ProfitTime in Practice: Pricing Used Cars Without a Calendar

April 5, 2019

It’s long been a best practice of Velocity dealers to review the prices of their used vehicles every day to ensure the prices fall within the top three value rankings within a competitive set.

The approach is intended to reflect how today’s online vehicle shoppers look for their next used vehicle purchase: After perusing vehicles on classified and dealership websites, they tend to narrow their wish list to two or three vehicles that, to them, represent the best value.

This best practice has served dealers well over the years except for a couple shortcomings.

First, pricing and re-pricing vehicles often isn’t a daily exercise. Instead, dealers may only revisit used vehicle prices once or twice a week, or even less frequently. The intervals are often tied to an age-based pricing strategy, which typically calls for assigning specific adjusted Price to Market percentages when vehicles hit seven, 10 or 15-day milestones.

Second, dealers often don’t truly consider competitive sets as they make pricing adjustments. Instead, they tend to price vehicles based on their age-based pricing strategy. For example, if a vehicle is 15 days old, a dealer might set a vehicle’s adjusted Price to Market percentage between 97 percent and 98 percent. After 30 days, the adjusted Price to Market percentages might range between 94 percent and 96 percent.

The pricing shortcomings are understandable. Dealers and used vehicle managers are super-busy, and it can be difficult to find time to find the time for a daily review of each vehicle’s pricing and its competitive set.

I’m highlighting these shortcomings because they surface, front and center, when dealers begin using Provision ProfitTime to manage their used vehicle inventories.

With ProfitTime, the age-based pricing strategy goes away. Instead, dealers base their pricing decisions on a vehicle’s investment value, as expressed by a score and Platinum, Gold, Silver and Bronze designations.

The absence of the age-based pricing strategy can be unsettling for dealers—particularly if they have grown accustomed to relying on age-based intervals to drive when they review vehicles, and determine the adjusted Price to Market percentage that best fits the vehicle at that time.

Time and again, when I’m talking to dealers and managers about how to price vehicles with ProfitTime, they’ll want to know the adjusted Price to Market percentages I’d recommend for Platinum, Gold, Silver or Bronze vehicles.

The question owes, I believe, to dealers being accustomed to using a range of adjusted Price to Market percentages that correspond to a vehicle’s age to make pricing decisions, and their desire to apply similar Price to Market ranges to ProfitTime’s precious metal designations.

I’ll then suggest two best practices to help dealers use ProfitTime to price used vehicles based on their investment value:

First, with ProfitTime, it’s even more critical that dealers review their used vehicle prices every day, without exception. That’s because you’re now managing the vehicle’s investment value, not its age. Second, with ProfitTime, the only way to truly determine if a vehicle’s adjusted Price to Market percentage and market position make sense, is to analyze the vehicle’s competitive set in conjunction with its investment value.

For example, if I have a Bronze vehicle, I know the vehicle’s investment value is challenged. It’s a car that, by all rights, I should retail quickly to get what I can and reinvest the capital into another vehicle that might offer a better return. With this understanding, if there’s a competitive set of 13 vehicles, I would probably choose to price the vehicle to be among the top three value rankings in the competitive set.

By contrast, if I have a Platinum car, and its competitive set includes 13 vehicles, I’d likely price the vehicle to rank 11th or 12th in the competitive set, because the vehicle’s investment value merits a competitive position that allows me to maximize its investment or gross profit potential.

The key take-away for dealers accustomed to age-based pricing decisions is that investment value-based management requires more diligent stewardship of competitive sets and vehicle prices.

I would add, however, that I have seen some dealers develop formulas for investment value-based pricing that, by design, are meant to offer a less time-intensive approach to pricing.

For example, a Northeast Toyota dealer created a formula to facilitate ProfitTime-based pricing. The dealer built the formula after determining the average adjusted Price to Market percentage at which his vehicles sold. He used that figure as a baseline to determine how to set prices within each ProfitTime precious metal designation.

“I was trying to not raise or lower the overall price of my inventory,” the dealer says. “I wanted the overall Price to Market average to come out the same.”

The dealer tinkered with the numbers, and came up with this formula: Each vehicle starts at an adjusted Price to Market percentage of 92 percent. From there, the dealer adds the vehicle’s ProfitTime investment score from the system’s 1-12 scale to determine the vehicle’s specific adjusted Price to Market percentage.

Hence, if it’s a Bronze vehicle with an investment score of three, the dealer would initially price the vehicle at an adjusted Price to Market percentage of 95 percent. If it’s a Gold vehicle, with an investment score of 9, the vehicle’s initial adjusted Price to Market percentage would be 101 percent.

“I wanted to give my managers a simple formula,” the dealer says. “We’re happy with how it’s working so far.”

I’m not necessarily advocating the dealer’s strategy.

But I understand the dealer’s thinking—for him, the formula is really the next-best thing to studying each vehicle’s competitive set and price position every day.

Further, I appreciate the dealer’s effort to find a way to base pricing decisions on each vehicle’s actual investment value, not arbitrary days on the calendar.