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How to Offset the Impact of Internet Pricing on Used Vehicle Gross Profit

Michael-Lynch
Written By: Michael Lynch
Posted on January 10, 2019

As all dealers are aware, the internet has made used vehicle pricing transparent for all consumers to view and compare. Some dealerships (and dealer groups) have subscribed to software programs and a business model that suggests turning used vehicle inventory over faster will increase a dealership’s return-on-investment. The model claims that by pricing used vehicle inventory more aggressively (with the aid of software that scrapes and compiles online used vehicle pricing) it will cause a faster turn rate thus maximizing a dealer’s investment. Simply put, if the vehicles are advertised for less (e.g.: 5% less) than similar vehicles in the marketplace, than the vehicle will sell faster because of the more attractive price. This, in turn, reduces the chances for aging inventory and the losses that incur as a result of selling rotten fruit. Franchised dealerships and independent used vehicle dealers that have adopted this Fast Turn business model may have inadvertently placed downward pressure on used vehicles gross profits as the market becomes more intensely price competitive. The days of pricing and advertising used vehicles with lots of available gross profit margin and ample ‘wiggle room’ have long since passed.

For dealerships (and dealer groups) that have adopted a Fast Turn business model there are several ways to maintain used vehicle gross profit:

1. Convert to a One Price Only Price Business Model

In the years that preceded the internet and Fast Turn business models, dealerships would commonly mark-up used vehicles with a margin that would allow a customer to negotiate a $1,000 or even a $1,500 discount, with the dealership still maintaining a gross profit or $2,000 or $3,000+ even after the hefty discounting. That ship has sailed. Today, many vehicles advertised online are holding a $2,000 gross profit (or less) at full asking price. There is no room for error, very little room for price negotiation, and Fast Turn models tend to negotiate in the $200 - $500 range.

Consider this: If the industry has managed to realign customer (and salesperson) thinking from $1,000 and $1,500 discounting to $200 - $500 discounting, why not realign to eliminate discounting altogether. A One Price Only Price business model does not permit price negotiation, ever. If (as a dealership) you have managed to drastically reduce used vehicle discounting, then you are only one small baby step from going One Price Only Price. This business model holds onto the gross profit lost in negotiating dealerships, and greatly improves the customer experience. If you take a look around the industry, you will notice that many of North America’s largest used vehicle operations have converted to One Price Only Price business models. 

A Perfect Example:
Recently, I worked with a large independent used vehicle dealer in Brampton, Ontario, Canada that sells between 400 - 500 used vehicles per month. Brampton is a city of just under 600,000 people with 73% of the population made up of visible minorities, the largest groups being Indian and Pakistani. These cultures are well known for their desire to negotiate and their negotiating prowess, and this dealership was working with narrow thin profit margins to move inventory on the Fast Turn model. After converting to a One Price Only Price business model, the Brampton dealer’s volume and gross profit increased! If a dealership located in a market dominated by negotiation savvy customers, can convert to One Price Only Price and improve both volume and gross, then any dealership can.

2. Increase Business Office Profitability 

One of the most effective ways to offset aggressive used vehicle pricing and lower front-end used vehicle gross profit is by focusing on maximizing business office profitability. Have your salespeople or sales managers present multiple payment options as a closing tool and be sure to include suitable extended warranties and/or vehicle protection products. Offer a finance pre-approval service as the first or second step of your sales process that allows customers to gain a finance approval for a vehicle before they actually buy it (not after).

Remember, you already offer this service on your website, so why not offer it when a customer first enters your dealership? This allows the financial services manager the opportunity to submit a customer’s credit application to a lender that not only includes the desired vehicle, but also a suitable extended warranty, vehicle protection, creditor insurance, etc. The customer is much more likely to purchase protection if it’s already been approved in advance.

For dealerships (and dealer groups) that prefer to maintain a more traditional Price Negotiation business model, consider the following strategies to maintain used vehicle gross profit:

Create price-leaders through creative accounting                                                 

For example, add $100 to the cost of 5 similar used vehicles in inventory (a write-up) and deduct $500 from the cost of 1 used vehicle in inventory (a write-down). This creates a price-leader that generates leads without sacrificing gross.

Increase volume by offering sub-vented interest rates on your online used vehicle listings

If a dealership participates in a manufacturer’s Certified Pre-Owned Program, advertise the sub-vented interest rates (applicable vehicles) on each online used vehicle. If your manufacturer was offering 0% of new vehicles you would advertise this everywhere, so why not utilize this same practice on used vehicles?

I can hear the argument already, “If we offer a sub-vented rate, then we will lose the business office dealer reserve/commission offered on the non-sub-vented bank rates.” Remember, most CPO programs limit their offer of sub-vented rates to a 60 month term while most used vehicle customers finance for 72 months or longer. Meaning you end up going to a non-sub-vented rate anyway.
You increase volume with the offer of sub-vented rates and, in most cases, still finance the vehicle at regular bank rate.

Create price-leaders to switch to a manufacturer’s Certified Pre-Owned program

A franchise dealership that participates in a manufacturer’s Certified Pre-Owned Program can aggressively price a non-CPO used vehicle to create a price-leader. The sales team can then offer the price-leader or upsell a customer to a CPO vehicle once at the dealership. Across the industry, manufacturer’s Certified Pre-Owned vehicles generate a higher gross profit/vehicle.

Utilize priority postings and sell the value of the vehicle, not just price

If a vehicle is priced a little high because of surprise reconditioning costs, dealerships can utilize priority postings when advertising online to attract attention to the make, condition, odometer reading, and other main selling points.

Remember to include the following information in your Priority Posting:

  • Instant online access to a CarFax (with no information capture required)
  • A listing of what’s included in the price of the used vehicle:
    1. 135 point inspection
    2. Mechanical reconditioning
    3. Cosmetic reconditioning
    4. Executive detailing
    5. Lube, oil, filter
    6. Full tank of gas
    7. 3 month power train warranty
    8. 3 month roadside assistance
  • Payment options
  • Along with quality photos of the car, be sure to include in the photo series:
    1. 2 sets of key fobs
    2. The owner’s manual
    3. A photo of the inspection report and the repair orders.

Be proud of how much your dealership spent on the vehicle to make it perfect for your customer! 

When we train salespeople to sell new vehicles, we focus on selling the value of the vehicle, the brand, and the dealership. Do we do the same with used vehicles or do we just go straight to price? Not every potential buyer is looking for the cheapest vehicle in the market, some are looking for the best vehicle. 

Offer a flat rate commission plan to your salespeople that rewards volume

If your dealership is striving to maintain gross profit, put control of gross profit squarely in the hands of the sales managers, not the salespeople. Whether you are running a One Price Only Price business model or Price Negotiation business model, the sales manager has the power to accept or refuse any deal. Hence dealerships that pay on a flat commission with volume bonuses, train their salespeople to sell the value of the Price-to-Market pricing policy, the vehicle selection and reconditioning process, the vehicle history, the warranty, and any value-adds that justify the price.

NCM’s automotive experts have decades of experience and are ready to help your dealership drive profits in all areas of your business. As the largest provider of 20 Groups in North America, NCM Associates is capable of scheduling in-dealership consulting, hosting industry-leading automotive training, and providing dealers with a suite of benchmark and software solutions to help your team perform at their best.

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