A “Pay Up” Pitfall as Dealers Source Customer Vehicles

October 21, 2021

Last week, I shared some pointers to help dealers do a better job sourcing vehicles from customers.

But the post didn’t directly address a pitfall that often arrives as dealers move away from relying on auction and trade-in vehicles to feed their inventories, and expand their sourcing efforts to the service lane, off-street purchases and other channels to acquire vehicles from customers.

The pitfall relates to a longstanding belief or understanding among dealers that they shouldn’t pay “auction money” to acquire a vehicle from a customer.

The understanding is at least partly rooted in the knowledge that you’ll always pay more for auction vehicles compared to those you purchase from customers. At auctions, you’re bidding for cars against other buyers. You also face additional fees/costs to purchase, inspect, insure and transport the vehicle—expenses you don’t typically pay when you purchase vehicles from customers.

There’s also the reality that, in many if not most cases, dealers can acquire customer vehicles for less money than they’d pay to purchase the same car at auction. Customers may not know what their car’s worth. They may accept less for their vehicle to pay less for a vehicle they want to purchase. They might not really care what they get for their vehicle, provided they get something that seems like a fair offer. They may also accept less for their vehicle because they appreciate a dealer’s easy and convenient appraisal/purchase process.

Dealers have fashioned their appraisal strategies to account for the understanding that they should be able to acquire vehicles from customers for less money. In many stores, the used vehicle department has long followed what might be considered a two-tier appraisal strategy—one that applies to auctions, the other to trade-ins. With auction vehicles, a dealer’s strategic appraisal objective might be an average acquisition Cost to Market of 85 percent (or less), and an average gross profit target of $1,000. With customer vehicles, the same dealer’s strategic appraisal objective might be an average acquisition Cost to Market of 80 percent (or less), and a gross profit target average of $2,000.

Today, as dealers have put a greater focus on acquiring customer vehicles from a wider array of sourcing channels, the two-tier appraisal strategy has morphed into a multi-tier strategy, with objectives that are specific to each distinct appraisal/acquisition environment. For example, the appraisal strategy objective for a service lane purchase, from a customer who brings their car back at every service interval, might be different than the objective for a vehicle purchased from a customer who’s just selling a vehicle he/she doesn’t need or use much.

Generally, I’m OK if a dealer sets strategic objectives to optimize outcomes for individual acquisition environments. There’s absolutely no question that purchasing an auction vehicle, and purchasing a vehicle from a customer, are totally different, even if they both serve the same purpose of supplying inventory to the used vehicle department.

But there’s a problem with two- or multi-tier appraisal strategies when their underlying foundation—the understanding that you should acquire customer vehicles for less than you’d pay at an auction—gets put to the test. Too often, we’ll see dealers or managers miss acquisition opportunities for customer cars they need because they refuse to pay up to, or even beyond, “auction money” to acquire the customer’s vehicle.

To me, the decision not to pay up to, or even beyond, auction money to acquire a vehicle from a customer that you know you need is not OK. In fact, I’d submit it’s counterproductive.

Sometimes you must do what’s necessary to get a car you need and/or make the deal. Plus, if you pay up and get the car, you’ve acquired a new customer who may well do business with you again.

In my recent conversations with dealers about acquiring customer vehicles, I’ve been suggesting that they flip the script. Rather than refusing to pay “auction money” for a customer vehicle, they should consider the purchase price they’d pay for a vehicle at auction as the minimum they’ll pay a customer for the same car—especially if you need the vehicle and the market likes it.

It’s not always a popular view. But it’s a view that fits the current moment, when no dealer can afford to miss any customer acquisition opportunity for inventory they need.