How “Variable Management” is Moving to New Vehicles

Regular readers of my blog know I’ve embraced a “Variable Management” strategy for used vehicles and built a software system, ProfitTime GPS, to support the strategy.

The strategy itself flows from a data science discovery that undercuts one of the central principles of traditional used vehicle inventory management—that each vehicle is fresh and full of potential on Day 1.

However, we now know, thanks to data science and its ability to predict a used vehicle’s investment or ROI potential, that this principle isn’t true. In fact, each vehicle arrives in a dealer’s inventory with its own unique profile of risk and opportunity. Some are earners. Some are turners. Some fall in between.

I’ve been sharing this message with dealers across the country over the course of the past nearly two years. I’ll show them how ProfitTime GPS can help dealers know each used vehicle’s ROI potential on Day 1 and manage it accordingly. I’ll explain that the end game is to get dealers and used vehicle managers to operate more like prudent investment managers, wherein each asset, or used vehicle, gets treated with its own profile of risk and opportunity in mind.

To date, my message has focused on applying the Variable Management strategy and related principles to used vehicles. But now, with the advent of Vehicle Identification Number (VIN)-level incentives some OEMs are applying to new vehicles, it seems wise for dealers to at least consider how a Variable Management strategy should apply to their new vehicle inventory investments.

Historically, dealers have viewed new vehicles as commodities. Across different models, colors and trim lines, dealers have tended to treat new vehicles the same. Their mark-ups or discounts were often uniform across model lines and segments. The mark-ups or discounts would change as vehicles aged, or as OEMs offered broad-based national or regional incentives to help move model lines that were over-supplied on dealers’ lots.

Today, some OEMs are playing a slightly different game. Their VIN-specific incentives are targeted to move individual new vehicles that haven’t sold—a growing trend that fundamentally alters the risk and opportunity profile of one new vehicle compared to the next.

I recently spoke with a Midwest Ford dealer who’s extremely disciplined about moving new vehicles before their time in inventory creates floorplan expense. His concern: He’s effectively getting penalized when he sacrifices gross to move an aging unit while a competing dealer can sit on the exact same car and then receive the reward of a VIN-specific incentive to help move it out. “Some of those incentives definitely hurt us,” the dealer says.

To his credit, the Ford dealer understands that, despite the similarities of new vehicles in his inventory, each vehicle represents an investment of his money. Therefore, he accepts that it’s his responsibility to optimize the ROI on any particular unit before it ages away. He doesn’t plan to ease up on his discipline to turn each new vehicle in its own appropriate amount of time, which is a form of the Variable Management strategy I advocate that dealers adopt in used vehicles.

Looking ahead, I’m told that VIN-specific incentives are likely to increase in frequency and scope, especially as affordability concerns dampen retail sales of new vehicles and some OEMs keep sending more inventory to dealers than their market needs. That’s exactly why vAuto’s Conquest team has built new functionality to help dealers automatically apply VIN-specific incentives as they arrive.

But as the landscape of new vehicle incentives evolves, it’ll always be important for dealers to operate with the Variable Management-like mindset of the Midwest Ford dealer—ever-vigilant about each new vehicle’s individual profile of investment risk and opportunity and a desire to ensure each vehicle meets the your ROI objectives. That way, even if an incentive arrives too late because you already sold the vehicle, you’ll know made the most of your investment, and achieved your objective, while you owned it.