ProfitTime in Practice: A Positive Improvement in Inventory Investment Value

Since dealers began using Provision ProfitTime in earnest about six months ago, I’ve noticed a positive improvement in the overall investment value of dealer inventories.

To be sure, the improvement is a primary driver of the increases in gross profits and sales volumes that I’ve shared in this space in recent weeks.

But I thought it might be relevant and useful for dealers to go behind, or beneath, the headlines to understand the day to day decision-making that’s helping dealers maximize their inventory investment value and the return they receive from it.

To start, let’s examine the typical inventory investment value when dealers start using ProfitTime.

The top chart at right shows a composite of the investment value of dealer inventories across the country. The composite is derived from applying the ProfitTime algorithm, which combines each vehicle’s adjusted Cost to Market, Market Days Supply and other market factors, to score each vehicle on a 1-12 scale and assign it a corresponding precious metal designation (Bronze, Silver, Gold and Platinum).

You’ll notice that when dealers start using ProfitTime, more than half of their inventories consist of Bronze and Silver vehicles—the least valuable vehicles, in terms of investment quality. Meanwhile, slightly less than half of their inventories represent Gold and Silver vehicles, which represent the most valuable investments.

You can also see signs of investment inefficiency. For example, the average Cost to Market and Price to Market percentages for Bronze vehicles run above 100 percent, and the Market Days Supply percentage is the highest among all types of vehicles.

You can also see that dealers are holding on to their Bronze vehicles significantly longer than any other investment class.

These dynamics indicate that dealers are managing the poorest-performing vehicle investments as if they had much to gain.

Meanwhile, let’s look at the Platinum vehicles. You can see that dealers have a smaller share of these top-performing vehicles—probably because they’re inclined to sell them faster than any other type of inventory. This dynamic occurs despite profit-positive Cost to Market and Market Days Supply percentages that suggest these vehicles do, and should, deserve more time on the market to maximize their investment return.

It’s been fascinating to watch as dealers use ProfitTime, and see how the investment composition of their inventories change.

Check out the second chart at right from a dealer who’s been using ProfitTime since late February/early March. While the dealer’s inventory looked much like the composite above, he’s engineered some positive improvements.

For example, note the Bronze vehicles. The dealer’s got fewer Bronze cars, they’re priced to move and, generally speaking, they’re leaving his inventory as retail sales much faster.

Next, look at the Platinum and Gold vehicles. They now make up more than half of the dealer’s inventory. In addition, while the dealer probably should give these vehicles more time on the market, he is allowing them more time than he might have previously without ProfitTime.

“We’ve still got work to do,” affirms the dealer, whose average front-end gross profit has doubled since launching ProfitTime. “There’s room for even better improvement.”

From my conversations with ProfitTime dealers, I’ve gleaned three key reasons for the then/now investment value improvements.

1. More consistent, investment value-minded acquisitions. With ProfitTime, dealers can appraise an auction or trade-in vehicle with the benefit of what we call the trifecta—the vehicle’s Stocking Grade (generally, its appeal in the market), its Strategy Action (a +/- designation that shows whether your inventory needs the car) and its ProfitTime score (the numeric value that determines the precious metal designation). With the trifecta, dealers say their buyers and appraisers have a clearer view of the critical factors that determine whether they should buy a vehicle, and what they should pay to acquire it. These insights become particularly valuable in both acquisition settings.With trades, dealers now have a clearer understanding of whether they can and should put more or less into a vehicle to make a deal. At auction, dealers say that while the ProfitTime trifecta may not necessarily help them acquire better investment-grade units, it helps them walk away from cars that don’t make sense financially or otherwise.
2. Less ego and emotion. This point is a corollary to the one above. With ProfitTime’s investment value clarity, dealers aren’t acquiring cars they shouldn’t or paying more than they should. Similarly, ProfitTime dealers are now pricing vehicles more directly in relation to their respective investment values, not how they think the car should be priced. You can see the difference in the two charts—in the composite, the average Price to Market percentage for Bronze and Platinum vehicles is 101 percent and 96 percent, respectively; in the dealer’s chart, the Price to Market percentage is 98 percent for Bronze vehicles, and 101 percent for Platinum units.This pricing flip-flop essentially means that ProfitTime dealers are making decisions like data-minded investment managers rather than relying solely on what they know or playing hunches.

3. The positive power of ProfitTime. Mathematically speaking, you’d expect that the share of Bronze and Silver vehicles for ProfitTime dealers would decrease as they retail these cars faster than their more profit-productive Gold and Platinum counterparts. I would add, however, that I’ve been surprised by the growth in the share of Gold and Platinum vehicles in dealer inventories. I’d presumed that the national composite averages simply represented the way things are in today’s market. As it turns out, ProfitTime is helping dealers understand the way things can, and should, be in today’s used vehicle market.

In my next ProfitTime in Practice post, I’ll address the question of whether inventory turn still matters when dealers switch to ProfitTime.