Russians don’t take a dump, son, without a plan. And senior captains don’t start something this dangerous without having thought the matter through.
Admiral Josh Painter- The Hunt for Red October.
What the hell does the The Hunt for Red October have to do with a profitable pre-owned business strategy you may ask?
I'll tell you....This is War!
You are in the battle for the digital real estate in the automotive industry. Getting customer eye balls to your website, via 3rd party websites, to make sure that your cars show up first in the listing of the largest Automotive websites like Autotrader and Cars.com
Building a profitable pre-owned business strategy can’t be something you just throw together without giving it some serious thought…….unless, you want to fail.
I’ve narrowed it down to these 6 building blocks, for your foundation, to build a Profitable Pre-Owned Business Strategy.
- Pricing Strategy
- Why Certified Cars Matter
- Service Drive Trade-In Program
- Inventory Control
- Recon Process
- Business Plan Development
Profitable Pre Owned Business Strategy: Pricing Strategy
A great pricing strategy is the foundation for any great Pre-Owned business plan. In today’s market you must price your cars aggressively (usually 97% to market) to even have a hope of getting customer eyeballs on your cars as potential customers scroll down the infinite list of cars listed on the world wide web.
The days of pricing cars at 105% to market and hoping customers will send in an internet lead are gone. That’s the hope and pray strategy and it just doesn’t work. You’ll find yourself with aging cars stacking up in the 60+ day old bucket, no profit and more than likely, all these cars will be massive losers.
A Great Pricing Strategy is all about the "Turn"!
How many times a year can you turn your inventory?
Turn is what creates profit. It’s like a professional baseball player getting more times at the plate. A great batter hits for the averages. Singles, doubles, the occasional triple and the ever so illusive homer.
How do You Calculate Profit?
Profit, customers don’t want to pay it and you have to figure out how to make it.
A great desk manager works every angle of the deal positioning him or herself to make every facet of the deal make money. It’s not about crushing it in front end gross on every deal. Here’s an example of what I mean.
- Average front end gross $1200
- Holding back on the trade $750
- Just by selling the car you generate a $599 doc fee
- Average Finance gross profit $2300
When you start to focus on batting for the average your gross profit will start looking like the example above and your total profit structure is a whopping $3850 per car.
This is job security baby!
Most Dealers and GM’s only dream about running these kind of numbers. But I promise you, it’s possible to do.
Certified Pre-Owned Cars
There’s no secret, that your CPO (Certified Pre-Owned) cars are one of the most important parts of your overall used car strategy.
I’ll tell you why in just a few minutes.
I get ask a lot of questions about this topic, here are some of the most frequent questions I get.
- CPO sales are not profitable, so why should I focus on it?
- My manufacturer doesn’t incentives me for CPO, so why should I care?
- How did you grow your CPO sales so fast to rank in the top 5 in 3 months?
CPO Sales are not Profitable, Why Should I Focus on it?
To some extent, I agree with the first part of this question. It’s really hard to maintain your PVR (per vehicle retail) on Certified Pre-Owned cars because of the increased cost that is required to get your cars to meet your manufacturers requirements for a CPO car.
The reasons you should focus on Certified Pre-Owned sales volume boils down to a few incredibly important parts of the overall profitability of your dealerships.
Remember earlier how we talked about calculating profit?
It’s the same concept here. CPO sales volume drives dealership gross profits in these three areas.
- Internal Service and Parts Profit
- Customer Retention
- Finance Department
Your internal RO’s(repair orders) roughly generate 75-78% profit to your dealerships service department. Do the math.
Average RO $1375
75% profit is $975
75 CPO sales for the month
That’s $73,125 profit to your stores bottom line
The average RO I’m using here is probably low, especially for Brands like Audi, BMW, Mercedes and Range Rover. These brands could see average RO’s exceeding $2K in some cases. So, image the profit that brings to the bottom line.
But I don’t get paid on Service profit!
I get it, but that’s the narrow minded view and you need to change your mindset here. When you create a CPO churning machine, your actually increasing your paycheck because you get more swings at the plate. (my aha moment)
More volume equals more gross profit in the variable department, which increases your paycheck if your on a good pay plan. Pay Plans are a whole other conversation and we’ll talk about that later.
Customer Retention
This is really crucial so pay attention to this part.
Most CPO programs included prepaid service plans that come as a benefit to the customer for buying a Certified Pre-Owned car. This benefit to a customer, is actually one of the greatest benefits to your dealership as well.
CPO programs drive customers back to your store for prepaid service work and create service retention. After the prepaid service work expires, that gives your service department another income opportunity to retain that customer for life.
This is where great dealerships leave the others in the dust.
Develop a Service Drive Trade in Program
Your service drive is an absolute gold mine. This is where your able to offset the low front end profits of CPO cars, and get prime, perfect pedigree car’s, that will sell quickly increasing your turn rate, along with improving your average PVR. Mining cars from your service drive also will reduce how many cars you need to source from Auctions houses like Manheim and Adesa.
These customers already have a great deal of trust in your dealership and usually, are less likely to negotiate. You can bring these cars into your used car inventory around 86% cost to market, which is well below auction sourced car’s that usually come in at 90% or higher. Let me explain the details.
Prime, pedigree cars are those that were originally sold at your dealership, either New or Used, with a meticulous service history and hopefully, a clean CARFAX. These are the cars that new incoming buyers are looking for in their searches on Autotrader and Cars.com.
If your weren’t aware of this already, you should know that Autotrader educates consumers on how to search for cars on their blog and website.
The Top 2 terms searched for on automotive listing website are “One Owner” and “Clean Carfax”.
That’s why it’s so important to mine all the cars you can from your service drive to increase your Turn rate and Gross Profits.
Profitable Pre Owned Busines Strategy: Inventory Mix
I bet you thought I was going to talk about how many Core(CPO) cars vs. Off Brand models you should have in your inventory. While this is important, and you should generally run at a 60% CPO to 40% Off Brand ratio, this really depends on each dealerships customer base and market.
Here’s a good example. Let’s say your at an import store but your customer base typical trends higher for a secondary type credit buyer. Since Domestic cars have a higher NADA loan value compared to their actual transaction prices than Import cars do, you will need to stock more Domestic cars.
While this rule is usually the norm, you can never count out import cars based on NADA book values. Below is a prime example. This 2016 BMW X5 has a very good NADA compared to the actual MMR (manheim market report) and rBook(average market list price).
That’s why its so important have a tool like Stockwave at your fingertips. Once you have all the pieces in place and are ready to execute a business plan, Stockwave starts feeding you cars like a vending machine so you can start acquiring vehicles that have that One-Two Punch . (shameless plug…..check out this article with Patrick Janes, Director of Stockwave.)
Inventory Control
With declining profits and margin compression become such a huge issue in the last few years, inventory control is more important than ever to a successful pre-owned marketing strategy. With all the controversy that came about with Dale Pollak’s, Profit Time Strategy, Dale’s view’s on the amount of cars you should stock at any given time have also changed.
In the past, dealers were taught to stock their lots with a 45 day rolling average of inventory or higher. The belief was, “If I have more cars in inventory I will sell more”. Nothing could be further from the truth in today’s fast past, high turn, velocity method of selling cars.
You can no longer flood the lot with massive amounts of inventory and sell through your problem cars. You must strategically plan your mix of inventory and stock your lot with a 30 day rolling average of inventory or less. I stock my lot below my rolling 30 day average and run lean and mean to control aging issues and increase my inventory turn.
I suggest first, to use your rolling 30 day rolling average for your target inventory level before you try running lean like I do. Running lean can create a whole set of other issues that can get out of control quickly if your not on top of your game.
The Recon Process
The recon process is the last unconquered frontier in the automotive industry. There has been a huge amount of focus on this process in the past few years, and for good reason.
The higher your average days in recon, the lower your turn rate will be. It’s a proven fact.
In 2017, Dale Pollak posted on his blog the 3 Best Practices to Beat Back Margin Compression.
In most cases, the results show the average front-end gross profit declines by at least 50 percent once vehicles cross the 30-day line. If you segment vehicles retailed after 45 days, it’s not uncommon to see a roughly 50/50 split between vehicles that make a little money and those that lose a lot more.
In today’s market, in my humble opinion, this cycle has shortened even further and that 30 day line is now at 20 days.
Static spread sheets just don’t cut it. There’s no real accountability and no actual way to measure your success. Time is Money, and with only 20 days in the cycle before your cars start to lose money, you need to measure your average days in recon just like you monitor your days supply and turn rates.
There are several software companies like, Reconvelocity, iRecon, and Rapid Recon, battling for their share of the business in this last space of unconquered frontier. All of these recon software tools have their own pros and cons, like all the tools we use in the used car business. But there’s a tech startup company, TrueRecon, that is gaining momentum with its patented software that gives you increased speed and efficiency by combining their TrueSpot technology with the TrueRecon software.
Here’s and example using TrueSpot’s online value calculator.
Total Cars in inventory = 350 (new and used)
Average Sold Cars per month = 150
Average holding cost per day = $42
Average days in recon = 9
Here’s what Mike Hanna, CEO and Founder, has to say about TrueSpot and their suite of software.
Imagine your entire reconditioning or make-ready process mapped on a custom dashboard. Imagine it being accessible by desktop or mobile device, tailored to your vendors and customized for your process. Our solution pinpoints every car location and how long it has been there. The result? You identify bottlenecks, expedite the process and reduce the number of days from truck to lot-ready to sold. That’s real money in your pocket, with faster service and less frustration.
Before you decide to install one of TrueSpots competitors software, I suggest you reach out to one of the TrueSpot Experts and schedule a demo today.
TrueSpot and TrueRecon is my choice of software to increase turn and profitability.
Check out this post I co-authored with the great team at TrueSpot, Top 10 Recon Best Practices in Vehicle Recon.
Profitable Pre Owned Business Strategy: Business Plan Development
If you’ve been following me for any amount of time on LinkedIn, you know that auction sourcing and business plan development is my passion.
As I’ve stated on numerous occasions, and I’ll state it again.
If you’re not using Stockwave, Your just not in the game in my opinion.
The first place you start is with your Strategy Page. Stockwave takes your statistical sales data from previous months and matches it against your market sales data. This data shows how your inventory performs against the market and points you to profitable segments of the market where you are underperforming. It also shows you where you are out performing the market.
You can drill down into this data by price, segment, model, year and so forth. Implementing this strategy, you can ultimately have a perfectly balanced portfolio of cars that will perform higher than the market.
This next step is a little tricky and you’ll need your Stockwave performance manager’s help. All the sales data is downloaded to an excel spreadsheet and put into your Provisionion Strategy Page. This is where you fine tune your stocking levels based on segments and past sales date.
In the chart below your overstocked by 4 cars in the intermediate segment between 10-15K price range. In the Certified Pre-Owned segment, your understocked across the board, as well as the Sport, Luxury, Luxury Sport and Luxury High segments between 25-30K.
Using the Provisioning Strategy page as a method to source auction cars, saves you hundreds of hours in reach. This allows you to target the right cars for your inventory, every time.
You may be asking yourself at this point, ok so how to I find all of these cars? This is where all the magic happens. All you have to do is click any of the green boxes and Stockwave instantly shows you a list of cars, at auctions, in that segment and price range.
How easy is that!
Armed with this type of data, you can slowly develop a powerful sales machine that will outperform the market like Warren Buffet against the S&P 500. After you have your inventory dialed in, you can then start experimenting in markets that you may have not tried before to create an even more powerful sales machine.
Stockwave will be feeding you cars like candy from a vending machine.
In closing, there is so much more to cover on each individual topic in this post. So please read my other post where we deep dive into each subject.
With help from my friends at vAuto and Stockwave, like Scott B. Sadler and Patrick Janes, I have been able to master all of these techniques and marketing strategies to build a profitable pre-owned business strategy that creates gross profits month after month.
Great practical hands on advice. Would you like to guest blog for http://www.maxdigital.com?
Hi Kim, thanks for your comments. Your my very first comment. Huray! I would be delighted to guest blog on maxdigital’s blog. Send me a message on LinkedIn and we can discuss. Thanks, Craig
Great work! This is a Very practical “playbook” for any person looking to follow a great roadmap to success. Things I would love to hear your thoughts on are best practices on disposing of aged units and thoughts about outside vendors touching used cars for recon.
Todd, Thanks for your comments and suggestions. I will start whipping up a couple of post about the disposing of aged units and vendor recon process. I did co-author this post with the folks at TrueSpot, Top 10 Best Practices in Vehicle Recon.
Like!! Thank you for publishing this awesome article.
Great stuff as always, Craig!
Thanks Dane! Good to see you here.