A Look at “Known Unknowns” of Used Car Retailing

I recently read a column in the New York Times that discussed the “known unknowns” of our current time. The writer, author Geoffrey Wheatcroft, defines the term as “things that were not at all inevitable, and were easily knowable, or indeed known, but which people chose to ‘unknow.’” He then describes how “known unknowns” were chief contributors to the current economic downturn, recent financial scandals and political turmoil.

I couldn’t help but think of some of the “unknown knowns” of used vehicle retailing:

1. Market-based acquisitions and pricing are a must: Every dealer knows the age-old axiom that “you make your money when you acquire a unit.” But I’m continually surprised by how many dealers don’t examine market data to identify and potentially pursue all makes and models of vehicles that have retailing potential. They also don’t correlate wholesale and retail prices to see if a unit’s acquisition cost will allow sufficient spread to meet profit objectives and attract buyers (the majority of who shop online and are prices-smart). When I discuss this with dealers, they understand why this approach makes sense but choose not to adopt it. Instead, they acquire units they think will work, apply a standard mark-up and pack, and then blame aging inventory, low sales volumes and wholesale losses on their used car managers.
2. Packs are problematic. As a corollary to the first point, some dealers apply up to $1,000 in packs on every used vehicle they bring into their inventories. This, coupled with a standard mark-up and little/no deference to retail market
   prices, can translate to vehicles priced well above competing units. In addition, the size of a pack has a direct impact on the type of inventory a store might acquire: If I’m a used car manager, and know the store gets $1,000 off the top on every vehicle, I’m only going to acquire units that perform best for my department and paycheck—and ignore those where the time/effort yield more marginal results for me. For the dealership, this means lost or unrealized opportunities. Dealers understand these dynamics but won’t adjust. Why? “Packs are like crack,” says one dealer who has lowered his pack to $200 to build inventory volume and ensure competitive retail asking prices.
3. Pixel proficiency is critical. It’s not uncommon for dealers to complain about the amounts they spend with vendors to list and promote their inventories online. When I hear these complaints, I’ll ask about what I call “pixel proficiency,” or their efforts to measure the performance of their online merchandising and investments to attract customers. Often, these dealers are not aware of the key metrics that can guide online merchandising success and, in some cases, they erroneously believe that once they “put their inventory out there” their job was done. The most successful dealers are those who take the time to manage their Search Results Page (SRP) and Vehicle Details Page (VDP) metrics on a regular basis. An example: Some dealers evaluate VDP conversions for their inventory every day, looking for the units that generate too few VDPs and those that appear to have too many. The exercise often reveals a variety of needed fixes: photos are missing or of poor quality, descriptions aren’t compelling or absent, the pricing is too high or too low, etc.  To be sure, vendors have a responsibility to share metrics and best practices with dealers, but it’s the dealer’s responsibility to ensure processes that encourage better performance.
4. Sourcing requires more sophistication. When I hear a dealer or used vehicle manager say they’re frustrated by an inability to find used inventory, I peel the onion: How many online auctions do you use? What technology and tools do you use to identify and acquire the make/model and equipment/trim configuration of vehicles that will sell in your market?  How are you extending inventory sourcing to other parts of your operation (e.g., service drives, lease customers, etc.). Typically, I find the dealers who struggle most to find inventory haven’t fully answered these questions for themselves. They may recognize today’s wholesale marketplace is extremely competitive, but they haven’t yet embraced the technology and tools that will lead them to more efficient and proficient processes for sourcing vehicles.
5. Transparency is transformational. I’ve had multiple discussions with dealers who are deploying what I term a “documentation is the new negotiation” approach to sales. That is, they use market data to both affirm and justify their retail asking prices and trade-in evaluations as they work deals. To a dealer, the end result is strikingly similar: Customers back off from asking for discounts on used vehicles and/or accept an offered trade-in valuation. The reason? Dealers are using market data from the same sources their customers researched prior to showing up to the dealership. This blend of consistency and transparency also yields greater customer satisfaction as evidenced by the positive reviews and referrals these dealers receive—often punctuated by comments like “there were no surprises.” Some dealers are loathe to embrace transparency as they effectively equate it with the end of their right to negotiate deals. I don’t begrudge any dealer the desire or right to negotiate, but I also believe the market is telling us something about many of today’s and most, if not all, of tomorrow’s customers.

The New York Times article closed with the following, which is worthwhile for all of us to remember: “…try to unknow less and know a little more.”