One of the key benefits Provision ProfitTime offers dealers is the ability to appraise an auction or trade-in vehicle, enter a potential purchase price and see, instantly, what kind of investment potential the vehicle offers as a retail unit.

ProfitTime reveals the investment value by serving up investment scores and precious metal designations (1-3, Bronze; 4-6, Silver; 7-9, Gold; and 10-12, Platinum). The scores and designations are derived from combining each vehicle’s like-mine Market Days Supply, Cost to Market, recent sales volumes and other market factors.

In addition, ProfitTime shows the score in the context of your inventory needs (e.g., the Strategy Action) and the unit’s potential appeal in your market (e.g., the Stocking Letter Grade (A-F).

As we discussed in my previous post, these metrics offer a powerful trifecta that helps dealers sharpen their appraisals and related processes to bring in auction and trade-in vehicles for the right money.

But the trifecta also creates a temptation. I’m seeing some instances where dealers are using the ProfitTime metrics to engineer profit-positive outcomes on vehicles. The efforts can skew the vehicle’s true investment value and hurt your retail objectives.

The temptation, and the problems it can create, are most profound with trade-in vehicles.

For example, an appraiser may enter a potential purchase price on a trade-in vehicle—say, $7,500. The appraiser would then see the vehicle gets a ProfitTime score of 3 and a Bronze designation. The appraiser might also note that the vehicle’s market appeal is OK (a C grade) and the used vehicle department needs three more of the same/similar units (a +3 Strategy Action).

The appraiser might then think: “What if I put less money in the car, to make it a Silver or Gold investment?”

In my view this is a dangerous consideration for two key reasons:

First, the appraiser’s interest in improving the vehicle’s investment value may result in not acquiring a trade-in, which can hurt the retail objectives for both the new and used vehicle departments. After all, a better investment score doesn’t do you much good if you don’t get the vehicle.

Second, the appraiser would seem to be side-stepping the dealership’s approved valuation process. Theoretically, the dealership has developed a standardized way to put a number on vehicles to achieve some level of valuation consistency among appraisers. When an appraiser decides to self-engineer a vehicle’s investment value, it undermines valuation consistency and opens the door for justifications that often don’t stand in light of the vehicle’s true market position and your retail objectives.

Now, to be clear, I do believe appraisers should have some latitude to improve a vehicle’s investment value.

But I think appraisers should limit this discretion to auction purchases. With these vehicles, it’s truly in your best interests to achieve the lowest purchase price and best investment value possible, given the typically higher costs of auction acquisitions.

In addition, if you lose an auction vehicle because you were trying to pay less and make it a better investment, you aren’t risking a retail deal—you’re just honing the blade for the next profit-smart auction purchase.

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Since the dawn of the used car business, it’s always been true that the retail fate and fortune of every used vehicle starts with the appraisal.

This is the moment, whether it’s an auction or trade-in unit, that gives dealers their sole opportunity to size up a vehicle, determine whether it’s a good fit for your inventory and market, and establish the vehicle’s money-making potential, based on its purchase price.

It’s also true that, over the years, appraisals have shifted from an art, to a blend of art and science.

At one time, appraisals were all about art. Appraisers got a sense for the car, and came up with an acceptable number, sometimes after consulting book values, sometimes not.

In more recent years, science has entered the appraisal process. Appraisers have tools that help them consider real-time market metrics, such as Market Days Supply, Cost to Market and Price to Market metrics, and competitive sets, as they value a vehicle.

But even with the additional data and tools, there’s a wild card at work with auction and trade-in appraisals. It’s the emotion, and personal preferences, of the appraisers themselves.

The emotion may come from really liking a car, responding to pressure from the desk to make a deal or getting angry at being outbid at auction. Whatever the case, the emotion isn’t good for business.

Too often, the emotion results in appraisers making mistakes. They put too much in the wrong car, and too little into the right cars. They tweak appraisals to fit the deal at hand, not the car that’s in front of them. Worst of all, the mistakes often live on, as managers try to make up for the appraising shortcomings by pricing the vehicles higher than they should be, given the market.

These are the scenarios that dealers are uncovering as they use Provision ProfitTime to help guide their appraisal process for auction and trade-in vehicles.

ProfitTime tells dealers three important things about every vehicle at appraisal—its market appeal as expressed by an A-F letter grade, a Strategy Action that indicates whether you need the vehicle or don’t, and the vehicle’s investment value based on ProfitTime’s 1-12 scale (1-3, Bronze; 4-6, Silver; 7-9, Gold; 10-12, Platinum).

Dealers say this trifecta of information is helping appraisers make more objective and on-the-money decisions.

“We found who shouldn’t be appraising cars,” says Steve Jackson, used vehicle director for Lansing, Mich.-based Shaheen Chevrolet, which retails around 190 used vehicles a month.

“We determined that maybe we should just have appraisers go in with facts, not emotion,” Jackson continues. “ProfitTime takes the emotion right out of it.”

Jackson says the ProfitTime appraisal application has led to deeper, and more frequent discussions about how they’re appraising vehicles, and why they miss some units. The effort’s paying off.

“The cars I take in, now, we’re at least taking them in right,” he says. “The best thing for me is that on Day 1, right away, I know what I’m going to do with that car and how to price it. It works, and the proof’s in the pudding. Since we’ve been using ProfitTime, our turn on our Bronze vehicles has gone up dramatically.”

Trent Waybright, vice president of pre-owned operations for the six-store Kelley Automotive Group, Fort Wayne, Ind., says ProfitTime is helping his appraisers see vehicles as they are, not what they might want them to be.

“The natural tendency of a manager at the store level, when they’re looking at an appraisal, is to stay away from anything that looks negative,” Waybright says. “Understandably, they want to make the deal. We’re learning that with some vehicles, it just is what it is.”

Waybright adds that more investment-astute appraisals have helped improve the percentages of Silver and Gold vehicles in their inventories. “To me, that’s a result of people in the showrooms buying in. They are putting the right money into the cars,” he says.

I’ve long stated that today’s car business is a game of inches, and success goes to dealers who look for, and pursue, opportunities for incremental advantage.

Based on what I’m hearing from ProfitTime dealers, it seems that there’s at least some incremental advantage waiting, untapped, in the way they appraise auction and trade-in units.

Perhaps best of all, this incremental advantage is now easier to find and address.

Note: In my next ProfitTime in Practice post, we’ll examine why appraisals on auction vehicles, not trade-ins, offer the best opportunity to engineer your inventory’s investment value. 

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Note: The following is the first in what I intend to be an ongoing series that details best practices, key insights, lessons learned and retail results of dealers who are putting ProfitTime into practice at their stores.

There are typically two pricing hurdles dealers face right away when they implement Provision ProfitTime.

The hurdles aren’t easy to overcome. But, once dealers get past them, the pain they may endure quickly turns to opportunity.

Hurdle 1: Pricing the disproportionate share of distressed, often aged, vehicles in their inventories appropriately to the market and an individual unit’s investment value.

Hurdle 2: Pricing their best investments less aggressively to take advantage of the fact that they can afford to give these vehicles more time on the market.

Some quick background: In ProfitTime parlance, the first hurdle addresses Bronze vehicles that typically make up about 45 percent or more of a dealer’s inventory. The ProfitTime system measures these vehicles’ individual investment values by combining the Cost to Market ratio, like-mine Market Days Supply and recent sales volume to determine a score. In ProfitTime, Bronze vehicles are the lowest investment class. They earn scores of 1 to 3 on the system’s 12-point scale.

The second hurdle pertains to inventory ProfitTime determines to be Platinum. These vehicles typically make up between 5 percent and 10 percent of a dealer’s inventory. Platinum vehicles earn scores between 10 to 12, and represent the units that offer the highest appeal and profit potential for dealers.

Dealers become aware of these hurdles quickly as they view their inventories through ProfitTime’s investment value lens.

They immediately spot what I’ve come to call an “investment value inversion”—wherein dealers have priced their Platinum vehicles, or their best investments, most aggressively, and priced their Bronze vehicles, their worst investments, most proudly.

Let’s address the hurdles, and the opportunities they represent, respectively:

“I thought, ‘Boy, I’ve got an awful lot of Bronze vehicles,’” says dealer Jim Blickle of Performance Toyota, Sinking Spring, PA, when he first turned on ProfitTime at his store, which retails about 100 used vehicles a month.

Blickle’s inventory looked like many other dealers—nearly half of his roughly 125 vehicles were Bronze units. They represented a mix of fresh and distressed units.

Pre-owned sales manager Mark McQuaid at RBM of Alpharetta, a Mercedes Benz store that averages 100 used vehicle sales/month, found a similar situation. Bronze vehicles represented the largest share of his inventory. These vehicles were often, but not always, his oldest vehicles.

“We were caught up in that inversion a little bit, too,” McQuaid says. “We might have had a 2 percent spread in the Price to Market averages of our Platinum and Bronze cars, but our Price to Market average was higher for Bronze vehicles than any other category.”

Both dealers then began the difficult work of pricing their Bronze vehicles more appropriately to the market to improve the overall investment health of their inventories—and taking the pain this necessary step creates.

For example, if a dealer has a Bronze vehicle priced at a Price to Market ratio of 98 percent, and it should be priced, based on its investment value, at a Price to Market ratio of 92 percent, the difference represents a 6 percent reduction on the unit’s front-end gross profit potential.

If the vehicle has an asking price of $10,000, the 6 percent haircut represents $600. If the vehicle’s asking price was $20,000, the 6 percent reduction amounts to $1,200.

These adjustments, spread out across 40, 50 or more vehicles, add up quickly—and dealers and managers know it.

“It’s hard take that aged Bronze inventory right off the bat and slash our prices,” says Lisa Groleau, sales manager for Bill Marsh Automotive Group, Traverse City, MI. “Why? Because we know what we own it for. Every time you look at what you own the vehicle for, it makes it hard to price it right the first time. It’s our own egos.”

I call this “taking the medicine” when I speak to dealers interested in ProfitTime, and those who’ve begun using it.

In some ways, the initial price-reckoning with Bronze vehicles is like going on a diet or breaking a bad habit. You’ll typically feel a little worse before you start to feel better.

But here’s the best part—the pain passes in fairly short order, and the pay-off comes pretty quickly.

“We learned that it’s really about the entire model,” Groleau says. “Until you do it for 30 days, you’re not going to see success. But when you hit the 30-day mark, it’s almost instantaneous. It’s like, this is incredible. I’m on to something.”

Blickle reports that after making the price adjustments to his Bronze vehicles, they are turning more quickly than other inventory segments, and producing better front-end gross profits than they would have under his previous pricing strategy. McQuaid sees a similar dynamic at his dealership.

Now, let’s turn to the Platinum vehicle pricing hurdle.

Across the country, I’ve seen the average Price to Market ratio for Platinum vehicles run close to 95 percent. But these vehicles, because of their strong investment value and market appeal, should be priced closer to 100 percent, if not higher, depending on each unit’s competitive set and market conditions.

On some level, you think it’d be super-easy for dealers to mark up vehicles to maximize their front-end gross profits.

But it’s not as easy as you think, and some believe it’s just as difficult as taking the medicine on your Bronze vehicles.

“It’s equally difficult for Velocity dealers, since we’ve been trained to not worry as much about front-end gross, to mark up your Platinum cars,” Groleau says. “You have it in your head that you only need to make so much, so you set your price and move on to the next car to free up that floorplan.”

Blickle faced a similar issue. As a Velocity dealer, he cared about how he owned a car, but it wasn’t a driving force in his pricing strategy. With ProfitTime, his thinking has changed.

“It’s not really that the market is different for the car,” Blickle says. “It’s just that if I own it for less, time is on my side. I can afford to ask all the money. Whereas, if I own it for too much, time is not on my side. If that car becomes 60 days old, I’m going to lose money.”

When dealers overcome the Bronze and Platinum pricing hurdles, they begin to see how ProfitTime is helping them improve front-end gross profits and increase sales volumes—something many hadn’t considered possible in today’s margin-compressed market.

“When we started with ProfitTime, I thought maybe we’ll turn cars a little quicker and maybe we’ll pick up some gross profit,” Blickle says. “The one thing I was not expecting was a dramatic improvement in my front-end profit. If you would have told me I could raise my grosses by $300 to $500, I probably would have bet against you. We’re thrilled.”

In my next post, we’ll examine how ProfitTime is helping dealers transform vehicle appraisals and set a better stage to sell more used cars and make more money.

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A Sobering, Softer Start To 2019

02.22.2019

I haven’t talked to a single dealer who’s happy about how they finished January at their stores. In some cases, February is looking a little better, particularly in used vehicles in areas of the country where weather conditions have been tough the past several weeks. But the feedback about January is sobering: “It’s like someone […]

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Why Calendar Time and ProfitTime Don’t Mix

02.21.2019

You’ve undoubtedly heard the phrase that oil and water don’t mix. If you try to mix them, the oil floats on the water. Each liquid stays separate from the other, even if they’re in the same container or glass. I’ve been thinking about oil and water, and other things that don’t go well together (like […]

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

02.13.2019

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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Pricing Primer Follow-Up: A Deeper Dive Into Competitive Sets

02.08.2019

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 […]

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A Provision ProfitTime Pricing Primer

02.01.2019

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 […]

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NADA Day 3: Final Day Reflections

01.28.2019

All eyes were on the weather on the final day of NADA. Not the weather in San Francisco, but elsewhere across the country. Forecasts of snow and sub-zero temps made some wonder whether they’d get out of town as planned. Lighter foot traffic on the show floor gave me the opportunity to ponder a few […]

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NADA Day 2: Pricing Efficiency, Recon and Digital Retailing

01.27.2019

A curious question came up more than once on day two of the NADA convention: Will we see automated vehicle pricing sometime soon? When dealers asked the questioned, I took time to better understand the reasons that prompted it. In each instance, the dealers shared that they weren’t sure that the individuals who currently handle […]

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