used vehicle reconditioning among the lowest priority of the service department. While taking care of customers is a high priority, you need to find a way to provide the same time sensitive service to each and every used vehicle in need of reconditioning and/or repair.

10. Per vehicle gross profit as a sign of strength – The proper sign of strength for any used car operation is their total gross profit – not average gross. The most important dynamic is the velocity and turn of the inventory. Those dealerships that focus on per vehicle gross profits find themselves trying to convince buyers to pay more for a vehicle than they need to or waiting ever longer periods of time to find someone that doesn’t know better. It’s costing you more to hang on to these two losing strategies than to let loose of them. Remember that time is the enemy to a vehicle’s value and desirability. Consequently, a vehicle’s stay in inventory needs to be very brief. Total gross profit needs to be a dealer’s key metric to be profitable in today’s volatile marketplace.