3 Pointers To Ensure Used Vehicle Prices Maximize Profitability

December 3, 2013

“I got to work and my GM said we had 20 calls and e-mails about a car. That’s the last thing I want to hear. It’s like, ‘Geez, we did it again.’”

If I would have heard this comment fromtipo330 a dealer 15 years ago, I would have thought he was nuts. How can a dealer, or any retailer, say they don’t want a lot of customers interested in their merchandise? Isn’t that the whole point of being in business?

Today, however, the comment reveals an astute sense of today’s used vehicle marketplace. It came from a Chicago-area Chevrolet dealer over lunch recently. We were talking about his used vehicle pricing strategy and how his used vehicle manager will sometimes miss the market, pricing a vehicle below its market “sweet spot” and triggering a sudden spate of customer inquiries.

“That’s what keeps me up at night…leaving money on the table. I don’t mind giving up a little profit to a customer, but I hate giving it away.”

The following are three best practices to help ensure you find the pricing “sweet spot” for every car and avoid “giving away” your margin:

  • Distinguish your “high gross” and “volume” cars. Today’s competitive and price-focused market means that there are fewer cars that can deliver big-dollar, front-end gross profits. Most dealers can readily spot the “high gross” cars, and they should price them to reflect the market supply and demand dynamics that distinguish these vehicles from competing units. Conversely, there are many more vehicles that lack the significant degree of market appeal to qualify as “high gross” units. These “volume” cars should be priced to balance their lesser degree of desirability in the market and a dealer’s need to maximize volume and profitability.
  • Be precise and productive. For most dealers, each used vehicle represents an average $10,000 to $12,000 investment. This means every car merits careful review of its market appeal and profitability potential, particularly as the unit ages. This takes time and it’s easy for dealers and used vehicle managers to be more productive than precise as they adjust used vehicle prices—that is, they make “blanket-style” adjustments, based on a vehicle’s age or other factors, rather than conduct detailed assessments of each car’s current market position to determine any pricing adjustments.
  • Mind your SRPs/VDPs. I’ve long considered the tally of conversions from a Search Results Page (SRP) to a Vehicle Details Page (VDP) conversion as the “money metric” in used cars. Recent industry studies demonstrate what many dealers intuitively understand: The more VDPs a vehicle generates, the greater its likelihood to sell quickly.

Because of this relationship, a growing number of dealers are analyzing VDP conversion rates and vehicle-specific VDP counts as they adjust their retail asking prices for used vehicles. A Northeast dealer group, for example, considers a vehicle “underperforming” if its VDP conversion rate runs 2 percent or less; a vehicle is an “average” performer if its VDP conversion rate is 2.1 percent to 3 percent; and a vehicle is a “high performing” unit if its VDP conversion rate is 3.1 percent or higher.

The dealer group managers evaluate each vehicle’s pricing every seven days. If they notice a vehicle’s VDP conversions are poor, they’ll first examine the merchandising factors that may make the vehicle less appealing (e.g., its competitive market position, as well as missing or poor photos, incomplete descriptions, etc.). If they’re satisfied the car is merchandised properly, the managers turn their attention to a unit’s pricing. In this instance, the poor-performing vehicle will likely see a price reduction. By contrast, these managers may also raise a vehicle’s price if its VDP conversions and other market factors show a positive, upward trend.

Such attention to a vehicle’s VDPs is like a good parent with a child—you can often discern what’s right or wrong about a child if you take the time to recognize and respond to the clues he/she offers.

I should note that used vehicle pricing missteps can and will occur—just as they do in parenting. No one is perfect and current circumstances can change quickly. However, these three best practices should ensure that your used vehicle prices consistently reflect the market and help you maximize the profitability potential of every car.