More dealers are adjusting their used vehicle operations to compete and succeed in an efficient market where both buyer and seller have equal knowledge and access to information. Historically, dealers have used gross per unit to gauge their success in the used vehicle department. Now, they focus on total gross and increasing inventory turns. Let’s look at the key components that contribute to success in today’s market—price to market, days’ supply to market, and cost to market. [Note: these terms and much of the discussion below are used in VAuto and other inventory management software. ConSept/NCM is not suggesting any software is better than the next, we just like their wording.]
Price to Market
This is the measurement of your pricing compared to that of similar vehicles in the market. In the efficient market, dealers price their vehicles at or just above the market price. They then monitor and adjust weekly or even daily depending on age, activity, and market conditions. Before the internet, many dealers would price fresh inventory far above the market and hope for the “big deal.” Customers today are better informed about pricing in their markets, so this strategy no longer works.
The evolving way in which customers shop and compare vehicles on the internet renders your chances of that “big deal”—above market price and with no context—very unlikely. You need a pricing policy that is monitored and adjusted continuously to be competitive with the market. This will enable you to generate more leads and floor traffic.
Will you have as many of the big gross deals of the past? Probably not—but if you generate additional traffic by pricing at or just below market level, you’ll close customers you’d never see if you overpriced. Remember—you still have the opportunity to pick up trade-ins and F&I income once the customer is in the store.
Market Days Supply
Before you trade or purchase a vehicle, you should know how it turns in your market. Many dealers back into inventory needs by identifying the fastest turning vehicles for their markets and having their buyers locate them. You can afford to pay a little more for a car that turns in 15 days in your market, since your holding cost will be less.
When pricing used vehicle inventory, many of the most successful operations will focus on a systematic pricing strategy that will allow them to alter pricing as a vehicle ages and/or becomes more unique in the market. When adopting this type of strategy, it is important to recognize that the market does not care what you have in a vehicle; the price has no bearing on your cost. Rather, you should be pricing the vehicle according to a semi-strict set of rules that you have set in place. That is not to say that this set of rules shouldn’t change. It is a good idea to try different pricing strategies to see what works best for your store and your market. But if you do not have a system in place, you will be running your department far more “from your gut” than according to data-driven science.
Below you can see an example of a pricing strategy (again, using VAuto terminology) that a store could use. Notice that the first bucket (fresh inventory with low market days supply) gives you an opportunity to get those juicy grosses you are used to. After that, you need to be realistic and identify your inventory as aged after it has been on your lot for a couple weeks. Set up something similar, then tweak the levels and see if you get more traffic. The key is to establish a system and stick to it!
Cost to Market
This is a major consideration as you acquire inventory. One result of an efficient marketplace is pressure on margins. As margins are reduced, the cost of the product plays a bigger role in determining your gross performance. Be it a trade-in or auction purchase, the question arises: can you buy the vehicle at an amount that will enable you to transport the car, recondition, pay a commission, and still be at or below market price with an acceptable margin?
When all three of these components are maximized, you will generate more total gross, turn inventory faster, and increase profitability. Calculate, review, and update your numbers using the proper analytics, and you can keep your customers happy and your business flowing.