In the past several weeks, I’ve met with dealers to discuss front-end gross profit problems in used vehicles.The gross profit problems, it should be noted, are not due to low sales volumes.
I’ve found this practice can shrink a dealer’s used vehicle margin spread in three ways. The greater the pack, the greater the cost, the smaller the margin spread. Second, the presence of packs often spurs reflexive pricing decisions.
Dealers will price vehicles above the market to make up for the pack cost they’ve added to a car.
To root out the source(s) of the trouble, I will closely examine the factors that make up the cost-to-market metric for a dealer’s inventory.
This number shows the relationship between the total costs for a vehicle (acquisition, fees / transportation, reconditioning, packs, etc.) and the prevailing retail prices for the same or similar vehicles in the market.
For a $13,500 used vehicle, a cost-to-market metric of 90 percent translates to a spread of $1,500.
This is the profit margin the sales team has at its disposal to close deals.Typically, I look for an 84 percent cost-to-market average for a dealership’s inventory.This figure says that, on average, the used vehicles in a dealer’s inventory offer a 16 percent spread for the sales team to secure front-end gross profits.Put another way, they were handing over the spread to customers. They implemented training to help create a transparent sales process that calls for salespeople and sales managers to directly discuss the group’s market-focused approach to pricing — what I call “documentation as the new negotiation.” The result?They’ve added an average 0 in gross profit per copy in just three weeks, and the number’s still climbing.For some, it might be the buying that is intimidating, while others are more concerned with being able to make regular sales.But when you have the right tools in your arsenal, you’ll be better prepared to successfully take on the used car sales business.They should recognize that these costs have a direct impact on a car’s profit potential — and they should take steps to mitigate these add-on costs wherever possible.Such mitigating steps might include reducing the retail rates charged to the vehicle for reconditioning parts and labor in service.Often, these dealers are selling more used vehicles than they used to.The issue is that front-end gross profits are not meeting dealer expectations.