The right way to increase average used car gross profit
Below is a note that I received this afternoon from a vAuto client and friend. I thought my response would be constructive as I think it addresses a common concern.
I was just putting a few numbers together from January-April for the last 3 years at our store:
New Chevrolet Used Vehicle New Loss Used Profit
2008 128 Units 196 Units -18,000 $48,000
2009 70 Units 208 Units -62,000 $63,000 (Includes about $30,000 of write down money we took to gross)
2010 89 Units 243 Units -28,000 $44,000
Overall I’m very pleased with our progress, but we are not making more money and that has me concerned. I’ll put my thoughts down and then ask for input from either of you:
March and April of 2010 have been our 2 biggest volume months of used cars in the last 5 years that I could easily put my fingers on and I think our 2 biggest months ever overall and consecutive (66 in March and 74 in April). This with dramatic decreases in new vehicle sales(which also decreases nice trade-ins). We have worked really hard to go out and buy the right vehicles with the help of your tool. While that is exciting news and our salespeople are making some volume bonuses our used net is not at a 5 or 10 year high. We seem to be struggling with our gross both front and F&I. We have had no more than 5 vehicles over 60 days for the last 2 years and that probably affects our gross somewhat, but we would like to see our front gross up around $1,500 (currently at $1,200). It also seems difficult to keep our F&I gross up on deals closed online or over the phone (our F&I gross is $455 per unit which is not far from our goal of $500). I was thinking that if we could get consistently up to 65 to 70 used that we could move our used net to $20,000 per month, but it seems we have had to sacrifice too much gross (can’t move it from $1,200 to $1,500) to get to that unit level. I fear if we now try to move to 75 or 80 units per month it will not pay in net (I realize more service gross in the process) with a bunch more work. Our expenses are low in our 20 group other than personnel, which is a decision we have made to keep an additional manager that we could probably do without as I plan to move to the dealer position in the next few years. In other words there are not huge expenses that can be cur. Any other insights from this limited data? Anything else either of you would like to see?
Thanks to both of you for the great product we have the privilege of using and the support that comes along with it. It is a game changer and we buy it 100%. I just need to figure out how to use it more effectively to get a little better net to the used department. – Chuck.
Thanks for your very thoughtful note and analysis. I have several suggestions and observations. First, welcome to the reality of today’s used car business. The reality is that you and every other dealer are working in a highly compressed margin environment. Unfortunately, wholesale prices of used vehicles have risen much more than their retail counterparts. This is because there are obliviously many more used car wholesale buyers chasing fewer vehicles. On the retail side, banks won’t advance as liberally as they once did, and more and more dealers are pricing aggressively. Unfortunately, I don’t see relief for this condition in the near or intermediate term. For this reason, I would encourage you to look for evermore places to become more cost efficient.
In light of this reality, you’re confronted with a dilemma, and that is the need to make more profit with less margin opportunity. The most common response and the one that is incorrect is to raise your prices. The effect of this strategy is like shutting the oxygen off to the patient. While you might be successful in raising your front-end average to your target level of $1,500, you will undoubtedly sell fewer vehicles and make less total gross.
Another incorrect alternative strategy and one that many dealers have used without realizing it is to put more money into used car inventory. This method allows the dealership sometimes to sell a few more cars, but ultimately produces an even worse return on investment.
The only viable strategy is to go from money to metal, from money to metal, from money to metal as many times as you can with the present amount of cash. This sets up the question of how you’re going to move merchandise even faster without lowering prices even more which would seemingly make your average gross profit dilemma even more difficult. Well…here’s the answer.
You must begin to manage average gross profit, but you have to do so in a new way. I would offer you the following three strategies for properly managing gross profits:
First, recognize that we have built a culture in the showroom over many decades of big negotiation. When cars are priced right, you can not afford to do as much negotiation. While everyone is concerned with what you tell a customer that expects a large discount or trade over allowance, that is not the biggest problem. Chances are the customer arrived at your store because they already satisfied themselves that your vehicle is priced right. Unfortunately, they just don’t announce that fact upon arrival. The real problem is in the mind of your own sales people. Based on decades of high mark-up pricing, we have taught them that they need to negotiate, and now it’s time to change that culture.
This begins by taking the vAuto system into your sales meeting and showing the sales staff how sophisticated you are philosophically and technologically about pricing your vehicles for sale rather than negotiation. You would like your sales person to leave the meeting with a bounce in their step, and when they greet the first customer of the day that asks “what are you going to do for me”, your sales person responds with the true belief and words “come on…we both know why you’re here”.
The second key strategy of proper gross management is to have documentation replace negotiation. It’s a crime that you’ve used the most sophisticated price tool in the universe to get the customer to the store but yet a sales person is out in the showroom struggling to justify its price without data. The vAuto tool has a showroom report that is designed to show a customer why your vehicle is priced fairly. It doesn’t need to be the lowest, all you need to do is to show why lower priced vehicles are not exactly the same as yours, i.e., mileage, equipment, condition/history, etc. Using this data to open a customer takes away the most powerful weapon they have that costs you gross in every single negotiation, the weapon of BS and exaggeration. Not only does this strategy reduce the amount of discount, but it also reinforces in your sales person’s mind with each presentation as to the appropriateness of your asking price.
I believe so strongly in the need to do replace negotiation with documentation that I have built and launched another tool called RealDeal.com. This new system is to the price what CarFax is to the car. In other words, objective, third-party validation as to the fairness and value of the price on a specific vehicle. I would encourage you and every other dealer to see a demo at www.RealDeal.com.
The third strategy is to begin measuring the amount of discount between asking and transaction price for each transaction and each sales person. The mere practice of measuring the discount creates almost automatic reduction in the amount of discount of the average transaction. Over time, you will create a competitive environment that will reward sales persons not for how much gross they make, but rather for how much gross they gave up.
Dealerships that have been using these practices are able to reduce the average amount of negotiation from thousands to just a few hundred. The effect of these strategies will dramatically improve your gross profit as they wipe away needless discounts. Please check with your vAuto Performance Manager for training classes that we offer around the country (no charge). Thanks and let me know how it goes for you. – Dale