So far I’ve discussed two factors that are putting gross profit margins under pressure: market-based pricing and the impending increase in the supply of used cars. There’s a third element to this equation—the fact that dealers have fundamentally changed their pricing strategy without also changing their sales and marketing approach. That’s led to a disconnect that we call the “double discount.”
“Double Discounting” Defined
The first discount used to be taken at the desk with the “first pencil.” But now with market-based pricing and the transparency of the Internet, the first discount is actually taken with the Internet price before the consumer even gets to the store. Then when the consumer is negotiating the car deal, salespeople are often programmed to try to close by discounting price, leading to a double discount.
That’s because salespeople have been trained to negotiate to close the sale by discounting and consumers have been conditioned not to buy unless they negotiate a significant discount. This has put dealers in a bind. Either they double discount on price and erode their margins, or they refuse to negotiate on price and discount their closing rates.
The Need to Adapt
So what’s the solution? Increase your close rates without discounting. Or at the very least, minimize the discount offered when already priced to market. How? By adapting the way you market and sell your cars.
That’s easier said than done, of course. But the bottom line is that dealers have fundamentally changed the way they price their inventory without adapting the way they market their cars online or sell them on the lot. In the long run, that’s an unsustainable situation.
Over the next few posts, I’ll describe how dealers can avoid the double discount problem by changing their sales and marketing strategies.