New thinking about reconditioning vehicles in today’s price sensitive marketplace

July 24, 2009
PARK RIDGE, IL - JULY 01:  Toyota vehicles sit...

It’s not uncommon for dealers and used vehicle managers to say, “We’re sticklers for reconditioning.”

The underlying premise is a good one: We’ll do everything we need to do to make sure a used vehicle is safe and stands tall from a retailing perspective.

Of late, however, I’ve started to wonder if our own propensity to detail and recondition a vehicle to the “nines” may be out of step with what our customers truly need or expect when they buy a vehicle. What’s more, I wonder if the costs we incur as dealers to perform the reconditioning make our vehicles more costly for today’s increasingly price-conscious buyers.

My musings flow from a recent meeting of vAuto clients. The dealers gathered around the conference table were all mega-dealers-guys with multiple stores and a keen interest in building used vehicle sales, volumes and profits.

To a man, this group agreed that winning with today’s Internet-enabled buyers meant that all dealers had to strike a balance between stocking the “right” vehicle for a market and pricing it competitively to attract customers. As we drilled into the discussion, our attention turned to factors that make competitive pricing more difficult.

Reconditioning expenses topped the list-more or less tied with the current difficulty of buying vehicles at the “right” price with so many dealers and used vehicle managers now filling auction lanes and bidding up the prices of vehicles.

I asked the group to share their average reconditioning expenses. The range of averages, from $525 to $2,000 a unit, was striking. We normalized the figures to account for the varying degrees of reconditioning expenses required to meet factory certification programs and differences in the retail rate these stores typically charge themselves to do recon work. Even then, we still had a roughly $1,000 gap between the highest and lowest average.

How can that be? Part of the answer, no doubt, has to do with the size and sales volumes of the individual dealer groups. Some centralize their purchasing of parts and supplies needed for reconditioning (a cost savings) and others are more efficient at getting the reconditioning work done in a timely manner (a second cost savings).

We agreed that regular reviews and audits of reconditioning expenses including any vendors we might use for detailing, upholstery and body work merit greater time and attention to ensure every dealership has the most cost effective and efficient reconditioning process possible.

Our discussion then led us to think outside ourselves: While we believe reconditioning adds value to a vehicle, what do customers think? Does the additional mark-up we use to cover reconditioning expenses make our unit less price-competitive in their eyes? Is it fair to ask customers to essentially pay us a profit twice because of recon work-as the unit moves through service and then as it gets sold?

Then came a curveball: We talked about how some franchised dealers are offering customers the option of paying for reconditioning work when they buy a vehicle. All of us found the concept intriguing.

Essentially, these dealers do a vehicle inspection, write up an RO and then give the RO to a customer: “We believe this vehicle needs this work. You have the option of doing the work here, for this price, or purchasing the vehicle as-is and getting the work done yourselves.”

I spoke to a dealer who’s testing the concept: “It’s working. We’re selling to a group of customers we otherwise would not have sold. Most have us do the work, but a few do it on their own.”

I recognize this idea flies in the face of traditional wisdom about the need and value of reconditioning. I can see where the risk of come-backs might even make it DOA for most dealers and used vehicle managers. But, right or wrong, the concept gave our discussion group pause. It gives the customer a choice, which is never a bad thing.

As dealers we must therefore, see the issue of reconditioning as a strategic decision. Specifically, do we recondition the vehicle to the max and accept the inevitable pressure that it places on margins, or do we do little if any at all? While I know it’s not popular and in fact downright offensive to many dealers, I think that charging retail rates for used vehicle reconditioning forces managers to make decisions about pricing for the wrong reasons.

As we wrapped up our discussion, we were reminded of an age-old axiom: Just as a vehicle’s worth what someone is willing to pay, the same is true for our reconditioning work. The key is finding the sweet spot that works for your store and customers.

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