3 Reasons A “Turn And Earn” Strategy Eludes Some Dealers

October 24, 2014

For the past several years, I’ve been a vocal advocate of the Velocity Method of Management—a market-based inventory management strategy that pushes dealers to turn their used vehicle inventories to maximize return on investment and minimize risk.

My advocacy flows from a firm belief that today’s market penalizes dealers who do not make a concerted effort to sell more used vehicles in less time. In today’s market, the longer a dealer futuristic-car-wallpaper-110155hangs on to a vehicle, the less likely it will generate a sufficient return on investment. This reality owes to a combination of competition, pricing transparency and volatility—all of which contribute to margin compression.

My faith in a “turn and earn” retailing strategy also flows from the successes of dealers who adopt this approach. In a matter of months, the best “turn and earn” dealers double their monthly sales volumes and see record-setting levels of profitability in their used vehicle, service/parts and F&I departments. The big pay-off comes a bit later, when the higher level of performance and profitability become standard operating procedure, and dealers achieve a level of financial return and reward they hadn’t considered possible.

But for every Velocity success story, there are dealers who can’t successfully adopt a “turn and earn” inventory management strategy. I’ve seen enough of these implementation failures to identify three key reasons the dealers came up short:

1. They lose faith. A few years ago, I coached a New York dealer as he adopted a “turn and earn” strategy. His first course of action: Take accountability for all the aged vehicles in his inventory. This wasn’t easy because it required taking a $500,000 loss in the early months as the dealer retailed cars that had sat too long to offer a positive return.

This day of reckoning is a prerequisite for dealers who adopt a Velocity strategy and, for some, it’s too painful to accept. These dealers will blame the “turn and earn” strategy for the loss and ditch the strategy altogether. Of course, the strategy didn’t create the loss; rather, it exposed a “water problem” the dealer would rather ignore.

I compare the initial stage of Velocity strategy implementation to the experience anyone undergoes as they try to rid themselves of an addiction. At first, it feels terrible and, for some, this initial pain proves too much. But those with more persistence realize that, over time, they actually feel better as the addiction loses its grip.

The same is true for dealers adopting a “turn and earn” strategy. Their addiction is aged vehicles, and it’s a difficult habit to break. Those who have the faith to withstand and work through the initial pain, often wonder why they ever thought an aged unit was OK.

2. They can’t break the resistance. When dealers adopt a Velocity strategy, all the goal posts move closer. Dealers must put used vehicles online as soon as they purchase them. Likewise, reconditioning/detailing must be completed in day or two, not a week or more. Appraisals and asking prices must continually align and re-align with the market. Managers must make speedier decisions about each vehicle’s exit strategy.

In other words, a true “turn and earn” dealership requires a much higher level of collaboration among dealership departments, and everyone must understand that efficiency and speed drive the size of their paychecks and the dealership’s success. It’s not uncommon for dealers who adopt a Velocity strategy to find their skills as coaches and leaders put to the test.

“At times, it felt like I was herding cats,” says a Midwest dealer who adopted the Velocity strategy two years ago. “It’s tough to get everybody on the same page and we lost a couple people who couldn’t make the adjustment.”

3. The old habits never really go away. It’s common to hear dealers say that their average front-end gross profits decline as they adopt a “turn and earn” strategy. I address this complaint by showing dealers how their average gross profits have really normalized to the market. I also encourage them to focus on the “total” gross profit each vehicle, and their inventory as a whole, now generates for the dealership.

But some dealers have a hard time seeing the whole picture, and they end up undermining the “turn and earn” strategy with decisions that draw from a more traditional average front-end gross-focused playbook.

For example, dealers will set used vehicle asking prices well above the market in an effort to maximize average front-end gross profits—irrespective of whether the unit deserves the asking price, based on market data. This knee-jerk, control-the-gross impulse inevitably puts the dealer’s vehicles at a price disadvantage and slows their rate of sale.

Some “turn and earn” dealers also see diminished front-end profitability due to sales process “leaks.” This scenario occurs when dealers set market-competitive asking prices, and then allow sales associates to discount the price by $500 or more. The solution, of course, is a compensation plan that rewards sales associates when they stand firm on price and help sustain each vehicle’s front-end profit potential.

I advise dealers who want to adopt a “turn and earn” strategy that the transition will be a difficult, sometimes painful journey. I let them know they’ll face each of the challenges noted above, and probably a few more.

I also note that every successful Velocity dealer has been there. They’d be the first to tell you that adopting a “turn and earn” strategy isn’t easy. They’d let you know it takes an extraordinary level of commitment and courage to confront and contain the adversity that inevitably arrives.

But they’d also say the journey, for all its pain, has been well worth the gain.