5 Benchmarks To Guide Your Used Vehicle Investment Success In 2013
This question comes my way more frequently, and much earlier in the year, than it did in the past. To me, this is a good thing—more dealers are thinking hard and planning ahead to do a better job in their used vehicle operations.
For the majority of dealers who pose this question, my answer is nearly uniform: Do a better, more consistent, job of meeting the metrics that guide an optimal return on investment (ROI) and maximum profitability for your used vehicle operations.
I share this guidance because it’s no easy task to consistently maintain efficiency and harmony among all the people and processes that touch every used vehicle. Inevitably, even the best dealers will stumble. And, when they do, the corrective steps almost always go back to the fundamentals—the benchmarks that provide the baseline conditions for success.
Here are the five used vehicle management benchmark metrics I share with dealers to help maximize their ROI and profitability in 2013 and beyond:
1. Market Days Supply: This metric measures market supply/demand data on specific cars, and offers a thumbnail read of their desirability among potential buyers. The goal: a 70-day market days supply for your entire used vehicle inventory. The benchmark should guide, but not strictly define, a dealer’s acquisition strategy. Broadly, vehicles with a market days supply of 65 days or less are often retail “no brainers”—that is, the balance of supply and demand data suggests these cars will sell quickly. However, used vehicles with a 120-day market days supply can also make good sense as retail units, depending on a dealer’s ability to acquire it “right” and align its pricing to reflect a fair amount of competing cars. The key here is striking an inventory-wide balance between highly desirable and less desirable cars. In general, the 70-day mark indicates a well-balanced inventory.
2. Cost to Market: For much of 2012, dealers have complained that high wholesale values for used vehicles make buying cars “right” more problematic. They found the cost of reconditioning and packing cars hurt their ROI and profitability. These insights were gleaned from tracking the cost to market metric for their used vehicle inventories and individual cars. The metric measures the ratio or “spread” between the dealer’s cost to acquire and make a vehicle retail-ready and its prevailing retail price point.
The benchmark: Dealers should aim for an 84 percent cost to market metric for their inventories. This creates a 16 percent “spread” to achieve a dealer’s front-end gross profit goals. This benchmark should guide vehicle acquisitions to ensure appraisers and buyers can readily understand the relationship between the acquisition price, reconditioning/other costs and a unit’s likely gross profit potential. The old saying, “you make your money when you acquire a car” remains true today.
3. Price to Market: This metric compares the asking price of a vehicle to the prevailing prices of similar vehicles available in a market. It’s ever-more critical for dealers to offer competitive pricing to capture consumer attention. The most successful velocity dealers manage this metric in relation to a vehicle’s market days supply metric and its time in inventory. Example: A vehicle with a 120-day market days supply might be priced 5 percent less than competing units (a 95 percent price to market) during its first seven days as a retail unit. The 5 percent discount reflects the unit’s lesser degree of desirability, because the market days supply metric suggests a high degree of retail competition. If the car doesn’t sell in a week, a dealer would adjust the pricing to 93 percent price to market for the next seven days. The cycle typically continues until the unit sells.
4. Inventory Age: Every dealer knows it’s important to sell fresh cars fast to maximize gross profits and inventory turn. That said, I still see a lot of dealers with more than half of their used vehicle inventories older than 30 days. This scenario suggests a problem managing cars that don’t sell right away. The causes of aging inventory are many—the wrong car, the wrong prices, too much time lost to make it retail-ready. Regardless of the issue, however, dealers who maintain at least 50 percent of their inventory under 30 days of age are best positioned to maximize their inventory turn, investment ROI and profitability.
5. Average Discounts on Deals: This benchmark ensures that dealers “hold gross” when they close deals with customers. The goal: Average discounts should run $250 or less at a dealership. Dealers should track this number by individual managers and salespeople. In addition, dealers who adopt sales processes that validate their retail asking prices with customers and the market are best able to minimize discounts.
A final point: It takes a great degree of discipline and oversight to ensure your people and processes are pointed to meet these benchmarks on a daily basis. But, as I tell dealers who seek better results in the months ahead, the pay-off from improved ROI and profitability is well worth the price of admission.