It’s something the industry knew was coming for several years now, and whether your dealership is ready or not, it’s here.
It’s the closing profit gap between new and used vehicle sales.
According to a report from Auto Loop LLC, “the gross margin gap between the sale of used and new vehicles dropped 21% in 2017.” As more off-lease vehicles flood the market, there is increased opportunity to sell more vehicles, but the gap between profits is shrinking.
What are the driving reasons for this margin gap? For starters, many dealers today seem to treat used vehicles as a commodity. In other words, when determining the initial sale price they start by using software to see the current asking price for a given year, make, and model. Then to be competitive, they establish a price point that is lower (or at least in the top five ranking) than their competition. While this pricing strategy does aid in making sure your inventory is priced competitively, the problem is it creates a race to the bottom. The result is a back and forth price adjustment among dealers that ultimately erodes gross profit and your used vehicle becomes a commodity.
When did the industry stop selling used vehicles based on value and start selling based on price? Used vehicles are not a commodity and depending on your market, it is not always possible to make up the margin gap with volume. Do not get me wrong, you need to be competitive when establishing prices, but you should not look solely at market pricing data. You need to consider the value of the vehicle as well. Consider various factors such as the vehicle condition, the mileage, what features are installed, even consider how many are in your market when setting a price. Do not just play the price war game or you will continue to see an erosion of gross profit.
So what has your dealership done to stop treating used vehicles as a commodity and avoid playing the price war game? Follow these three tips to make sure your dealership is ready to handle the closing profit gap between new and used vehicle sales.
- Quit playing a guessing game on used vehicles.
Since the profit gap is closing, every used vehicle on your lot has increased in importance. You should be 100% certain every car on your used lot will sell and sell quickly. In order to be confident in every vehicle, you and your used vehicle manager need to stop playing a guessing game on which vehicles to sell. Start using real data (market data and historical sales data) to decide which vehicles to keep and how to price them.
- Evaluate your used inventory every month.
It’s no myth that you lose money every day a used vehicle stays on your lot. The longer it stays there, the longer you wait for a return on the money you spent purchasing and reconditioning the vehicle. To avoid waiting too long for the profit, establish a pricing and aging policy. Evaluate your used inventory every month to determine if you need to adjust prices, run specials, or switch out the vehicles on your lot.
- Utilize a tool that helps you control your used vehicle inventory.
It can be hard to determine on your own what vehicles will sell, how to price them, how long to keep them, and how much work you should put into them. Utilizing a complete and fully integrated solution to help you accomplish these tasks is the answer. The solution will improve the efficiency not only in your used vehicles department, but across your entire dealership while allowing you to increase turn rates and make higher profits.
Overcoming the Gap
Despite the share of used vehicle sales rising in 2017, the closing profit gap is still happening and is something your dealership shouldn’t take lightly. Apply these tips to your used vehicle department in order to overcome the gap. Your dealership can also send unique marketing, such as emails and other alerts, to used vehicle customers to entice them to return to your dealership for service. Many used vehicle buyers don’t return to the dealership for service, so bringing them back to your service department will increase your profits and contribute to fighting the closing profit gap as well.
Originally appeared in the Fuel eNewsletter, published by Reynolds and Reynolds. (http://fuel.reyrey.com/)
