3 Opportunity Costs You Should Consider Trimming

by dpollak on 04/10/2018 · 3 comments

As more dealers think of ways to adjust to today’s margin-compressed environment, cutting costs becomes a primary topic of conversation, if not decisions.

It’s a good exercise. It points your attention to how you’re spending money. It prompts you to examine whether these investments deliver the return on investment (ROI) they should.

But I caution dealers that this review ought to a bit more all-encompassing and thorough. It should go beyond the checks you sign every month. It should look closely at the way you do things, and whether your people and processes, wittingly or not, create and contribute to opportunity costs that hurt your business.

You can Google a lot of definitions for “opportunity costs.” I like to think of them this way: They amount to the benefit, profit or value that you give up when you choose to make decisions, or complete tasks, in a certain way, one that may be less efficient than an alternative.

When dealers tell me they’re cutting expenses to help boost dealership profitability, I’ll suggest they take examine three areas of opportunity costs that are often ripe for reduction:

1. Pricing Vehicles: vAuto recently took a close look at how dealers price their new and used vehicles. It was a snapshot view that captured a week’s worth of price changes (increases and decreases) across new and used vehicle inventories. The analysis isn’t scientific, but it’s telling. The following take-aways suggest that dealers could reduce opportunity costs by reconsidering how they price vehicles.

Price adjustment frequency: For the most part, the data show dealers are reviewing and repricing used vehicle inventory at least three times a week. I found it curious that the vast majority of dealers did not make any new vehicle price changes in the mid-month week we examined.

Price adjustment direction: For most dealers, the overwhelming majority of pricing decisions resulted in reductions. On one hand, this take-away isn’t surprising, particularly given that dealers’ pricing primarily pertained to used vehicles in the analysis. But we noticed a notable number of dealers who struck more of balance; their price adjustments included increases and decreases (in both new and used vehicles). It’s hard to draw a firm conclusion, but I suspect the data indicate that dealers may be reflexively reducing prices, and not identifying the vehicles, and market conditions, that merit price increases.

Price adjustment size: If there’s a headline from the analysis, it might be “Dealers Who Price Their Vehicles More Frequently Make Smaller Adjustments.” The data showed a clear pattern among dealers who reviewed and adjusted vehicle prices more frequently—on the whole, their price adjustments were more incremental, and the impact on gross profits less profound. I couldn’t help but think that dealers who only touched their prices once or twice a week, and cut six-figure sums from their gross profits, might see better results if they priced in a more market-efficient, and proactive manner.

2. Sourcing Vehicles: There’s a dichotomy at many dealerships between their new and used vehicle departments. In new vehicles, I think you could make the case that dealers and managers would have a better mix of market-desirable vehicles if they put more insight and time into their factory ordering decisions. vAuto’s Brian Finkelmeyer, who helps dealers improve their new vehicle performance, says it’s not uncommon for factory orders to occur in a hurried, last-minute rush to meet the factory’s deadline.

“The opportunity cost comes when the scramble results in ordering copies of cars that you’ve had in inventory for the past four months,” he says.

In used vehicles, we’re seeing a shift toward making inventory sourcing less time-intensive. With today’s technology and tools, dealers and managers aren’t spending as much time researching and traveling the country, for three to four days a week, to acquire inventory. The shift helps them address the opportunity costs that come when key players are off looking for cars, and unavailable to do things like close deals, manage teams and move vehicles more efficiently through reconditioning.

3. Merchandising Inventory: I was a dealer back in the days when the Internet first arrived. It was a pretty clunky and time-consuming process to get vehicles, descriptions and photos online. At the time, I understood that time was money. The longer it took me to get my cars online, the less opportunity I had to sell them while they were fresh. That’s why I missed a lot of bedtime stories with my kids. I was still at the dealership, writing descriptions and uploading files.

We’ve come a long way since then. But even so, it’s still far too common for five, seven or even 10 days to pass before many dealers get their new and used vehicles properly merchandised and posted online.

The best I can tell, these delays are all due to process inefficiencies. Perhaps the inefficiency relates to your service department, or your detailing team, or perhaps the outside vendors who work with you on their schedules. Whatever the case, there’s room, I believe, for most dealers to minimize the opportunity costs associated with less-than-optimal (and time-urgent) merchandising.

I’ve shared these three areas of opportunity costs because I believe they represent some of the lower-hanging fruit that dealers can harvest to mitigate margin compression and improve their operational efficiency and profitability.

I also hope this post serves a broader purpose—to help dealers and their teams recognize that minimizing opportunity costs will ultimately provide more long-term benefit to your operation than simply cutting your monthly expenses.

  • Thank you Dale! Several great points…as always!

  • Brad Hatfield

    Hi Dale… did the data reveal any relationship between the frequency of pricing adjustments vs retail sales or stock turns?
    I would assume that those dealers making more frequent adjustments are seeing some kind of benefit.. but does the data show this??

  • Yes it does.

Previous post:

Next post: