How do you make used car profit today?

by dpollak on 10/30/2008 · 0 comments

Ask any dealer or used car manager about their used car operation’s gross profit and the first thing that you are likely to hear is their average per unit.  The hallmark of a used car department’s strength has traditionally been this metric. This metric has served as a proxy for many skills including how good are the buying, reconditioning, merchandising, and selling techniques of the operators.  Total used car variable gross profit has been a distant second to the department’s focus.  At the risk of drawing criticism, I take the position that in today’s highly efficient and transparent used car internet environment, average gross profit must now take a backseat to total used car gross profit.

It is unrealistic and dangerous to believe any longer that a used car operation can draw substantially more profit per vehicle than the market will deliver.  This is because used car shoppers, today, have easy access to the whereabouts and pricing of substantially similar vehicles in their market.  This is not to say, however, that a used car operation should not be concerned about its average per unit or can not obtain a respectable average per unit, but, it will not be achieved in the traditional manner.

Let me begin by stating how a dealership will no longer achieve superior average gross profit.  High average gross profit will not be the result of sitting across the table from a perspective buyer and convincing them to pay more than they should or need to for a similar vehicle. It is simply too easy for them to know better. There are only two strategies that, if executed properly, will result in respectable average gross profits.

The first strategy is to stock your lot with the right cars.  By “right cars” I don’t necessarily mean those that you have done well with in the past. What I do mean by “right cars” are those vehicles in your market that have a large amount of demand relative to their supply.  This is because the used car business has transitioned from an inefficient to an efficient marketplace. An efficient marketplace is one where buyers and sellers have relatively equal knowledge about their choices and alternatives.  In any efficient market, when a seller is offering an item with more demand relative to its supply, it is less sensitive to price competition.  This allows the seller to ask and obtain premium prices and profits without sacrificing turn.  Conversely, when you are the seller of an item in an efficient market with more supply relative to demand, the only way to turn the item is through extremely aggressive competitive pricing. Therefore, the first strategy to obtaining respectable high average gross profit is to stock your lot with those vehicles that are in maximum demand with minimal supply. Today, there is technology that quantifies any vehicle’s supply, demand, and price sensitively in any market, at any moment with its exact equipment configuration.

To understand the second strategy, imagine two dealers competing against each other in the same market with the exact same vehicle.  Further, suppose that each of these dealers purchased their vehicle “right” relative to the market. The difference, however, is that one dealer purchased his vehicle fifty days ago and the other dealer purchased his vehicle twenty days ago.  The dealer with the fresher unit can likely price their vehicle for less and gross more than the dealer with the aged vehicle.  The absolute truth is that the dealership with the freshest inventory, purchased correctly, will win in this new highly efficient, transparent used car marketplace. Understanding this reality is understanding the strategy that I call “velocity.” I know many dealers with Ford, Chevrolet and Chrysler franchises in economically depressed areas, delivering upwards of 200 used vehicles per month.  True enough, they are not averaging $2,200 front end gross, but they are operating in the mid-teens and laughing all the way to the bank.  This experience unfortunately, is all too often contrasted with their counterparts, who are struggling to sell 30-40 used cars per month and are proudly focused on the strength of their average per unit gross profit.

Today, the used car business is a new game.  Make no mistake; it is not as good of a game for dealers as was the old used car business. However, the old used car business is not coming back and, like any game, there will still be winners and losers.  The losers, however, will no longer be used car shoppers that pay more than they should have if they had only known better. The losers now are dealers that either don’t understand the new rules, or are not willing to play by them. The winners will be those dealerships that understand the rules and are equipped to adapt their thinking and practices to the new marketplace.  Sadly, with the now all too frequent dealership closures, we are all painfully aware of the ruthlessness of this new game.

Previous post:

Next post: