Getting Past Pricing to Build Used Vehicle Profitability

March 26, 2012

“Dale, we’re selling more used cars but I’m not making any money.”

This is a common complaint among dealers, particularly those who’ve adjusted their retail asking prices to reflect today’s more competitive and price-sensitive used vehicle market.

As I discuss used vehicle profitability with these dealers, I’ve found that many are not yet accustomed to managing their used vehicle operations in a manner that maximizes their ability to achieve an acceptable level of profitability. These dealers are often fixated on price as their chief means to drive used vehicle profitability.

This thinking flows from tradition. Pricing has always been the principal lever dealers pulled when they paid too much to acquire a vehicle, spent too much on reconditioning or simply wanted to increase front-end grosses. This doesn’t work to improve profitability in today’s marketplace, where pricing functions mainly as a way to get the attention of price-sensitive online shoppers and drive traffic to the dealership.

My counsel to these dealers is this: You need to recognize that profitability comes from the sum of the effectiveness and efficiencies you build in your used vehicle operations, not price. A dealership’s profitability in used vehicles flows from its strategy for inventory composition and management to the multiple decisions and processes that touch each stage of a used vehicle’s lifecycle. It’s not an easy task, and it’s not accomplished overnight. However, dealers who achieve operational and process efficiencies in their used vehicle departments usually find that increased sales volumes and profitability follow quickly.

The following are best practice recommendations to address three common “profit killers” in used vehicle departments:

Focus on fresh inventory. To maximize profitability, dealers should focus on acquiring the “right” vehicles and selling them quickly. This velocity-minded approach to used vehicle management leverages the age-old truth that fresh vehicles are best able to hold their mark-up and gross profit potential. Dealers who strive to keep inventory fresh, using strict acquisition and pricing processes, lose less profit potential to depreciation and see fewer wholesale losses. In today’s environment, dealers should maintain at least 50 percent of their inventory under 30 days of age. Dealers who meet this benchmark effectively drive the “turn and earn” power of velocity inventory management and bring more money to the bottom line. The first step of a fresh-inventory-first mindset is recognizing the vehicle segments, or buckets, that work best for your dealership and its market. Then, it’s a matter of acquiring the “right” vehicles to fit your segments, pricing the cars to attract shoppers and revisiting each vehicle’s merchandising at least weekly to ensure every car is positioned to sell quickly.

Control your inventory costs. In today’s competitive used vehicle marketplace, it’s critical to be “on the money” with every wholesale unit acquired through auctions or trade-ins. The best way to avoid over-paying for a car is by assessing its cost-to-market ratio before you make the decision to buy the vehicle. This ratio measures the “spread” between a vehicle’s wholesale acquisition cost and its most competitive retail asking price. With this, dealers can account for other potential drags on a used vehicle’s profitability potential–auction/transportation fees, reconditioning costs and packs—as they determine the maximum amount they can pay to acquire a unit and produce a reasonable retail profit. These cost management efforts require the ability to effectively coordinate a “cost-to-market” mindset with buyers, service managers and appraisers to ensure everyone recognizes their decisions have a direct impact on a used vehicle’s profitability potential. Today’s technology and tools help dealers manage this critical balancing act to preserve, protect and maximize each vehicle’s profit margin.

Build transparency in your sales process. Dealers who have adopted a velocity-driven approach to used vehicle management recognize they have a powerful pricing “story” to share with customers for every car. They can use technology and tools to detail and defend why a $13,375 asking price is, in fact, the best deal on the car in question. As part of their sales processes, these dealers address price right up front, explaining the store’s efforts to manage costs and price the car competitively to maximize its value proposition for customers. In this way, dealers “hold gross” by openly conveying what their customers have already learned through their online shopping and research: This vehicle is a good value, given its price and condition. When velocity dealers embrace transparency, they typically find little or no pricing push-back from their customers. In this environment, discounts are rare and, when they do occur, they run less than $200.

After discussing these used vehicle profitability best practices recently with a group of dealers, I asked them if they thought, in light of what I’d just shared, if they still believed they had a problem with profitability in their used vehicle departments.

One dealer’s response was particularly telling: “No, it’s a not a profitability problem. I’ve got a people and process problem, and a lot of work to do.”