It’s becoming more critical for dealers to pay close attention to the average cost of their used vehicle inventory.
I say this for three reasons:
First, today’s market can lead dealers to believe that managing your average used vehicle cost isn’t important. After all, cars are more expensive and, if you want to play in today’s highly competitive used vehicle market, you’ve got to pay.
Second, even if a dealer recognizes how/why a lower average inventory cost helps a used vehicle department reach its peak performance potential, it’s easy to look the other way when buyers or managers consistently pay too much for trade-ins or auction purchases.
Third, dealers who do proactively manage their average used vehicle inventory cost tend to sell more cars in less time than dealers who don’t. Among the best-performing dealers I know, the average cost of their inventory is a topic of conversation and investigation every day. They live and breathe the metric, and their results prove the benefit of their cost-minded commitment.
One of these dealers is Bradley Williams, general manager for Rivertown Buick GMC in Columbus, Ga. His take: “The further you drive down your cost, the quicker your inventory turns. Increased volume should follow.”
Some dealers may question this thinking but, if you step back, it makes sense. There are far more potential buyers for lower-priced vehicles, and these units also typically pose less depreciation and valuation risk than their higher-priced counterparts.
The key question then becomes, “OK, Dale, what’s the best way to set and manage our inventory cost targets?” Here are three best practices I’ve gleaned from Williams and other dealers:
1. Recognize the relationship between average new/used vehicle costs. I like Williams’ formula: He strives to maintain his average used vehicle cost at 50 percent of his average new vehicle cost. For example, if his average new vehicle cost is $26,000, his average cost goal in used vehicles is $13,000.
This goal serves two key purposes. It helps create an inventory mix that delineates the value proposition between new and used vehicles for customers and, if managed correctly, can mitigate the preferences of individual buyers/managers, who like stocking higher-cost cars.
2. Evaluate your inventory turn by cost segment. For Williams, this analysis taught him that lower-cost cars turn more quickly. “As I managed my $13,000 cost target, I could usually expect an increase in monthly volume of one unit when we landed $100 below the goal,” he says. “I could also expect a reduction in unit volume as average cost increased.”
Other dealers arrive at the same conclusion as they evaluate inventory age by cost segment. In many cases, the oldest vehicles are also the most expensive and, in turn, they often suffer from the most significant price (and gross profit) reductions as dealers do their best to retail them.
3. Be realistic, and not too rigid, with your average cost target. The best used vehicle retailers recognize that managing your inventory to meet your average cost target is a balancing act. If you’re too firm, you’ll pass up retail-worthy vehicles that happen to fall outside your cost parameters. If you’re too flexible, you run the risk of burdening your inventory performance with too many expensive cars.
“You have to be realistic,” says the used vehicle director for a six-store group in the Midwest. “There are times when I’ve relaxed our cost targets to make trades and fill inventory gaps. But when I do, I know I’ve got to focus on retailing those higher-cost cars quickly to keep our turn and grosses in line.”
In closing, I should note that I’m writing this article as the spring selling season is coming to a close, and analysts indicate used vehicle values in most segments are on the wane.
My prediction: This seasonal volatility will prove far less problematic for cost-conscious dealers who, through their ongoing diligence and discipline, will have the advantage of less inventory water to bail as summer arrives.
Dale Pollak is the founder of vAuto. These entries and Pollak’s entire blog can be found at www.dalepollak.com.
How many email leads do you get every month at your dealership? How many do you successfully engage in conversation with? How many of your scheduled appointments show? How many of those test drives turn into write-ups? What is your average response time? How many are you able to set an appointment with? How many of those appointments take a test drive? How many of those write-ups turn into sales?
These are all questions you should know the answer to.
Without this data, you will never know where your strengths and weaknesses are, which is the first step to improving at anything. As the old saying goes — If you can’t measure it, you can’t manage it.
What percentage of email leads do you think you should be closing? 5 percent? 10 percent? 20 percent? 40 percent?
Average dealers close approximately 5-10 percent of the email leads they receive.
Elite dealers close approximately 20-25 percent of the email leads they receive.
Let’s do some simple math.
If your store receives 100 emails leads a month and you close at 5 percent, you are going to close five deals.
If your store receives 100 email leads a month and you close at 25 percent, you are going to close 25 deals.
Imagine what those extra 20 deals a month would do to your bottom line. There are no incremental expenses, just you getting more out of what you are already paying for.
You’re probably wondering, how do you go from closing 5 percent of your email leads to 25 percent? Well, that’s magic question, isn’t it? I’ve had the benefit of consulting on dealers in both brackets, and it’s pretty clear what separates the elite from the rest.
First and foremost, it all comes down to process in the store. You’ll never achieve strong, repeatable results without having a rock-solid process.
Below I’ve listed out what I’m calling “The 4 Commandments of Handling Online Leads” — They might not be inscribed into a stone tablet, but if your team learns to excel in these four areas, your closing ratio will improve and you’ll sell more cars as a result.
SPEED
Every second counts. The first commandment is both obvious and self-explanatory. The faster you get back to the prospect, the better your chances of establishing contact. A response time of 15 minutes compared to a response time of 45 minutes could very well be the difference between you winning the business or missing out. If you can get back to them while they are still browsing on their computer, you’re much more like to a get conversation started. A fast response time will often derail the shopper from visiting your competitors websites, as they are now busy engaging with you.
PERSISTENCE
Most dealerships really drop the ball on both short and long-term follow-up. There is only one right way to follow-up with prospects, and that is until they ‘buy or opt-out’. What does that mean? It means you need to have a process (either manual or automated) where you follow-up with unsold (and sold, for that matter) prospects indefinitely. The car shopping process is long; it generally takes a shopper 30+ days to purchase a vehicle after they first submitted a lead. Despite the long shopping cycle, most car dealerships fail to follow-up past the first few days, greatly hurting their chances of winning the prospects business in the long run.
QUALITY
It’s not enough to just send a response in a timely manner, or follow-up a dozen times, the emails need to be of high quality. What does a high quality email look like? You need to focus on grammar, structure and content.
Most emails that I see being sent to prospects today fall short in these three areas. When you’re trying to win the confidence of someone, hoping they will spend $20,000 to $70,000 at your place of business, you need to earn their trust. If you can’t instill confidence that you can write a coherent sentence or a proper paragraph structure, why should they trust you with the second largest purchase they will make in their lifetime? Impress car shoppers and improve your chances of closing the deal by including something over and above what they asked for, like a personalized video or CarProof report.
TACT
Last, but not least, your email needs to have tact. If you want to close at 25 percent like the best of the best, you need to be more than a question-answering- robot. Communication is an art-form; you can easily win or lose this battle with the words you choose to write in your email. Words can start wars, or they can make people fall in love. They are the most powerful tool we have at our disposal.
Every email you send to a prospect should include a question, as this will increase the chances of engaging in conversation. If you don’t ask a question, why should the prospect respond to you? What kind of questions should you be asking? Here are some examples of questions that will help ensure you keep the communication flowing:
Creating a strong and reliable lead handling process in your dealership will take some time, but it will be well worth the effort once you and your team reach the Promised Land. Follow The 4 Commandments of Handling Online Leads religiously, and you will see the light.
Kevin Gordon is a co-founder of Convertus, a fast growing automotive digital marketing agency based out of Vancouver. Contact Kevin at kgordon@convertus.com or call 888.354.6441 to see how Convertus can help you craft a winning digital marketing presence for your store.
The above quote – often attributed to Albert Einstein – reflects a concept that can be applied to almost every business in the world. But, as with most things in life, there’s a catch! The optimal value of experience within any industry only lasts until there is a fundamental shift in the way the industry operates. If such a shift occurs, experience can actually become a liability.
Knowledge then belongs to those who are willing and able to adapt to the new way of doing business, and gaining a new kind of experience. The idea of hanging your hat on “20 years of experience in this industry” can become an empty measure of your knowledge within an industry that’s undergoing extreme change. The focus needs to become gaining experience, and therefore knowledge, within this “new world”.
There has been a paradigm shift in the used-car business regardless of whether we believe it, like it or accept it. The fundamental change that has occurred in the way the used-car business now operates is the result of the Internet. About a decade ago, the buying public started interacting with car dealerships in a different way. Previously, the buying public would first visit a dealership, and then decide what type of vehicle they wanted. Today, the buying public decides what vehicle they want, and then visits a dealership. Take a few minutes and really digest that shift.
This shift in the way that potential customers interact with a dealership means that all of your sales processes, marketing, buying and price strategies need to be revamped to serve today’s market. These changes become extremely difficult to enforce if the members of your management team have been in the business for more than 5-10 years, and have had some success under the previous business model.
The blinders are on, and it becomes difficult for those people to see what they are doing wrong – I’m talking about members of upper management that want the staff to work harder or spend more time training on the old ways of doing things, and members of middle management that try to buy vehicles cheaper and to change reconditioning processes to reduce costs.
Unfortunately, the majority of the time, the actions that these “experienced” members of your dealership take only speed up the decay of your used-car department – they do not produce positive results, and actually turn a lot of showrooms into morgues. You know what happens next, right? You’ve got staff sitting around with a lot of time on their hands, reminiscing about the good ol’ days, and complaining about how the Internet and other new technologies have ruined the business. Well, it doesn’t have to play out like that. I’ve been a part of dealerships, and have seen several dealerships, that consider the last three to five years in this business the best years ever – profitable, fun, and offering boundless potential for future success.
If you feel that your dealership or department is struggling to maintain the same numbers it produced 10 years ago, then here are some key areas of change that you can focus on:
■ Advertise your vehicles for what you would sell them for; don’t inflate.
■ Minimize transactional discounts. If you can’t attract a customer and sell a vehicle for really close to your advertised price, then the odds are that you are missing out on business.
■ Provide information upfront and make it freely available. Do not use information as a customer control mechanism or as power tool for negotiations.
■ Market each vehicle individually. Highlight each vehicle’s positive features with quality pictures and a compelling relevant story.
Making these changes isn’t complicated, but it will require hard work and discipline. All of this creates either an opportunity or a problem, depending on how you want to look at it. If your current used car manager is open to change, then you have an opportunity; if your used car manager is not open to change, then you have a problem. The majority of experienced used car managers have good skills that are, and will continue to be, an asset. If you can combine that with a solid pricing strategy, marketing approach, and sales process, all based on the new realities of the way the used car business operations, then look out – your success is limitless!
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.
The spring selling season is quickly approaching, and as we turn the page on the very chilly first quarter of 2015, it is important that we focus on the bottom line and make sure that the used-car department is, at the very least, in the black. I’d like to share some thoughts with you on what I believe are the most important areas to focus on when your UCD is not in the black — maximizing the value of third-party vendor products for your dealership, and figuring out the true cost of your retail vehicles. If your UCD is already making a profit, then this article will help you push that bottom line number even higher.
The first tip is that you need to use every third party service or product that you purchase in a way that exploits every possible benefit that you can derive from that service or product.
Then, you need to complete an ROI assessment on all of these products or services to make sure that they’re contributing toward the increase of your bottom line.
What we’re talking about here is any product or service that assists you with the buying or selling of used vehicles — for example, advertising, training, reconditioning services and technology solutions.
Vendors that promote technological tools or services related to automotive sales are particularly plentiful. Technology is moving at incredible speeds for all sorts of businesses and industries, and the car business is no different.
This shift is exciting, as some of the products being offered to the automotive sales industry are truly amazing and innovative, and in the right dealership they can vastly improve the bottom line. However, in other dealerships, those same products could also just add expenses and create a negative ROI.
Let me give you an example to help illustrate this point. There is one dealership that we will call “Rockstar Motors”, and another dealership that we will call “Complacent Motors.”
A software company provides both dealerships with a tool that helps them find service customers who are potentially in a positive equity position or could upgrade their current vehicle to a new model, for similar or lower payments. Rockstar Motors uses this software to sell an additional 10 new cars a month and acquire an additional 10 used cars.
Rockstar Motors has developed staff training and dealership processes to effectively use this software tool and realizes that they’re seeing a positive ROI on their investment. Complacent Motors believes that the software tool will do all the work, and has therefore not put effort into staff training or creating dealership processes to manage the tool in the most effective manner possible.
Complacent Motors sell one extra new car a month and acquire one extra used car, and do not see a positive ROI on their investment.
If you were to ask me if a software tool that can pinpoint service customers who are in a positive position to get a new vehicle brings added value to any dealership, I would say “yes, of course it has the potential to — but purchase of the tool alone doesn’t guarantee a positive ROI.”
At the 2015 NADA Convention in San Francisco, there were over 550 third-party vendors, who were all presumably adding value to their dealer clients. However, the catch is that the majority of these vendors are offering services and products that still require quality people and processes in place in order for their value to be maximized.
If you don’t use a service or product, stop paying for it or make the decision to start using it. If you don’t use the service or product properly or don’t know how to use it properly (in other words, if you’re not seeing a positive ROI for the service or product), then invest in the people and processes that will help your dealership use these amazing services and products for what they are ultimately intended to be used for: making money.
Now, to shift topics a bit, the second area that I think is incredibly important to focus on when your UCD isn’t generating a profit (or not as much profit as you would hope) is making sure that you properly assess the cost of your retail vehicles not only before you sell them but, even more importantly, before you buy them.
I throw this scenario and question to a lot of my dealer clients: “You bring in a 2014 model on trade with 5,500 kilometers and in showroom condition. You paid $20,000 for it. What would the cost be when you sell the car?”
If it takes you more than 30 seconds to answer that question, I believe you are leaving a lot of potential gross profit on the table in your used-car department. In order to clear out a retail vehicle without losing money, you should know what you can retail it for, in a worst case scenario. Once you have that number, you subtract the amount of money you will spend on the vehicle after you own it. Now you have your retail “break-even” number.
Almost every dealer I know tells me that they find it difficult to get their hands on good inventory. This is indicative of a very competitive market. Not understanding what your costs will be on any given vehicle puts you at a disadvantage when you are bidding on vehicles, and it will cost your used car department gross profit.
Most dealers only focus on cost when selling or reconditioning these vehicles – but by then, they already own the vehicle. If you want to generate more gross profit without spending more money, create a clearly thought out exit strategy for each vehicle before you buy it.
As with almost all of the recommendations I give to dealers, the thoughts I’ve provided with you on the two areas of focus in this article relay some relatively simple and logical concepts. However, executing these recommendations is hard work. Execution requires putting the right people and processes in place, and then following through with the discipline to ensure that those processes become part of the fabric of your dealership.
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.
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
- Oil change, new air/pollen filter, and new wiper blades
- Up-to-date required maintenance
- Minimum tire and brake requirements that are 2.5 times greater than government minimums
- 100 point detailed mechanical inspection and appearance inspection forms
- 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.
Take a second to imagine this scenario: you and I are working together, and I ask you early-on in the consultation phase, “Where do you think the greatest area of opportunity in your used-car department exists, and how can I help you capitalize on that opportunity?”
Think about what your answer might be, for your specific dealership. If you are anything like the overwhelming majority of people, you would ask me to help you get more inventory.
A little later on in this article, I will give you some recommendations on how to secure more inventory, but first, let’s dig a little deeper into the concept of “getting more inventory”, and what that means.
A lot of dealers believe that volume is the single key to profitability. However, I like to believe you first become profitable, and then try to increase volume, in order to further increase profit. Unfortunately, we often justify low (or non-existent) profits by placing the blame on factors that appear to be out of our control.
For example, you might find yourself saying, “at ABC Motors, our break-even target volume number is 53 cars per month, but we are averaging 41 cars per month. If we could just find 12 more cars per month we’d be making money, but there are just no good cars out there. Oh well. Wholesale inventory should increase in 2015, and until then we will just keep trying our best.”
What starts off as a barrier, then becomes a reason, and then turns into an excuse. The whole cycle continuously repeats itself.
On any given day, there are hundreds (if not thousands) of cars available for sale exclusively for registered dealers in Canada, and thousands (if not tens of thousands) available in North America.
“Yeah, but Richard, those cars are no good – they’re overpriced, and most have accidents. Heck, they pay more wholesale for those cars than I can retail them for.” The barrier, reason, excuse cycle begins.
So getting more inventory isn’t really want you want — you want high quality, low risk, quick turn and great gross profit inventory. You also want this inventory to arrive at your door without devoting time or resources to it, and without having a plan of attack on how to get it there.
Cars that are easy to acquire always come with a price. I like to call those “convenience cars,” and daily rentals are at the top of the list of convenience Cars. Generally speaking, daily rentals require minimal service reconditioning, are still under factory warranty, have low payments through long finance terms, and — the best part is — they give you a list with prices, and you just pick the ones you want, so you can avoid the auction. Pretty convenient, but wait, what’s the catch? The catch is the same as it is when you buy a big bag of chips at the convenience store, instead of at the grocery store. The exact same Bag of chips will cost you $4.99 instead of $2.99. You pay for the convenience. Daily rentals do not have the market cornered on convenience, as there are many companies and businesses that cater to making it easy for you. Just remember, convenience always comes at a cost.
So how do you acquire better inventory? The first place I would suggest you look to increase your inventory is through the front door of your dealership. Do you have a solid trade appraisal process that is followed every time? Do you know what your look-to- book is? Do you spend time training staff on how to explain to a customer the true value of their trade? Do you try and retail every trade-in aside from true clunkers? Do you pay more for a trade-in than you would pay at auction? If you answered “no” to any of those questions, then you have a starting point.
Maximize all potential opportunities through trade-ins before searching elsewhere, as trade-in vehicles will not only be your best value, but they are also the easiest to acquire; they hold the least amount of competition, and they create added value and profit to other departments of the dealership.
After your trade-in opportunities are at capacity, and you still require more inventory, then it is time to look at your manufacturer’s closed auction. Create a systematic (almost science-like) plan for how to secure vehicles. This requires Dedication, discipline and a lot of time. The overall goal should be to not allow a single vehicle to go through the closed auction without having had an evaluation done by you. It is not realistic to think that you can randomly attend auctions, expect to buy a bunch of cars and then be profitable. That all sounds a little too convenient, and we know what convenience costs. Having said that, most dealers, with the help of inventory management Software, understand that the prices some people pay at auction sometimes exceeds the retail value of the vehicle. This is why it is important to have a systematic plan, along with a schedule, and the dedication and discipline to follow through with that plan and schedule.
Once you have maximized your use of your manufacturer’s closed auction, then you can take your system and discipline, and enter the open market, where there are hundreds to thousands of cars and hundreds of dealers are all looking for the “right” inventory. This can also be the time you choose to look at third-party brokers, whether online or in person, to add convenient inventory in order to increase overall profitability.
A great quote from Thomas Edison comes to mind when I think about acquisition – “Opportunity is missed by most people because it is dressed in overalls and looks like work.” 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, or visit www.rpmsolutions.ca.
'm a passionate guy. Aside from the obvious loves of my life (my children, wife and family), I'll admit that I'm one of those guys that loves his job — engaging in the game of the used-car sales industry. I also love sports — especially golf and hockey.
I'm not a very good hockey player and I am a Maple Leafs fan, so it's probably best to not get into a discussion about hockey. Let's talk about golf, instead.
In 2006, my love of the art of the golf swing reached its peak — because of a commercial (of all things). The commercial was called "Swing Portrait" and it was for Nike (you should look it up if you get the chance) — it showed Tiger Woods taking a golf swing in super-slow motion, and featured the smooth sound of a cello solo playing in the background.
In a word, the commercial was breathtaking. The true art of golf was displayed so poetically in that single minute commercial. From that moment on, I was hooked on creating a swing for myself that looked exactly like the swing of Tiger Woods. This was not an easy task as, at the time, my swing looked like a mix of Jim Furyk's and Charles Barkley's golf swings.
Eight years later, I still don't swing like Tiger Woods, but along the way I realized something — no one swings like Tiger Woods. Tiger doesn't even swing like he did back in 2006. However, if you look at the top 100 golfers in the world, although no two swings are alike, they all involve the mastering of certain fundamental traits (in the case of golf, those traits include things like square impact, good balance and proper follow through).
If I wanted to improve my golf swing, I had to learn that I wasn't going to get there by standing in front of a mirror all day, trying to move my body exactly like Tiger did in that commercial. I needed to first study the fundamental traits that are common to the most successful golfers, and then to figure out how to master those traits — in my own way. I needed to be able to create my own unique swing.
In the world of used-car sales, you are always striving to improve. How do you get to the top? Do you try to mimic specific things that the top dealers are doing? Or do you try to study the patterns in the fundamental traits that all of the top dealers have — and then try to master those traits in your dealership — in a customized way? I'd suggest that you need to do the latter.
Luckily, there is a lot of information that is shared on what the top 10 percent of dealers are doing, and how they are doing it. And I can assure you, they all do it in their own unique way. Instead of mimicking their unique way, try to focus on the fundamental traits that all successful used-car dealerships master.
Those traits include the following:
High inventory turn rate
Use of metric-based acquisition and retailing (primarily using data in order to make decisions about buying and selling prices, instead of primarily using gut instinct and self-interested wholesalers)
Effective and efficient reconditioning and marketing/advertising
Staff that is well-trained on internal processes and procedures
Once you understand the key traits, you will then have the foundation to try and figure out how to master those traits in your particular dealership, and in your own unique way. Just because a particular top dealership uses fixed pricing to achieve high inventory turn rate, that doesn't necessarily mean that if you start using fixed pricing, you'll reach the top as well.
That said, you will start seeing improvements to your bottom line if you figure out the most effective way for your particular dealership to achieve high inventory turn rates (and the other fundamental traits).
By taking the time to study, implement and master the fundamental traits shared by the top dealerships, instead of trying to jump on what you think is the "quick win" train of mimicking, you'll ensure that your foundation is strong and resilient. This will allow you to change with the market, adapt to modern selling methods, stay current and always continue moving forward.
There's a saying in golf: "You don't beat the game of golf, you only play it." Keep this in mind when you are going through a rough patch or struggling to transform your used-car department.
Even the best dealer in the world is looking to do better — to accomplish more — and improve from the year before.
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.
Ninety percent of a successful used-car dealer’s time, money, energy and efforts typically go into the processes that take place before a customer ever contacts the dealership: buying, reconditioning, photography, etc.
When I was in sales, many years ago, my first manager would always say, “Let’s go take our unfair share of the market!” At the time, our dealership was already No. 1 in our area – but we were trained to want more than just our fair share.All of this was said in reference to new-car sales, processes and procedures.
I believe the new-car market is a finite market, with very few variances. Manufacturers track market data, and dealerships are armed with concrete information about the sales that their market produces.
The goal of a new-car dealer is to outsell its market (pump-in versus pump-out) and have a greater market share in its city or area than its nameplate. There are, of course, limits to this – if a dealership’s nameplate has a 3 percent market share, it is unrealistic for the dealership to acquire 30 percent of the market.
This concept creates a finite market that new-car dealers really have no control over. However, what new-car dealers do have control over are sales processes and procedures — and, rightfully so, that is where the majority of their focus goes.
I like to call it the 90-10 rule: typically, 90 percent of a successful new-car dealer’s time, money, energy and efforts go into the interaction that sales associates have with customers. Good dealers consistently measure results in areas related to customer interaction in order to better improve their sales and take their unfair share of the market.
The other 10 percent of a successful new-car dealer’s efforts are typically put into other operations such as marketing, displays, POP (point-of-purchase), etc.
Does the 90-10 rule apply to used cars? I believe the answer is “yes,” but with one major difference — it’s backwards.
Ninety percent of a successful used-car dealer’s time, money, energy and efforts typically go into the processes that take place before a customer ever contacts the dealership (things such as buying, reconditioning, photography, etc.).
The other 10 percent of a successful used-car dealer’s efforts are typically put into direct customer interaction and sales.
When we try to sell used cars the way that we sell new cars, we are forgetting one major advantage that new-car sales has: the OEM. When you sell new cars, you are an agent of the OEM, and you receive all of the benefits that go along with the mutual goal of selling vehicles.
When you sell used vehicles, the concept of the OEM doesn’t exist, and you are essentially the OEM and the agent — a situation that has its own set of pros and cons.
Recognizing this void is the first step to filling it, and filling it requires a lot of work, but the benefits are massive. This is where the 9010 rule comes into play. We need to do for used cars what OEMs do for new cars. It’s worth mentioning that OEMs are doing a lot with CPO programs to assist dealers, but the reality is that they need to focus the majority of their efforts on new cars.
The lack of an OEM for used cars means that processes and procedures that don’t exist with new cars are a reality for used-car sales. Some new-car dealers haven’t put enough focus and attention on this point within their used-car operations.
These back-end processes include buying, reconditioning and market pricing each vehicle, as well as gathering all relevant historical and other information about a vehicle. All of this, properly done, will produce a qualified customer and will lead to a quick and profitable sale. The vehicles, dare I say it, will “sell themselves.”
We saw it happen with Japanese imports back in the early 80s, and why was that? Was it because when they started selling vehicles in North America they were able to attract the best sales associates and create a dominating sales process?
No. I believe it was because they created a superior product to what was available in the market at the time, and demand outpaced supply. As a result, the vehicles essentially sold themselves, and sales associates became product advisers and customer service representatives.
The market is ready to reward the dealers that can create a superior used-car product and experience.
If you put the work into what happens before the customer ever finds you, demand will outpace supply and the vehicles will “sell themselves.”
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.
Mistakes happen in used vehicles. Simply put, there are too many things that could go wrong, for everything to always go right.
That’s what makes the following story from a used vehicle manager so troubling.
Last December, the manager made a decision to stock up on inventory. He had no choice but to acquire the vehicles from auction, given new vehicle sales had slowed the pipeline of trade-ins. His ratio of auction to trade-in vehicles went from 50/50 to 70/30, respectively.
To make matters worse, auction prices were high. The manager, a student of the Velocity Method of Management, realized that he’d likely acquire the vehicles at a Cost to Market ratio at/near the Price to Market ratio where he typically retailed many units (around 92 percent to 94 percent).
The manager pulled the trigger. “For the past two years, if we had inventory and we followed our strategy, we sold the cars,” he says. “I made the choice to have vehicles available to sell.”
The manager also accepted the risk of additional inventory in the context of the bigger, “total gross” picture. During the prior two years, he made auction-purchased units a fast-turn priority. It wasn’t uncommon for these vehicles to retail as “$0 gross” deals to drive gross in other departments. “We made nearly $1 million in back-end money off the auction units last year,” the manager says. “That doesn’t count dock fees or F&I income.”
But then the market slowed down, forcing the manager to become even more price-aggressive to retail out of the higher-cost cars. “We took a thumping,” he says. “But the worst thing we could have done, from an investment perspective, was to sit on those cars.”
From my vantage point, the manager did exactly the right thing. If you make a mistake, face the music fast, and move on.
Unfortunately, the manager’s dealer didn’t see it that way. Instead, the dealer issued an edict to raise front-end grosses by $450/car.
Guess what’s happening now? As he works to meet the dealer’s directive, the manager’s unable to maintain inventory velocity, and monthly sales are down by two dozen-plus units.
“Our front-end grosses are better, but we’re actually losing money if you look at the dollars returned to the dealership from used vehicles,” the manager says. “It’s a little frustrating to feel like we’re going backwards, but we’ll get it right after the dealer sees the missed opportunities.”
I promised to keep in touch with the manager as he strives to re-ignite his Velocity strategy. Stay tuned.
Dale Pollak is the founder of vAuto. These entries and Pollak’s entire blog can be found at www.dalepollak.com.
In its 2014 report on dealership financial performance, the National Automobile Dealers Association (NADA) highlights a disturbing trend in used vehicles.
The NADA report notes that franchise dealers enjoyed a 6 percent increase in used vehicle sales compared to 2013—an increase similar to what dealers saw in 2013, compared to 2012.
Yet, net profits for used vehicles declined last year, which leads to a key question, “What gives?”
To answer the question, I took a deeper look at the data from 2012 to 2014. I found two data points that help explain why dealers are selling more cars and making less money:
1. Dealers relied more on auction purchases in 2014 than they did in the prior year. NADA reports auction units made up 26 percent of used vehicle acquisitions, while trade-ins remained relatively flat year over year. In 2013, auction cars fed 25 percent of dealers’ used vehicle inventories, up from 24 percent in 2012.
2. Dealers continue to sell more expensive vehicles. In 2014, the average sales price of a used vehicle ran $18,846 up 4.1 percent from the prior year. The increase marked the fifth consecutive year where the average dealer investment in a used vehicle increased.
Some of you may be thinking, “Thanks, Dale. You’ve just re-stated the obvious. We all know it’s tough to acquire the cars we need at a price that provides sufficient front-end margin.”
But , in light of a market where you can’t source all the used cars you need at your door, and you’ve got to pay more than you’d like to buy units for elsewhere, here’s the question dealers should be asking: What are we doing to retail these units faster to maximize profit and minimize risk?
Unfortunately, the NADA data suggests most dealers aren’t asking this question. I say this based on evidence from dealers who do ask the question, and do so diligently. These dealers beat the NADA averages. Their used vehicle net profits have increased in recent years, and keep getting better.
The following are three best practices these dealers follow to sell more used vehicles and make more money:
Know your opportunity/risk right away. The dealers recognize that the more they can know about a vehicle’s retail potential before they acquire it, the better. By evaluating each vehicle’s Market Days Supply and Cost to Market metrics, the dealers know pretty well, if not precisely, how their investment in the vehicle will perform. With this knowledge, the dealers plot the best retail exit strategy that will maximize front-end margin and minimize losses. It’s also not uncommon for these dealers to have more aggressive retail exit plans for auction cars, given the cost/margin challenges these vehicles pose in today’s market.
Press down your days-in-inventory average. I would encourage every dealer to conduct a two-pronged test of their past three months of used vehicle sales. First, assess the front-end gross profit and return on investment (ROI) for each sale. Second, segment the sales by days in inventory. If you’re like most dealers today, you’ll find that most, if not all, of the units retailed after 30 days performed significantly worse than those sold in less than 30 days. I suspect you’ll also find the bulk of your break-even and money-losing deals occurred after the 30-day mark.
Top-performing dealers accept this 30-day reality. They approach it like investors. They know they have 30 days to maximize the margin/ROI on every car and, if a unit is/becomes especially troubled, they’ll work even faster to retail the unit and redeploy the investment dollars in a vehicle with better potential.
I encourage dealers to maintain at least 50 percent of their used vehicle inventory under 30 days of age at all times. Anything less, I’m afraid, means you’re under-cutting your department’s net profit potential.
Source more cars in your store. In addition to showing that dealers relied more on auction vehicles in 2014, NADA stats indicate that dealers acquired more trade-ins from new vehicle sales (42 percent compared to 41 percent in 2013), while getting fewer trade-ins from used vehicle customers (24 percent compared to 25 percent) and off-the-street purchases (4 percent, 5 percent, respectively).
You could read these stats one of two ways: Dealers saw fewer retail-worthy units from used vehicle trade-ins and off-the-street purchases, or they did a better job acquiring cars from new vehicle buyers, while letting other in-store acquisitions slip.
Either way, the stats indicate dealers are probably missing cars that, if acquired, would offer better margin/ROI potential and reduce the reliance on auctions.
In a year from now, it’ll be interesting to review the NADA data for the current year. In particular, I’ll be curious to see how well dealers have reversed the trend of selling more used vehicles and making less money.
Dale Pollak is the founder of vAuto. These entries and Pollak’s entire blog can be found at www.dalepollak.com.
