Any dealer will tell you that it seems as if used cars are getting more and more expensive to buy, while competition and the Internet are driving down prices. Factor in transportation, recon, advertising and commissions; it can be a real struggle to make an acceptable profit.
In the past, used cars demanded a premium. Dealers took pride in telling customers that there are no two used cars alike. Because used cars were unique and like a rare commodity, they rightly demanded a premium.
Dealers used the cost-up method to price inventory. This meant that once a car was purchased or traded, the dealer added all cost of acquisition and get-ready to the inventory cost and then added $3,000 or $4,000 in markup.
After that they would wait for the right customer to show up.
Unfortunately, those days are gone, and that business model is obsolete.
With few exceptions, there are no more “one of a kind” vehicles. Because of the Internet, customers are only one click away from dozens or maybe even hundreds of vehicles similar to yours. Dare I say it: maybe even better than yours, for less money.
The Internet has changed the way consumers shop for cars forever. Consumers are deciding in advance where they want to shop before they contact a dealer. They use third-party sites like AutoTrader.com or Cars.com to check availability and pricing on their vehicles of interest. They most often are eliminating potential dealers because of price.
If your cars are marked up $3,000 or $4,000, you won’t even be considered as an option.
You may ask, “What about high-line or specialty vehicles?" This is not an article about the exceptions, this is about the real-world challenges that most dealers face in an Internet world as it relates to profitability.
Is it only about pricing? Is it a race to the bottom? Can I just cut my price and fix this problem? No, no and no.
The answer has more to do with efficiency than pricing. How quickly you turn your inventory determines your ROI. Here is another way to say it: The greatest factor in determining your profitability in used cars is how many times a year you are turning your used car dollars and for what percent of return.
Here is some simple math:
- If Manager A maintained $1 million in inventory, and he sold 50 vehicles at $2,000 PVR (per vehicle retail) for a total gross $100,000, this may seem like a good job. The ROI for that month would be 10 percent.
- If Manager B worked from a $500,000 inventory, sold 75 vehicles at $1,333.33 for a total of $100,000, he may be told his PVR is too low.
But the numbers tell a different story. $500,000 in inventory and $100,000 in gross is a 20 percent ROI. Also selling an extra 25 cars means an extra 25 going through service, 25 more F&I opportunities and 25 more units that carry a DOC fee.
Both managers generated $100,000 in one month, however, manager B is getting double the ROI.
When we reward managers by only looking at PVR, we are not seeing the total picture. A used car manager can make his PVR whatever he wants it to be. If he needed to be at $2,000, then he could just pass on any deal under that figure.
Would you take a $500 front-end loser on an 80-day-old unit that would lose $2,000 at the auction? A smart business person would probably take the retail deal, give F&I a shot, maybe get a good trade, make a future service customer or a least liberate that frozen capital to redeploy it into a better more desirable asset.
How about a manager paid only on gross and PVR, what decision would he or she make?
Therefore, measuring PVR and total gross is not the right metric. The more valuable question is, "What’s my ROI and how fast are we turning our inventory?
If efficiency is the path to turning inventory faster for better ROI, how do we get there?
- Right car, right price. I see only one reason to stock a vehicle — because it sells quickly.
- Race to market. If your car is not online, then it is not for sale, and every car should be online within 24 hours of hitting the lot. There are many tools to help with this. This is easier than you may think. An exterior wash and then a couple of pictures before service. Then taking the full spread after service and full detail works fine.
- Price to market. Price your cars based on market data. What you own the car for has nothing to do with what you can sell it for. There are many online tools for this as well.
- Keep at it. Fight the temptation to go back to the old ways. Embrace the fact that things are changing. Accept the fact that you will make mistakes, and they may cost you money, but in the end be committed to long-term profitability in today’s market.
