3 Ways The “Profit Per Day” Metric For Used Vehicles Falls Short
Several dealers have asked me recently about the value of measuring the “Profit Per Day” of their used vehicles.
As I understand it, the metric is determined by dividing a unit’s front-end gross profit by its days in inventory (e.g., a retail unit that generates $1500 in profit after 30 days would translate to $50 in profit per day).
The metric appears to help dealers see how some units generate a higher per-day profit than others, particularly if they sell quickly. Likewise, the metric would also help dealers recognize that inventory turns are important. (For example, if the same vehicle noted above sold in 60 days and generated a $1500 front-end gross, the per-day profit would be $25.)
But I don’t think the metric is really the “game-changer” for maximizing inventory turns and profitability that its proponents claim. I say this for three reasons:
1. The metric doesn’t pass the “So what?” test. I might be missing something, but the metric seems to affirm what any market-astute dealer already knows—some cars do better than others and, generally speaking, you make your best front-end gross on any car while it’s fresh. To be sure, the metric offers some potential value to help dealers spot problem cars. But I would submit most dealers, if they’re honest with themselves, are already aware of the winners and losers on their lots.
2. The metric’s built on a faulty premise. The metric seems to be built on the traditional belief that you “make your gross” when you sell a used vehicle. In my day as a dealer, this was largely true—the customer didn’t know how much we might/should have paid for the vehicle, and it wasn’t easy for buyers to compare cars and prices, which gave us a lot of latitude with our cost-up mark-ups and margins. Today, however, it’s different. Customers are more circumspect and smart about retail prices and, as a result, there’s unprecedented pressure on front-end margins. In this more transparent environment, dealers effectively establish the front-end gross profit margin potential on any car when they acquire it. If they pay too much, the front-end gross profit will suffer, irrespective how of quickly the vehicle sells. In this instance, the Profit Per Day metric wouldn’t reveal that a dealer may have a problem acquiring cars “on the money.”
3. The metric raises more questions than it answers. The beauty of the Profit Per Day metric, its simplicity, is also its curse. Beyond buying the “right” car for the “right” money, there are a host of other factors that affect a vehicle’s gross profit potential—paying too much or taking too long in reconditioning, a car-specific pricing strategy that balances gross and turn, proper merchandising, discounts at the sales desk. If, for example, the Profit Per Day metric showed a less-than-favorable result for a vehicle, I’d have to ask various questions and see a lot of other data to understand the root causes and learn a lesson.
As I tell dealers, there’s no single metric that will change their destiny in used vehicles. Rather, it’s the consistent, ongoing use of several metrics, in tandem with each other, that help dealers maximize their used vehicle inventory turns and profitability in the most efficient, sustainable fashion.