There is no question about it — the used-car departments at most franchised dealerships are in the middle of unique, if not challenging, times. Inventory is scarce, competition is squeezing gross profit margins, and customers are demanding more. Customers are looking for higher levels of service, and for vehicles that are reconditioned better, but still have value prices. It is a battleground, to say the least.

When I first started as a used-car manager, I was searching for a competitive advantage over the independent lots who were selling my make in my market for quite a bit less money. I knew my fixed costs, fixed expenses and reconditioning bills were much higher than those of the independent lots. I believe that customers will pay additional money to purchase a vehicle from a franchised dealer, but that additional money still usually doesn’t cover the gap between the expenses a franchised dealer has and those of an independent lot.

When I asked the sales staff that I inherited about the CPO program, I was told that it heavily increased service costs, and only offered lower financing rates as a benefit. They went on to tell me that finance managers dislike the program – as it cuts into their finance reserve, and that most customers really don’t care about the benefits the program offers. Sound familiar?

Since the used-car department hadn’t been successful to this point, I decided to ignore the staff and actually read the CPO program policy manual in order to see if this program could produce a competitive advantage for me. I felt it could. Sure, at times it was difficult to see the air/ pollen bills on RO’s when I lost money on the deal, or when the rear brakes were at 40 percent and I didn’t account for that $400 bill when I purchased the vehicle. It’s extremely difficult to stay with the CPO program and its associated costs, especially when we operate in a system that says you are only as good as your last sale and in which you are compensated on gross. The temptation is high to avoid the extra costs associated with the CPO program, and to think that’s the best way to keep up your gross. But what if I told you that even though you made extra gross on that specific vehicle, it actually costs you more in the long run? As my first manager used to say – “you would be stepping over dollars to pick up dimes.” Let me explain.

First, let’s start with the surface.

Here are some of the benefits that most CPO programs provide to your potential customers:

  • Extended powertrain coverage
 
  • Subvented finance rates
 
  • Vehicle exchange
 
  • Oil change, new air/pollen filter, and new wiper blades
 
  • Up-to-date required maintenance
 
  • Service history
 
  • Minimum tire and brake requirements that are 2.5 times greater than government minimums
 
  • 100 point detailed mechanical inspection and appearance inspection forms
 
  • Vehicle history report
 
  • Automatic discounted extended comprehensive warranty
 
  • Vehicle promotion and marketing from the OEM
I’d like to go further now, and explain some additional unexpected benefits that I received from being committed to the CPO program:

The competitive market shrunk between 60-80 percent on most vehicles (independent lots were no longer our competition, as they couldn’t offer what we offered).

Sales staff were confident only comparing our price to other CPO vehicles.

Our technicians were becoming ambassadors of our used vehicles (we were doing everything required on all vehicles and not declining service work to make an extra dollar of gross profit).

A consistent sales process naturally developed, which gave the sales associates confidence and resulted in them becoming more professional (after the test drive, the sales associate would review the storybook).

The transactional discounts automatically reduced, since there was now documentation to justify the value price.

All non-certified and off-make vehicles had a similar storybook and reconditioning process, which allowed the sales staff to follow the same selling process every time, which resulted in a better customer experience and a more professional image.

Finance rates were used to help further distance us from the independent lots (the difference between a $15,000 loan over 60 months at 4.99 percent and 6.99 percent is roughly $800).

We had a greater number of finance deals, which created more opportunity for the finance department to sell added value products.

Pride of department increased, and the stereotypical used-car salesperson was replaced with a CPO professional.

The above points all add value and benefits for both the customer and the dealer, but they need to be explained clearly to your sales staff and your customers in order for you to be able to see the true benefits and potential for the department.

To be clear, I am not saying that you should go out and certify every vehicle that you have. However, you should look at a decision not to certify a vehicle as an exception to the rule. Otherwise, how would you be able to answer questions like these:

You have two 2012 Honda Civics with roughly 50,000 kilometers, with clean Carproof reports, and which appear to be the same; one is certified and one isn’t. Why?

During negotiations, if a customer wants a discount, the first thing that you pull out of the deal is the CPO warranty. Why?

You don’t do the minimum service requirements until after you sell the vehicle, and you only do them if the deal includes CPO (a result which depends on gross in the deal, and the desires of specific customer). Why?

The answer to some of these questions is likely that you acquired the vehicle for too much money, and now you don’t want to certify it because it will cut into your gross potential. Or the answer may be that you want to make a deal without certifying the vehicle unless the customer wants it, to maximize gross. What does that say to your staff and customers? I believe it says that there is no value in the CPO program, and that we do it because that’s what the factory wants (or if the customer knows about the low finance rates, we need to give it to them). It is difficult for your sales staff to build value and sell at market price if management doesn’t even believe in the value. At that point, participating in the CPO program turns into a cost, and carries a negative vibe with it.

By not taking advantage of the benefits of your CPO program, you are costing your dealership more potential new-car deals, not to mention service business. When you commit yourself to your CPO program, you will see an automatic improvement in the processes and professionalism level of your dealership.

How does all of this connect to your dealership, as a whole? Committing yourself to a CPO program means that you will sell more cars at a quicker rate, and will therefore need to replace your inventory more frequently. Your greatest source of inventory is your new-car department (trade-ins), and because your used-car department will be so successful, you will be in a position to pay full market value (or sometimes even overpay) to win the trade, being confident that you can still sell it for less gross profit, while still increasing the bottom line. When you’re not committed to the CPO program, your inventory will start aging, and you will be struggling to make gross profit. You’ll then find yourself wanting to pay less for trade-ins (both your own make and off-makes). What do you think happens when that customer shops his trade at a successful CPO dealership that is desperate for used car inventory? Let me tell you – they pay more for his tradein and steal the deal from your store.

Stop penalizing both your new and used car customers for current market conditions, because at the end of the day you will only be hurting yourself.

Remember, it all starts with you.

Richard Macdonald is the founder of RPM Solutions. Richard provides consulting, training and coaching services to new-car franchise stores to help them maximize their used-car department profits. For more information, contact Richard at (416) 894-1475 or richard@rpmsolutions.ca.