Around this time every year, I hear dealers and used vehicle managers acquiring additional inventory in anticipation of buyers with tax refunds looking to purchase used vehicles.

Every year, I caution against this practice for two reasons:

First, the stock-ups often result in pile-ups of aged vehicles. The retail sales dealers believe will arrive often don’t and, if they do, they’re less plentiful than you anticipated. Inevitably, used vehicle managers end up making drastic price cuts to find buyers, and the whole gamble doesn’t quite pay off.

Second, the stock-ups effectively amount to speculation. In most instances, there isn’t any clear-cut market data that would suggest imminent, incoming demand. Dealers and used vehicle managers are playing a hunch that isn’t justified by the facts at hand. In fact, I’ll often find the decision to stock up on inventory owes almost entirely to a memory of past tax seasons where the gamble paid off (even if, after working through the pile-up of aged or distressed vehicles, it really didn’t).

This year’s not much different, it seems.

Earlier this week, I spoke with a Midwestern used vehicle manager who’s worried about the 30-plus off-lease pick-up trucks his dealer decided to purchase to get ready for tax season. The manager seems to know something the dealer doesn’t—the Cost to Market ratios required to acquire the units will leave little, if any, front-end gross if/when the units sell.

But there’s a new wrinkle this year that I don’t remember hearing about in recent years past. That is, the tax refunds that are supposed to drive used vehicle purchases aren’t what many taxpayers expect.

This week, articles in the Chicago Tribune and New York Times highlight how the average tax refund for 2018, so far, is smaller than the amounts taxpayers received in the past. The stories also discuss how some taxpayers, who previously received refunds every year, now owe sometimes significant sums to the Internal Revenue Service.

The disparity between what taxpayers expected to receive, and what they’ll get or need to pay, this year seems to owe to a lack of understanding of how the tax law changes in 2017 would play out—despite coverage back than that suggested taxpayers should at least revisit their deductions and withholding levels to avoid future surprises.

Whatever the case, it seems to me this year’s tax season carries a cloud that may rain on dealers and used vehicle managers who stocked up in anticipation of buyers flush with refunds looking to buy their vehicles.

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In my previous post, I shared how Provision ProfitTime helps dealers price used vehicles to match their investment values.

I also promised that I would take a deeper dive into competitive sets, and how dealers should consider them as they determine the optimal price position for a used vehicle.

Let’s start the deeper dive with a quick definition and context-setting: For those who don’t know, a “competitive set” represents current vehicles in a market that will compete, in the eyes of vehicle buyers, with the vehicle you, as a dealer or manager, have in your inventory.

Competitive sets for most cars run between eight and 20 units. vAuto’s Provision system automatically determines a vehicle’s competitive set based, generally speaking, on the degree to which other vehicles possess the same/similar characteristics (e.g., year, make, model, mileage, color and meaningful equipment), and show up together when online shoppers search in a specific market.

As you might expect, it’s important that your inventory management system continually assess and refine the variables that determine and drive competitive sets. This refinement process ensures competitive sets always account for and reflect any relevant change or nuance in the search manner/terms online buyers use to find a vehicle.

It’s also important for dealers to trust the competitive sets. In my discussions with dealers and managers about distressed or aged inventory, we’ll often go back to the competitive set for clues that might indicate why a vehicle hasn’t sold.

Many times, we’ll find that someone customized a vehicle’s competitive set because he/she felt the unit had a specific characteristic (such as a color or piece of equipment) that made the vehicle significantly different and more valuable than the other vehicles in the set.

When I see these competitive set adjustments, I’ll wave a yellow flag.

In fact, this exact scenario occurred just last week. I was meeting with a Midwestern dealer group. We were examining a vehicle that hadn’t sold. It was priced about $2,000 above the same/similar units available in the market.

A little investigation revealed that a manager had adjusted the competitive set to justify the higher asking price.

The reason? “Mine’s black,” the manager says. Yes, it is, I agreed. But I pointed to a silver version of the vehicle. It had essentially the same condition, equipment and mileage.

I then asked the manager: “Do you think the typical Internet shopper would pay $2,000 more to get the black car? Is it possible you like black cars more than your buyers?”

Upon a bit of reflection, the manager agreed to adjust the price to more closely reflect its true competitive set.

Here are three best practices I recommend dealers keep in mind as they use competitive sets to make market position and pricing decisions:

1. Revisit them daily. Today’s competitive set may not be the same tomorrow in the ever-changing retail market. Units come and go all the time. If I were a dealer, I’d staff my used vehicle team to ensure someone revisited each vehicle’s competitive set and market price position every day. Yes, it can be time-consuming.

But I can’t think of any other used vehicle administrative task that’s more rational and sales-focused than monitoring each vehicle’s competitive standing in the market. If you don’t have the resources to make this an everyday exercise, then it should happen at least every other day, and no less than every third day.

2. Put on your “Buyer’s Cap.” Ultimately, your competitive set functions as your primary reference point for where you should position and price your vehicle for retail sale. As we discussed in my last post, the optimal competitive position depends on the vehicle’s appeal in your inventory and market, and its overall value to you as an investment.

It’s also important to remember that your ultimate goal is to end up on a buyer’s short list, which typically consists of three to four vehicles.

More and more, I’m seeing dealers and managers use hourly employees (who generally get paid $12-$18/hour, depending on the market) to manage their competitive sets and pricing. The move makes sense when you consider the other tasks used vehicle directors/managers are expected to handle, and their propensity to view vehicles as “car guys,” a perspective that’s often different than typical buyers.

3. Minimize customization. This point’s worth repeating. To be sure, there are times when a vehicle may be more special and unique than others out there. There may also be instances where you simply must rule out the cars from a dealer you consider disreputable down the street.

But I’d suggest the following rule of thumb when you’re tempted to tweak a vehicle’s competitive set: If you’re doing it more than 10 percent to 15 percent of the time, you’re probably kidding yourself and trying to justify outcomes that won’t happen.

I’ll close this deeper dive with an observation: If you aren’t paying close attention to each vehicle’s competitive set, chances are pretty good buyers aren’t paying attention to your vehicles.

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For much of the past decade, dealers have determined how to price used vehicles based on a unit’s inventory age.

That is, dealers would set less-competitive prices on fresh vehicles, and get more price-aggressive as a vehicle met/passed days-in-inventory milestones. For example, a vehicle might start at a 98 percent to 100 percent Price to Market ratio for the first seven days and then, at specific calendar intervals, the Price to Market ratio would drop as dealers reduced their asking prices.

This pricing practice has served dealers well over the years—except for the fact that it doesn’t necessarily account for whether you own the car right, or whether it really makes sense to apply the same Price to Market range or ratio to different vehicles, just because they happen to have been in your inventory for the same number of days.

Thankfully, Provision ProfitTime addresses these age- or calendar-based pricing shortcomings by focusing on each vehicle’s unique investment value, in terms of your market, your profit objectives and other vehicles in your inventory.

With ProfitTIme, you know right away if a vehicle merits an initial asking price of a 100 percent Price to Market ratio or better. The system’s investment score for individual vehicles, and the precious metal designations from Platinum to Bronze, give you more insight into how to properly price a vehicle in the context of its competitive set and your profit/retail objectives.

But I’ve come to understand that ProfitTime-driven pricing raises a lot of questions about exactly how to properly price vehicles based on investment value, and not just days in inventory. You might even say there’s some confusion on this topic, which seems particularly strong among dealers and managers for whom age- or calendar-based pricing is now first nature.

I thought I would use this post to help clarify how investment value-based pricing seems to work best for dealers who adopt it.

First, it’s important to understand that a vehicle’s investment score is one of three key metrics ProfitTime renders for every vehicle. In addition to the score, ProfitTime offers a read on the vehicle’s appeal in the market, assigning a letter grade (A-F). In addition, ProfitTime assesses the degree to which you need a particular vehicle, identifying if you’re long/short with a particular unit in your inventory.

Second, it’s crucial to understand that these three metrics—the ProfitTime investment score, the letter grade and the plus/minus designation that informs how much you may need a particular unit—represent what might be called a trifecta, or trinity, that brings greater certainty and clarity to each pricing decision. Together, these metrics help answer an age-old question—“how competitively priced do I need to be with this particular car?”

Third, I think that as dealers consider the trifecta of metrics for each vehicle, they should probably give greater weight to the investment score. After all, the score, whether good or bad, is the single-best indicator of whether the vehicle is a good candidate as a gross profit- or volume-generating unit, or something in between.

To illustrate what I mean, let’s work through a few examples with vehicles we’ll presume we’ve just acquired. We’ll also assume each vehicle has a competitive set of 15 vehicles:

Example 1: Let’s say you have a vehicle with an investment score of 3 (a Bronze unit), a C- grade, and you already have 11 of them in your inventory. In this case, the vehicle’s not the greatest investment, and you don’t really need it, but you own it. In my view, this vehicle should be priced to retail quickly, which means it should rank first or second out of the competitive set of 15 vehicles to generate immediate buyer attention and interest.

Example 2: Let’s say you have a vehicle with an investment score of 3, it’s a B-minus, and you need four in your inventory. In this instance, the vehicle isn’t the best investment, but it’s a pretty good car and, since you and your market needs it, you probably don’t need to be as price competitive. It seems appropriate to price this vehicle third, fourth or fifth in the competitive set.

Example 3: Let’s say you have a vehicle with an investment score of 7 (Gold), it’s a C-minus, and you have three similar units in your inventory. In this case, the car’s investment value would seem to merit a stronger price position, perhaps ranked seventh or eighth in the competitive set of 15 vehicles.

Example 4: Let’s say you have a vehicle with an investment score of 10 (Platinum), a B-plus and I need eight more. In this instance, the vehicle’s a great investment, it’s a solid car and the market wants it. If I were a dealer, I’d price this vehicle to rank 12th or 13th in the competitive set.

Example 5: Let’s say you have a vehicle with an investment score of 10 (Platinum), a C-minus and you have three more in your inventory. In this case, I might price the vehicle to rank ninth or 10th in the competitive set of 15 vehicles—a slightly more aggressive position than the vehicle in Example 4, due to this vehicle’s lower letter grade.

You’ll notice that in each of these examples, the vehicles were all “fresh” cars. Yet, because of their individual investment values, and the respective assessments of the metrics in the trifecta, each vehicle ends up in its own competitive price position on Day 1. There’s no standard application of a Price to Market range or ratio just because each vehicle is “fresh.”

In my view, this ProfitTime-driven approach to pricing will ultimately drive better results for dealers. Each car can truly stand on its own investment value, irrespective of the date on a calendar.

I should note that, when dealers execute an investment value-based pricing strategy, they must be honest and realistic about what constitutes a “competitive set.” The strategy may also require re-thinking how frequently today’s market requires revisiting your competitive sets and adjusting used vehicle prices.

I’ll take up both topics in my next post.

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NADA Day 3: Final Day Reflections

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NADA Day 1: A Hunger To Build, Improve Business

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Maybe it’s just me, but it seems like dealers at this year’s National Automobile Dealers Association (NADA) convention in San Francisco are especially hungry for ways to build and, in some cases, preserve and protect their businesses. I’m told many of the workshops were full, and dealers got turned away for lack of seats. Part […]

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NADA Day 1: A Surprising Start To Opening Day

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A Promising Premiere For Provision ProfitTime At NADA

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A ProfitTime Insight: Your Worst Used Cars Represent Your Best Opportunity

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It’s been a busy, gratifying start to the new year as I’ve been sharing vAuto’s new Provision ProfitTime methodology and metric with dealers. I’m encouraged by the fact that many dealers are asking about ProfitTime because they recognize that margin compression is a serious problem. They aren’t happy with the gross profits they’re getting in […]

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