ProfitTime in Practice: Your Price May Not Be As “Good” or “Great” As You Think

November 7, 2019

I recently raised a caution flag about pricing used vehicles to earn a price value designation from third-party classified sites.

Since then, I’ve gained a deeper understanding that pricing your used vehicles to “good” or “great” designations can lead to a false sense of comfort.

The take-away emerged this week in a conversation with a Midwest used vehicle manager who retails about 180 vehicles a month.

In ProfitTime, the dealer’s inventory showed an investment inversion problem. That is, the Bronze vehicles were priced too high, and the Platinum vehicles were priced too low. As a result, the Bronze vehicles were selling at a slower pace than the Platinum vehicles.

I asked the manager about the inversion.

The manager explained that he priced his inventory to meet “good” or “great” designations on a third-party site—a principle he applied to all vehicles.

I asked the manager if he believed that aligning his vehicle prices to “good” or “great” designations was enough. That the third-party value badge would sufficiently satisfy customers, and they would come to his dealership to purchase his vehicles.

“Yes,” the manager told me. “That’s what the consumers need to see.”

I said, OK, and asked to take a closer look at some cars and pricing.

We pulled up a 2018 Chevy Cruze, a Bronze vehicle that the manager had priced at a 96 percent Price to Market percentage to earn a “good” value designation.

In Provision, the vehicle’s pricing earned a vRank of 10, which meant it was the #10 value in the vehicle’s competitive set, which totaled about 60 vehicles.

I asked the manager if he thought a vRank of 10 amounted to a good price for a Bronze vehicle that would compel shoppers.

“I think so,” the manager affirmed.

Next, we took a closer look at the vehicles/prices in the Cruze’s competitive set. Here’s what we found:

The vehicle with a vRank of 1 showed an asking price $2,500 less than the manager’s price on the Cruze.

The vehicle a vRank of 2 showed an asking price of $2,300 less than the Cruze’s price.

The vehicle’s with vRanks of 3, 4, 5, 6 and 7 all featured prices that were at least $500 less than the Cruze’s price. The vehicle with a vRank of 8 showed a price $400 less than the Cruze.

I asked the manager if he still thought the Cruze was priced correctly given its Bronze-level investment value.

“Yes,” the manager told me. “There are 50 vehicles priced higher than mine, and my price is $1,500 below the average in the competitive set.”

Hang on, I said. I don’t think you can expect to get credit for the 50 vehicles priced higher than yours, or the fact that your price is $1,500 below the average.

The fact is, I continued, the consumer will see that there are at least seven vehicles with a much lower price than the Cruze, even though your price earned the “good” price designation.

It was at this point that the manager saw the light. He understood that pricing to meet a “good” or “great” value designation might not be enough to ensure the proper competitive positioning of a vehicle and its asking price in a market.

The manager agreed to undertake the following steps to fix the inventory investment inversion and ensure his used vehicle asking prices reflected each vehicle’s investment value:

Cross reference a “good” or “great” price against the vehicle’s competitive set. The manager and I agreed that the Cruze probably should have been priced at a vRank of 1, 2 or 3, given its Bronze status—and that a “good” or “great” designation, in and of itself, could lead to a false sense of security about a vehicle’s true appeal with shoppers.

Take your lump sooner rather than later. In my conversation, the manager admitted that he held onto Bronze and Silver vehicles longer than he should, in part, because of his pay plan. “You’ve got to understand, I have to work with a commission plan,” the manager said.

I told him I understood and offered a counter-point. I explained that the Cruze’s Bronze classification meant that it was a low-margin vehicle from Day 1 and that, over time, its potential return would only get worse.

“This car is going to hit your commission check one way or the other,” I told the manager. “Would you not agree that the sooner it hits it the better?”

The manager agreed.

The next day, the manager sent me note showing that he’d repriced his inventory and corrected the investment inversion.

“Atta boy!” I replied. “Thank you for being so open and self-effacing. Business partners like you inspire me.”