Time For An ‘Anti-Tax Movement’ in Used Vehicles?

by dpollak on 05/17/2012 · 6 comments

 

I would say the answer is “yes” after recent reviews of used vehicle department performance at several dealerships.

The “tax” in question is the pack these dealerships put on their used vehicles. In some cases, this add-on cost for every used car runs nearly $900.

W1957 Chevy Bel Air 300x218 Time For An ‘Anti Tax Movement’ in Used Vehicles?hy do I call a pack a “tax”? By definition, a tax is a surcharge that does not add value to a good or service. Reconditioning a used vehicle is not a tax, because it improves a car’s condition and value for a buyer.

A pack, on the other hand, adds no value to a car. In fact, for consumers, the pack diminishes a vehicle’s value, because it often translates to a higher purchase price than the same or similar available used cars.

I’ve seen cases where packs create a chilling effect on the volume and velocity of a dealership’s used vehicle department.

One telling example: Trade-ins are often far fewer, because appraisers only want to buy cars where the acquisition cost is low enough to support the pack, or “tax,” placed on a car, plus gross profit expectations. In turn, the used vehicle department must then source a greater share of inventory from auctions, where acquisition costs are typically higher.

Guess what happens to the front-end gross profits at these dealerships—even as they sell cars? They hit the floor.

I’m not suggesting dealers should eliminate this “tax” they place on vehicles.

However, they should recognize that, in a growing number of markets, the size of the pack dealers put on used cars is significantly less than it used to be. Some dealers have even abandoned the practice altogether as they seek to become more clear-eyed about their markets and more responsive to buyer expectations for retail pricing parity and transparency.

  • A pack shouldn’t have a incredible affect on the inventory 

  • Glen,

     

    Thanks for your thoughts.  First,
    to be clear, I don’t view used cars as “strictly commodities”.  They do however, compete in the market today
    much more like commodities as the internet provides shoppers easy ability to
    compare.  To be sure, every used car is
    different, and identifying and communicating those differences is much of the
    art of today’s used car management. 

     

    Now to the issue of making “a fair profit”.  In the past, the concept of a pack is that we
    could place a non-value added charge to a vehicle, and pass it along to a
    customer, particularly if the sales person wasn’t aware of it.  As my post suggests, informed shoppers today
    just don’t respond very well to that approach.
    Therefore, we must find other ways to make profit and meet the needs of
    today’s shoppers. 

     

    The most effective way that I found to do this is to price the vehicle
    right and replace negotiation with documentation.  There are many important steps to this
    process.  First, sales people themselves
    have to believe the vehicle is priced right.
    Second, tools are available today to present shoppers with competitive
    vehicle offerings such that the salesperson can justify the price of their
    vehicle.  It should be noted that the
    vehicle in question doesn’t have to be the lowest priced, you must just simply
    be able to explain why other similar vehicles are priced less.  Such justifications might be mileage,
    equipment, color, condition, vehicle history or reputation of seller. It should
    also be noted that such competitive pricing reports should be used early in the
    sales process just as we do with vehicle history reports.  When properly presented early in the buying
    process, the temptation on the part of shoppers to negotiate is much reduced
    and sometimes even eliminated. This is because shoppers know up front that they
    cannot BS you about fictional vehicles that they say they can buy for
    less. 

     

    Third, sales management in the dealership must create a culture around
    the management and measurement of the discount on each and every deal for every
    sales person.  As you’re probably aware,
    most dealers have a white board in the meeting room showing how many units each
    sales person has out for the month, day by day.
    Similar prominence needs to be given between the asking price and the
    transaction price for every deal and every sales person.  This type of measurement and visibility
    brings about a change in culture in favor of less negotiation.  Dealers that use these techniques commonly
    reduce the average amount of their negotiation to less than $300 per car, and
    very often, less than $200.  So to answer
    your question, this is how you make money in today’s used vehicle market.  By the way, it shouldn’t be missed that when
    done right, this approach is ultimately more pleasing and satisfying to the
    customer as opposed to emotional and confrontational negotiation.  I would be interested in your thoughts.

     

    Thanks,

     

    Dale

  • Al

    Dale I agree with you 100%. As someone who works closely with many dealerships, I constantly see used car managers struggling to trade and buy cars that will ” fit the pack”. They appraise the trades low and pass on buying the nice cars because of the pack. Instead of buying the nicer cars, they end up buying the generic, run of the mill cars from the rental companies. The used car managers hate the packs, but they have little or no control over this “inventory tax”. The end results of high packs is missed deals, lower employee morale, and an overall drag on the sale of vehicles. It is strange that some of the same dealers who complain about the burdon of high taxes, then turn around and place the same business killing packs on their own employees! Wake up dealers, the industry has come a long way. Quit holding back the very people who you hired to get the job done. Reduce or eliminate the packs and watch your used car operation take off!

  • Well said, thank you.

  • Tom

    Dale , your article is like to say lets get rid of dealer holdback on new cars ,If you have a Used Car Manager worth his salt he will not pass on a trade because of the pack he know a retail unit when he sees it and does every thing he can to trade for .

  • Tom,

    Thanks for your note. There are certainly some used car managers that will not consider the pack when purchasing, but the good ones will. Would you want anyone purchasing cars on your behalf that isn’t thinking about the point at which that vehicle will ultimately have to be priced in order to achieve the acceptable return on investment/gross profit? I certainly would not and I don’t think that you would either.

    Dale

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