A read-through of the findings in Cox Automotive’s just-released 2019 Car Buyer Journey study made me think of a conversation with a dealer about two years ago.

The dealer wasn’t doing well in used vehicles, and I was there to help him, and his team, discuss a better way forward.

A fundamental problem, it seemed to me, was the dealer’s desire to price every used vehicle to make an $1,800 front-end gross profit. As a result, the dealer had a lot of aged units and an overall Price to Market average for his inventory near 100 percent.

I suggested that more market-transparent pricing might help get customers interested in his cars.

The dealer responded that he didn’t think shoppers in his market really used the Internet all that much and, if they did, they weren’t all that savvy and sophisticated as they sussed out vehicles and potential purchase prices.

I specifically remember a comment the dealer shared: “There just aren’t that many sharpshooters out there to worry about.”

I begged to differ back then, and the Cox Automotive survey data suggests the comment’s even more off base today.

Consider the following take-aways from the Car Buyer Journey study:

Consumers spend significantly less total time researching and shopping for their next vehicle (about 14 hours today versus 14.5 in 2017). The report notes car buyers are now in the market for an average of 96 days, a drop of more than 20 days from two years ago. Between used- and new-vehicle buyers, used buyers spend more time in the hunt than new buyers (about 14 hours compared to 13 hours, respectively). Overall, the portion of research/shopping time spent online has slightly increased over the past two years.

Car buyers visit fewer dealerships in total (2.3 today compared to 2.7 in 2017). The report notes a slight difference between new- and used-vehicle buyers. The former will visit 2.5 stores, the latter, 2.2. Both figures, though, are down from two years ago.

Car buyers consider the specifics of a vehicle as a final purchase influencer more so than other factors, such as the make of the vehicle, the deal, or the dealership experience. This point affirms the axiom that, when all is said and done, the car is usually the star.

None of these data points offers a “wow” factor if you’ve been paying attention to changing consumer buying expectations and habits.

But, together, they do paint a portrait of online vehicle buyers who are getting better, and smarter, at finding exactly what they want in their next new- or used-vehicle purchase—and bypassing dealers who don’t fulfill their needs and wants.

In hindsight, I should have asked the dealer who made the sharpshooter comment to better define what he meant. In my book, if more buyers are coming to your dealership with a specific vehicle and price in mind, which I believe to be true, they’re shooting a lot sharper than in the past.

The Car Buyer Journey study also notes that, despite the best efforts of many dealers who are working hard to provide a more satisfying car-buying experience, 61 percent of vehicle shoppers say their most recent purchase experience was the same or worse than the last one.

This last finding suggests dealers have a significant opportunity—if they choose to do the work of meeting buyer expectations and providing the experience they expect, even as both continue to evolve.

I can suggest two ways dealers can get started.

First, dealers probably still need to give more consideration to what new- and used-vehicle buyers really want to know as they research and shop online, and more credit to how much they already know when they contact you about a car.

Second, instead of focusing most on how many new/used cars you sell every month, dealers should give equal, if not more, attention to whether those deals truly represent the acquisition of a new customer you can call your own, and not just another transaction.

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If anyone needs evidence that car dealers can no longer simply sell cars to make money, I’d offer the following nuggets from the recently released, NADA Data 2018: Annual Financial Profile of America’s New-Car Franchised Dealerships.

Nugget 1: In 2018, NADA reports the total operating profit for dealers, on average, dropped to -$13,338 in 2018—a figure that’s $105,112 less than the tally dealers achieved in 2017.

Nugget 2: Total expenses as a percentage of gross profit ran 100.2 percent in 2018, up from 98.7 percent in 2017.

Nugget 3: While dealers retailed slightly fewer new vehicles in 2018 (902/store on average, compared to 922/store in 2017), the average retail transaction price climbed $938 in the same period. Yet, dealers didn’t really take home any profit from the transactions. NADA reports the average retail net profit per new vehicle retailed sunk to -$570 in 2018; it was -$421 in 2017.

Nugget 4: While dealers retailed more used vehicles in 2018 (720/store compared to 706/store in 2017), there wasn’t much left over on the bottom line. The NADA stats show the average retail net profit per used vehicle retailed grew to $6 in 2018, a return to black from the -$2 in average retail net profit per used vehicle retailed in 2017.

To be sure, dealers still made money in 2018. NADA’s report shows that dealers’ average net profit ran $1,358,240 last year, off about $38,000 from the total in 2017 (and down more than $108,500 from the net profit dealers achieved in 2016).

Much of the profit, as dealers know all too well, owes to the factory checks dealers receive for meeting performance and sales objectives. It’s no surprise that some dealers are pushing back against what’s become an over-reliance on factory financial support for survival.

It’s also no surprise that dealers are keenly focused on expense reduction. They understand you can’t spend more than you make and expect to stay in business.

But I believe there’s a bigger opportunity for dealers to improve the financial performance of their dealerships.

The opportunity starts with a firm and unfettered understanding that selling cars is no longer enough to make money in today’s car business. Instead, you must believe that your primary purpose as an auto retailer in the current market is to make more money from your investments in new and used vehicles.

This shift to a money-making mentality may seem semantic or simple, but it’s much more impactful and significant than you might think.

Consider, for example, the investment fundamentals in today’s used vehicle market.

Two or three years ago, dealers could reasonably expect that they’d acquire auction and trade-in vehicles with an average Cost to Market percentage around 80 percent. Dealers would also know that, by day 60 or so, the Cost to Market percentage would reach 90 percent—a warning sign, for those paying attention, that their investment was running out of return potential.

Today, the Cost to Market average for “fresh” cars runs about 88 percent, a figure that typically climbs to 90 percent after 30 days in inventory.

Unfortunately, I don’t believe most dealers have reckoned with this fundamental change in the shelf life of used vehicle investments in today’s more-efficient market.

I see the evidence in dealers’ pricing strategies. In many cases, they haven’t changed at all in the past several years. They still appear to presume that you can sell a car after 60 days and make money. The trouble is, the money’s mostly, if not all, gone after 30 days with many vehicles.

Dealers who account for what I call this “new math in used vehicles” tend to see far better profits, and sales volumes, than those who haven’t yet woken up to the new money-making reality.

Let’s also consider how dealers manage and regard their new vehicle inventory investments.

When I talk new cars with dealers, I’m struck by what can only be described as a sense of resignation—the factories have taken the fun, and the money, out of the business, and there’s little that can be done to change the current outcomes.

Now, I would ask dealers to consider if they heard a similar explanation from their financial advisor: “Well, geez, yeah…I know. Your portfolio’s not really doing that well, but there’s nothing we can do.”

Here again, I believe there’s opportunity for improvement that starts with a money-making mentality.

For example, if you know your investment starts costing you real money after it’s been idle for 90 days, doesn’t it make sense to reduce this risk—perhaps by retailing these units before the fresh ones off the truck?

Similarly, if the percentage of your vehicles older than 90 days runs more than 20 percent, doesn’t it make sense to examine, and perhaps try to change, how and why those cars became your investments in the first place?

These are the types of questions making money-minded dealers proactively ask themselves, and their teams, every day.

I also believe there’s opportunity in fixed operations when dealers apply a money-making lens to their current efforts.

The NADA data shows the average dealership wrote fewer Repair Orders (ROs) in total in 2018 than in 2016. This downward trajectory unquestionably reflects the fact that today’s vehicles require fewer maintenance intervals. Still, given that retail sales of new and used vehicles effectively increased during the same period, I would expect the trendlines to be heading up, not down.

When I talk to dealers about the need to shift to a money-making mindset, I suggest the following first step:

At your next managers meeting, don’t start by asking individual managers how they plan to sell more. First, ask them how they plan to help you make more money.

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It’s long been a best practice of Velocity dealers to review the prices of their used vehicles every day to ensure the prices fall within the top three value rankings within a competitive set.

The approach is intended to reflect how today’s online vehicle shoppers look for their next used vehicle purchase: After perusing vehicles on classified and dealership websites, they tend to narrow their wish list to two or three vehicles that, to them, represent the best value.

This best practice has served dealers well over the years except for a couple shortcomings.

First, pricing and re-pricing vehicles often isn’t a daily exercise. Instead, dealers may only revisit used vehicle prices once or twice a week, or even less frequently. The intervals are often tied to an age-based pricing strategy, which typically calls for assigning specific adjusted Price to Market percentages when vehicles hit seven, 10 or 15-day milestones.

Second, dealers often don’t truly consider competitive sets as they make pricing adjustments. Instead, they tend to price vehicles based on their age-based pricing strategy. For example, if a vehicle is 15 days old, a dealer might set a vehicle’s adjusted Price to Market percentage between 97 percent and 98 percent. After 30 days, the adjusted Price to Market percentages might range between 94 percent and 96 percent.

The pricing shortcomings are understandable. Dealers and used vehicle managers are super-busy, and it can be difficult to find time to find the time for a daily review of each vehicle’s pricing and its competitive set.

I’m highlighting these shortcomings because they surface, front and center, when dealers begin using Provision ProfitTime to manage their used vehicle inventories.

With ProfitTime, the age-based pricing strategy goes away. Instead, dealers base their pricing decisions on a vehicle’s investment value, as expressed by a score and Platinum, Gold, Silver and Bronze designations.

The absence of the age-based pricing strategy can be unsettling for dealers—particularly if they have grown accustomed to relying on age-based intervals to drive when they review vehicles, and determine the adjusted Price to Market percentage that best fits the vehicle at that time.

Time and again, when I’m talking to dealers and managers about how to price vehicles with ProfitTime, they’ll want to know the adjusted Price to Market percentages I’d recommend for Platinum, Gold, Silver or Bronze vehicles.

The question owes, I believe, to dealers being accustomed to using a range of adjusted Price to Market percentages that correspond to a vehicle’s age to make pricing decisions, and their desire to apply similar Price to Market ranges to ProfitTime’s precious metal designations.

I’ll then suggest two best practices to help dealers use ProfitTime to price used vehicles based on their investment value:

First, with ProfitTime, it’s even more critical that dealers review their used vehicle prices every day, without exception. That’s because you’re now managing the vehicle’s investment value, not its age. Second, with ProfitTime, the only way to truly determine if a vehicle’s adjusted Price to Market percentage and market position make sense, is to analyze the vehicle’s competitive set in conjunction with its investment value.

For example, if I have a Bronze vehicle, I know the vehicle’s investment value is challenged. It’s a car that, by all rights, I should retail quickly to get what I can and reinvest the capital into another vehicle that might offer a better return. With this understanding, if there’s a competitive set of 13 vehicles, I would probably choose to price the vehicle to be among the top three value rankings in the competitive set.

By contrast, if I have a Platinum car, and its competitive set includes 13 vehicles, I’d likely price the vehicle to rank 11th or 12th in the competitive set, because the vehicle’s investment value merits a competitive position that allows me to maximize its investment or gross profit potential.

The key take-away for dealers accustomed to age-based pricing decisions is that investment value-based management requires more diligent stewardship of competitive sets and vehicle prices.

I would add, however, that I have seen some dealers develop formulas for investment value-based pricing that, by design, are meant to offer a less time-intensive approach to pricing.

For example, a Northeast Toyota dealer created a formula to facilitate ProfitTime-based pricing. The dealer built the formula after determining the average adjusted Price to Market percentage at which his vehicles sold. He used that figure as a baseline to determine how to set prices within each ProfitTime precious metal designation.

“I was trying to not raise or lower the overall price of my inventory,” the dealer says. “I wanted the overall Price to Market average to come out the same.”

The dealer tinkered with the numbers, and came up with this formula: Each vehicle starts at an adjusted Price to Market percentage of 92 percent. From there, the dealer adds the vehicle’s ProfitTime investment score from the system’s 1-12 scale to determine the vehicle’s specific adjusted Price to Market percentage.

Hence, if it’s a Bronze vehicle with an investment score of three, the dealer would initially price the vehicle at an adjusted Price to Market percentage of 95 percent. If it’s a Gold vehicle, with an investment score of 9, the vehicle’s initial adjusted Price to Market percentage would be 101 percent.

“I wanted to give my managers a simple formula,” the dealer says. “We’re happy with how it’s working so far.”

I’m not necessarily advocating the dealer’s strategy.

But I understand the dealer’s thinking—for him, the formula is really the next-best thing to studying each vehicle’s competitive set and price position every day.

Further, I appreciate the dealer’s effort to find a way to base pricing decisions on each vehicle’s actual investment value, not arbitrary days on the calendar.

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There was a time not long ago when selling used vehicles and making money were synonymous. Those were the days when you could take a used vehicle into inventory, price it to achieve your gross profit objective and reasonably expect to make your money, or at least a decent portion of it, even if it […]

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A Cloud Covering This Year’s Tax Season Lift in Used Vehicles?

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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 […]

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