Amid tight gross profits, dealers would be wise to pay close attention to trade-ins and their used-car operations to make up for lost ground.

That’s according to a survey of more than 430 dealers late last year that MAXDigital conducted with Erickson Research. 

“It’s tougher than ever to capture gross profits in today’s market, but this study shows that profits can be made by looking in the right places: trade-ins and pre-owned,” MAXDigital executive vice president Mike Cavanaugh said in a news release.

“To capture more gross, dealers need to treat trade-ins with the same level of importance as the front- and back-end, and make preowned a priority,” he said.  

The study, conducted online in November, found that dealers are pulling in median profits between $1,500 and $1,999 on used cars, but just $500 to $999 on new cars.

MAXDigital said these numbers are consistent with what the National Automobile Dealers Association found in its 2018 NADA Midyear Annual Report.

The research also showed that 60% of dealers participating in the MAXDigital study have seen new-car profits decrease in the last two years. The average dip was $170 per vehicle.

During an interview at the recent NADA Show 2019 in San Francisco earlier this year, Cavanaugh said that on the new-car side, many dealers work on a “factory money” model.

“They’re trying to sell cars and hit their numbers so they get that check. But in order to hit their volume numbers, in many cases, they’ll give away a car,” he said. “They’ll lose two, three thousand dollars on a car to do that, which will then bring down your average profitability on new vehicles.”

Untapped potential in trades

Dealers are also leaving money on the table during the trade-in process. Only 15% found trade-ins to be a major avenue of profit, the company found.

“And less than half of dealers are under allowing on the trade-in, with an average of just $250 per vehicle,” MAXDigital said.

During the NADA Show 2019 interview, Cavanaugh was asked why so many dealers don’t see trade-ins as a top profit source.

“My opinion is that, at a certain point, dealers conceded, based on a lot of that advice they were given from different people, that, ‘Hey, it’s really hard to make front-end gross profit. If you want to sell cars, you have to give it away,’” Cavanaugh said.

“‘Race to the bottom’ was a term a lot of people used all the time with front-end gross profit,” he said. “So, you saw it just deteriorate.”

So many dealers turned to the back-end of their business, focusing on drumming up profits on the F&I side through their work with various providers.

“They also kind of conceded that consumers always felt that they weren’t getting a good deal on their trade, and if they wanted good CSI, then they had to just give the customer whatever they wanted for their trade — even if they had to pay too much money,” Cavanaugh said.

“In many cases, if they wanted the bank to buy the deal, they had to make sure that they were showing a lot of money down on that deal,” he continued. ““So, you ended up overpaying for trades in a lot of cases.”

But the opportunity is not permanently lost, he said. They developed the MAX Path to Purchase Appraisal Tool to help dealers carve out the “hidden gross profit” potentially in trade-ins. According to the MAXDigital website, the platform is designed to “bring the customer into the appraisal equation, effectively answer customers’ informed questions, and still hold gross in the overall appraisal process.”

In essence, consumers want context and collaboration.

“And it wasn’t that customers wanted you to pay too much money for their car,” Cavanaugh said. “It was that they wanted you to really justify why you were giving them the price that you told them the car was worth.”

The trade-in process needs to be a “more collaborative process,” and one with data points and reasons to back it up and book values, various aspects of the car impacting that value.

In the study, MAXDigital lists these five tips for a collaborative trade-in process:

1. Have the customer evaluate the car. Walk around the car with them and discuss scratches, worn-out tires, etc.

2. Take a test drive together. Let them tell you what that noise is and why it pulls to the left.

3. Let them know what you think it will cost to repair the damages and wear and tear, so you can sell it to another customer.

4. Show them what the market value is using Kelly Blue Book, NADA or Black Book.

5. Make a fair offer on the spot, whether they buy the car from you or not

Trust the (new) process

Nearly half (45%) of respondents want to shake up the sales process. Most said they’re looking for a consultative approach and most said they want to integrate technology into the process.

“It’s not the majority, but it’s a lot, and it’s an increasing number,” Cavanaugh said of the 45%. “The more that people go to the Apple Store and have that great experience, the more that people become more innovative with technology, (dealers) see that collaborative doesn’t mean that you have to give away profit.

“And I think was a misconception in the industry for a long time, (that) if I’m transparent with my process, if I’m collaborative with the process, if I let the customer be involved with the process, that means I’m going to make less money,” he said.

“And it’s not true … this (Path to Purchase) tool that we rolled out and beta-tested, proved that to us and reinforced something that we already believed and have we’ve about for a while, but it is that those things are not mutually exclusive.”

In other words, you can be profitable and have a collaborative process.