The only controllable and sustainable way to make money in used car operation

October 30, 2009

I’d like to know if anyone can answer the follow two questions.

1) Is it reasonable to expect to make the same average used per vehicle gross profit today that we once made since the internet has taken hold in the used car shopping market?

2) Can we expect to make as much per vehicle as we once did now that the banks are not willing to extend generous advances?

I don’t honestly believe that anyone can answer “yes” we should, be able to overcome these realities of the new used car marketplace. Is it possible for our industry come to terms with the fact that we won’t make as much per vehicle as we once did? Do you think that we can overcome these harsh realities by becoming better negotiators, blowing up more brightly colored balloons in the showroom, or putting a bigger gorilla on the roof?

If we’re not going to get lucky on the used car lot as much as we used to, what’s the only rational strategy to make up for lost gross profit? When presented with this case and question, the most common response is “through volume”. Volume is close to the right answer, but not exactly on the money. Volume is relatively easy to achieve by dropping prices, but that could often lead to a profitless enterprise. The correct answer and the only one is “velocity”.

The velocity method of management is based on the premise that profitable used car operations don’t just occur through hard work or doing the same thing the same way over and over again. Rather, you must create the conditions for success.

These conditions are having vehicles with the highest possibly demand and least supply. Pricing them all right, which means not all high, nor low, but rather knowing which ones can and should be priced high and drop slowly, and which ones should be priced low and dropped rapidly. Finally, owning your vehicles right today means having a cost to market of no more than 82 – 83%.

It’s impossible to manage these conditions without using the new velocity metrics of management which are market day’s supply, price to market and cost to market. Once these metrics are used to create the proper conditions, profitable operations will naturally occur as a result of the efficient market.

Dealers that try to manage their way to profitable used car operations by trying to drive average gross profits to their pre-internet levels are attempting to defy the force of an efficient market. They are in fact shutting down the oxygen to the ailing patient that desperately needs a high velocity of air flow to sustain life and vitality.

It’s time to come to terms with the reality that the only controllable and sustainable way to make money in the used car operation is through the strategy of velocity management.

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