Four Ways You Can Improve Profitability
A recent NADA study showed that profitability on both new and used vehicles is dropping and, as a result, dealers are making less and less on their vehicles.
While profit per vehicle is dropping, some industry voices suggest that dealerships should begin looking at overall profitability instead of profit per vehicle. This makes sense in theory, but consider this example: if you sold one car with a $2,000 profit in 60 days you’d seemingly make less money than if you sold three cars in that same 60 days at a $1,000 profit. But what happens when you actually lose money with all of your added selling costs? In that same scenario, using today’s NADA-stated averages, a dealership would lose $58 by selling one car in 60 days vs. losing $174 if they sold three cars in 60 days.
Selling cars at a negative net profit can be a pitfall for dealerships. Not only are margins shrinking, but it also puts additional pressure on other parts of the business to absorb the costs of the Sales department. Furthermore, pumping more vehicles through as a solution vs. addressing the root causes results in more recon work for your Service department from the associated trade-ins. As Service work piles up for your Used Sales department, your store is taxed that much more and may not be able to handle all your customer pay business in a manner that breeds Service retention and satisfaction. Instead of velocity improving the situation, it might actually make things worse.
So, how can you reverse the trend and save profit margins on your used vehicles?
1. Stock the Right Vehicles
Understand the historical data that tells you what has moved in a market. Dealerships that are winning today are not bidding up against one another at the auction, fighting for that same silver compact crossover that has sold well in the past 60 days. Instead, they’re finding alternative ways to buy that silver compact crossover or, even better, they realize that while all the competition goes for the silver compact, you’ve actually had a lot of success selling the black mid-size SUV. Those that win today turn left when everyone else turns right.
2. Price Competitively
The key is to acquire the right car at the right price and get that car to market quickly. Arm yourselves with data and knowledge of trends so you have the flexibility to price aggressively and maintain a margin. Furthermore, when you have inventory that you have a proven track record of selling, you can develop subject matter expertise. Your people know how to sell that model over and over again, and you become the place to go for that type of vehicle – putting less pressure on you having the rock bottom price.
3. Merchandise Sooner to Turn Quicker
The clock starts on a vehicle the moment you take possession, whether that’s a trade or at the auction. Reconditioning can take days, with some dealers reporting that it takes them 10 days or more to get a vehicle retail-ready. While reconditioning optimization is an underserved part of the business, there is a way to work around this. For vehicles that require little work, what’s stopping you from putting those vehicles on your website the moment you take possession? By embedding vehicle stocking into your appraisal process, you can begin marketing that vehicle the second you get it. Many appraisal tools include the ability to take photos during the appraisal. But other tools go a step further and allow you to push that car from completed appraisal to your website inventory in near real time and to marketplace sites in a matter of minutes.
4. Develop a one-to-one marketing strategy
The moment you acquire a vehicle, leading dealerships are finding matches for a vehicle within their customer base. Powerful tools exist to help dealerships find upgrade opportunities within their customer base, so dealers can put their customers in a new or newer car with similar payments and, in the process, reacquire another car for their pre-owned inventory.
Now it’s your turn
The industry took the eye off the ball with a hyperfocus on velocity. Net profits in particular were sacrificed as selling costs, acquisition costs and wholesale costs skyrocketed. Remove your dependency from the auction; find better and underserved areas to acquire vehicles at more reasonable prices. With the right vehicles, you can deploy more aggressive pricing strategies that help you maintain a healthy profit, delight customers and win in your market.