MAXDigital Executive VP’s Take: Are You Getting It Wrong With Car Inventory Pricing?

November 2nd, 2018 by
I recently read an article in Auto Remarketing about Dale Pollack and how his views changed on how dealers should price their vehicles. I want to applaud Mr. Pollack for humbly communicating to the industry that he “got it wrong” when it comes to the model referred to as “velocity.” It takes a man of great character to publicly admit they are wrong at anything. VAuto and Dale Pollack have been synonymous with effective inventory management for many years now, and hearing this made me ponder on my years growing up working around used vehicles, specifically how we have priced and appraised vehicles for decades.

How Car Sales Have Evolved

When I was a young boy, I would attend auctions with my father and learn about how to buy cars that customers wanted to purchase and that you as a dealer could still make money on. Back in the 80s and 90s a lot of this was done based on gut (market experience) and a little bit of data found in a book that could fit in your back pocket (I think my Dad still has a Blackbook or NADA shaped outline worn into the back pocket of his jeans). Somehow, without any technology, dealers all over the country were able to buy cars for a good price, sell them for a fair price (in most cases), and still make money.
Back then most dealers got their inventory from local trades, other dealers, or local auctions. Some dealers with good connections and resources bought out of state (we were one of them) to find more unique inventory, but that wasn’t as common. A lot of the best inventory with the most profit potential came from those local trades, and that is as true now as it was back then. There were no transportation costs, auction fees, or other dealers bidding up the price of that trade. It was just a deal between the dealer and the customer. If both parties felt they were getting a fair deal they shook on it and left happy.
Now to quote Dale, there was an “art and science” involved in both people shaking on it and leaving the deal happy. I learned a lot of this from a long-time mentor of mine who sold more used vehicles than anyone else in the world for about two decades. The advice he gave was very simple:
  • Do the Appraisal with the customer. Let them walk around the vehicle with you and point out the scratches, scrapes, worn out tires. Let them go on the test drive with you and tell you what that noise is, why it pulls a little to the left. If you just “shut up and listen,” they will tell you everything you want to know about the car.
  • Let them know what you think it may cost to repair some of the damages or wear and tear before you can confidently sell this car to someone else (this builds trust in you and the quality of your inventory).
  • Be transparent with them on what you think the market value of the car is. Show them what Blackbook or NADA is, why you think it’s closer to average or rough than to clean or extra clean.
  • Make them a fair offer on the spot whether they buy a car from you or not. Customers don’t want a number with a contingency on buying a car from you (that feels shady). They want to know the value so they can make an educated decision.
If you do these four things you can acquire more vehicles from local trades and customer purchases at a much better price than you could ever get that vehicle for at an auction. You’ll avoid paying the auction fees, reduce transportation costs, and end up with a lot more margin in that vehicle. This is how you truly take control of “compressing margins” in your store.

High Velocity Leads to Low Margins

The Velocity model worked well for a lot of dealers when it came to selling a higher volume of vehicles every month. There were a lot of egos that inflated (with big volume numbers), a lot of “minis” that got paid to sales people (with low gross comes low commissions), a lot of prices that dropped in the market (to try and stay competitive), and a lot of auction cash registers that kept ringing as more and more cars were bought to fuel the machine.
Heck, even the transport companies were happy because dealers had to look further and further to try and source vehicles for their dealerships. I know this very well as I have even gone to the lengths of buying cars in Canada to try and source enough quality vehicles that still had some margin.
However, shame on us as an industry for commoditizing what we put a lot of hard work into 6 to 7 days a week. In order to stay competitive and follow the principles of velocity, we gave away cars that we spent hours researching, appraising, bidding on, transporting, reconditioning, merchandising, and selling. In some cases, many of us gave cars away for no profit, or we even lost money. A lot of fun gets sucked out of the business when you put in all that work to not make a dollar.
What’s the net effect? The overprescribing of these principles has created this “new normal” where we don’t expect to make as much money when we sell a car. We blame it on the internet and a more educated consumer. That may be part of it. But we have to accept the responsibility, just as Dale Pollack did, and admit that this model is not the best approach.

MAXDigital Focuses on the Fundamentals

As an industry, if we buy good cars, recondition them properly, merchandise them well, and provide the consumer with evidence and data, we can and should ask for a fair price. That price should have enough margin to make a healthy profit for all of the work we put into bringing that consumer a quality vehicle in market.
The philosophies above aren't new. They're fundamentals. These are the philosophies MAXDigital has prescribed since day 1, over 15 years ago. The “art and science” of the trade appraisal is something that we have now digitized and brought back to life for dealers in 2018.  
We believe that:
  1. Dealers need tools to help them buy the right cars for the right money (stocking, market-based appraisal).
  2. That pricing and merchandising should be done impeccably (market priced, pricing proof points, engaging VDPs).
  3. That the consumer experience in store should be done with technology that simplifies things (trade appraisal, payment calculation (estimate) at a minimum).
These are real tools that can have a real ROI impact. They aren’t very sexy. Alexa may not be involved. But they work, and they can help you run a more efficient and profitable business when used effectively on a consistent basis.
That’s what MAXDigital is about. Reliable, simple to use tools based on years of proven results with the data to back it up. This is why some of the largest most successful groups in the country have done business with us for over a decade. We only introduce tools that results and data can back up. That is why Path To Purchase Appraisal is what we are talking about this year. Dealers have implemented it, used it and seen measured improvements on a consistent basis.

Does Your Inventory Management Software Protect Your Margins?

The moral of this story is: Don’t believe everything you read and don’t get distracted by the next shiny object or widget that someone claims will make a dramatic impact on your business.
Take a look at our tools. They drive front-end gross profits. Link up with one of our dedicated Performance Managers today. Let us prove to you that our solutions work and can make a real impact on your profit when used consistently.
 
 
Mike Cavanaugh
Executive Vice President
MAXDigital LLC
586.255.0036