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.
In my previous post I discussed why pre-owned profit margins are under pressure. The factors driving this trend include transparency from the Internet, market-based pricing, and rising overhead costs from new dealership buildings. And that’s not the bad news—the bad news is that the problem is only going to get worse over the next few years.
The NADA average gross profit of about $2,300 likely represents a bubble in used car profitability. Why? It’s a simple matter of supply and demand.
The Rubber on the Road
New car dealerships sell the bulk of late-model used cars, typically aged one to five years. That means the number of new cars sold in a particular year impacts the supply of late-model used cars over the next five years.
During the financial crisis from 2008 to 2010, new car sales fell dramatically. That means the supply of late-model used cars plummeted over the last three to five years, as depicted in the chart below. In the wake of the recession, consumers’ increased frugality also led to an increased demand in used cars at a time when there was less inventory available.
So in the last five years, while the supply of used cars decreased compared to the prior five-year period, demand was on the rise. As a result, used car prices have climbed. And because supply and demand moved in opposite directions, that led to an increase in the average gross profit per vehicle.
But over the last couple of years, used car units in operation have been on the rise and will be peaking over the next three to four years, climbing to levels last seen in 2006. Back then, according to NADA, the average gross profit per vehicle was less than $1,800—more than $500 less than 2013 average gross profits. Are you ready to take that kind of hit to your profit margin on every pre-owned vehicle you sell?
The good news is that there is one thing every dealer can fix to avoid eroding pre-owned gross profits. In my next post, I’ll detail what that is.
One of the greatest challenges facing dealerships right now is that profit margins are increasingly under pressure. Several factors are at play, but it’s clear that the Internet is making it increasingly difficult to earn strong retail gross profits per vehicle.
NADA reports that the average retail gross profit for used cars in 2013 was $2,361, up 13 percent from the previous year. But dive a little deeper into the numbers and you get a different picture. When you look at six of the top publicly owned dealerships, gross profits at five of them fall between about $1,470 and $1,900 per vehicle. Only Lithia beats the NADA average at more than $2,500 per used car.
What’s notable about those figures is that the five public dealership groups with average gross profits below NADA’s reported average are disproportionately concentrated larger in metropolitan areas—Lithia is the exception, with more stores in smaller markets. When I ask larger metro dealers why they are seeing margin pressure, I consistently hear about Internet-driven price competition from “market-based pricing.”
Market-based pricing is certainly a necessity given consumers’ unprecedented visibility into pricing through the Internet. With consumers able to compare prices across hundreds of dealerships during their online research, there is more pressure than ever on dealers to price their vehicles competitively.
Unfortunately while market-based pricing and the internet are pressuring pre-owned margins, dealers’ cost structures have climbed. The dealership building boom driven by the factories has created beautiful facilities (ironically at a time when people stopped visiting dealers in person as much) but the result is a higher cost structure.
Furthermore, changing compensation for sales staff is also having an impact on dealerships’ cost structures. The average salary of a sales person was nearly $64,000 in 2013 vs. $46,000 in 2002. With more expensive rent and higher salaries, less gross profit is getting to the bottom line.
And the really big news is that we are about to see a seismic shift in pre-owned profitability that every dealer needs to plan for.
In my next blog post, I’ll explain why.
A dealer asked me to stop by about a week ago and do some in-depth, one on one training with a brand-new used car manager. I consider this dealer a friend and a customer, and since the dealership was close to my home (and near the famed BBQ Trail in Central Texas for a late lunch), I was happy to oblige.
When I arrived for the meeting, I was a little surprised to find that when the dealer called him a brand-new used car manager, he meant brand-new to being a used car manager, not brand-new to the dealership! In addition to covering appraisals, pricing, stocking, and on-line merchandising in FirstLook, we covered topics like how to check for paintwork, repping cars at auction, and managing the service department for his used inventory in recon. It was like drinking from a fire hose, but the questions that I got and the insights he gave me were things that I hadn’t gotten in a while.
When I train “experienced” UCD’s, I get more procedural questions about the software, which makes sense because these folks have a process down and are just adapting to the software. When you have to step back and talk about the influence of market data and prior sales history in the pricing tool, or the relationship of acquisition cost vs. customer offer on a high-demand trade-in, or the effect of Time To Market on turn and gross, it emphasizes an entirely different part of the title “used car manager”.
I think more often than not, we in the dealerships are looking for the “used car” part of the title, and not enough of the “manager” part. I watched an interview with the CEO of Cinnabon not too long ago, and she felt like that during her hiring process, the part she can’t train or teach is the cultural fit for an organization and that is the key to having great people. This particular dealer recognized that organizational fit and a history of looking out for the dealer’s best interests were far more important than knowing what clean book on a 2012 Ford Focus is.
And the BBQ brisket at City Market in Luling, TX was fantastic, as always.
Even though business is better, running a successful dealership has never been more difficult. Today, dealerships are more complex; markets are highly competitive; and hitting healthy margins are more difficult than ever before. Further complicating matters, consumers have become more knowledgeable on the value of vehicles, and far less willing to compromise during the car buying process. The bottom line, managing retail operations has never been more complex and chaotic.
But that’s OK. We’re here to help.
Used by leading automotive retailers – below are five essential tactics you can perform at your store to gain better visibility and control of your pre-owned sales performance.
So what are you waiting for?
1) Analyze appraisals from every day
Identify trends in your previous day sales, and devise a plan to replace this inventory with additional pre-owned units.
TIPS & RECOMMENDATIONS
Look at the Days to Sale, Margin, and Market Days Supply of the car in the market. What is your current stocking position? How did you acquire this car (trade or purchase)? Was this a market performer, or a store performer? Does it make sense to replenish your stock based on current conditions and the results that you saw at your dealership?
You may want to consider reaching out to other dealers and put together deals for their aging inventory (that match your core needs). Simply locate cars already in the market that have already been reconditioned and have low Market Days Supply. They may be overpriced or poorly marketed by their current dealer. In addition, check your Custom Inventory Analysis for the segments that make you the most gross and/or that you turn the fastest.
2) Execute your pricing plan by aging buckets
Put together a game plan for execution. Which cars do you price? It is easy to look at your aged cars or just the cars you bought/traded for (if multiple people are appraising), but when you are just making daily updates to the prices. Here are a few recommended best practices:
1. Stick to your Aging Policy and re-evaluate based on activity and market criteria.
2. PHYSICALLY pull the keys to each car on the planning tab. Book it out, check market listings, open the car (does it smell like wet dog?), start it, check the tires, do a “walkaround”. If you are doing this everyday, there will only be a handful of cars on the list.
TIPS & RECOMMENDATIONS
Draw a ‘line in the sand,’ and say “When a car hits XX days, I will re-evaluate its position in the market for pricing and ONLY when it hits this age.” You HAVE to give a car time to adjust to new pricing and have a chance to sell. Be “in the game”. Don’t just look at a report to tell you the cars you are asking above AND below market average, know WHY you fail into each category on EVERY car.
3) Assess Time to Market and Low Online Ad Performance
Accelerate your Time to Market and streamline your process from appraisal through recon, and into Online ads. Follow up in your service drive to push cars through recon and get new inventory to market.
TIPS & RECOMMENDATIONS
Recommended Benchmark: Time to Market should take no more than: 72 Hours. Time to Market will vary based on the dealership. Know YOUR setup and benchmark based on your top performing months and shoot for a 20% improvement each month.
4) Assess core inventory stocking levels
Plan for next week by identifying the best place to source these cars at auction.
TIPS & RECOMMENDATIONS
Use your Inventory Manager to see which of your top volume, gross and turn cars you are under stocked in. Over/Under Stocking Guide and see what you need to source. Find them at local auction.
Drill down past the make/model (Are there certain years, trims, or price bands you excel at?)
5) Analyze immediate wholesale P/L
How close to $0 on the positive side did you get? How many deals did you save/miss by being too aggressive/ conservative on my numbers?
TIPS & RECOMMENDATIONS
Manage the managers involved. Don’t knee-jerk and start giving $500/car more on every opportunity. Analyze the numbers and create an individual action plan for the people that are affecting the data the most. Your most expensive investment is PEOPLE – use this data to help you manage them.
I was recently speaking to a large dealer group in Wisconsin and the topic of CarMax came up. The big box auto retailer is finishing up construction on two stores in town (their first venture in that market), and there was a sense of urgency to “figure this out” before CarMax set up shop and put them all out of business.
As a former manager with CarMax many years ago, I saw this attitude many times before. I remember buying cars at auction in San Antonio in preparation of the Austin store’s grand opening and hearing dealers that were not exposed to a huge CarMax presence before screaming at me “are you going to leave any cars for us?!?!?”. Fast forward 10 years, and upon visiting a dealership in Katy, TX (outside of Houston), the tone was much different. CarMax was hanging their sign out in front of a brand new location, and the GM of the dealership across the street couldn’t have been happier. This market had seen CarMax for the last decade plus, and he knew what they represented. He was excited at the prospect of droves and droves of potential customers being drawn in by CarMax and was confident he could flip them. CarMax was basically sending hundreds of new customers right in front of his dealership for free! Why was he so confident?
Because he was dialed into what his store performs well with and knows which units he can hold gross on and which units need to be turned quickly by having an incredible amount of analytics behind every pricing decision. Relying on only market data in an area that has a large CarMax presence is a recipe for disaster. CarMax has teams of analysts and data engineers that have become really good at predicting market trends and staying ahead of the buy, meaning they are predictive, rather than reactive. Market Data-only dealers will only be able to stay a couple hundred dollars behind CarMax on units they have a much higher acquisition cost due to CarMax’s efficiencies. Race to the bottom anyone?
What keeps CarMax ahead of the curve is their ability to repeat successes and recognize their opportunities based on their own data. Market data is only half the story, and it is the half that drives grosses to the lowest common denominator.
In my last post I discussed how to identify and measure your “true” SEO traffic. There’s an important implication of SEO traffic that I’d like to cover in this post, traffic that appears to be organic but is closer to direct.
The best site traffic a dealership gets is direct traffic, which occurs when a shopper enters your website address to go directly to your site. All other sources of traffic give your competitors an opportunity to intercept your customers.
Similar to this is traffic in which a customer knows your store’s name but not your website address. In this case, the customer types your dealership’s name into a search engine. Like direct traffic, this is traffic you’ve earned through traditional advertising or branding efforts. But while customers intended to visit your site directly, this traffic is being funneled through Google’s organic search.
This is dangerous because organic traffic through Google is always at the risk of being intercepted, either by other organic results on the search results page or by competitors who target your name using Search Engine Marketing.
It’s important to recognize traffic that intended to come direct to your website and to protect it from being intercepted. According to a recent national sample of dealership website traffic:
- 57 percent of dealerships’ organic (non-paid) traffic from search engines actually typed in the dealership name, typically looking for the dealership website. Think about that – more than half of dealers organic search engine traffic intended to go directly to the dealer website yet ended up at high risk of being intercepted by the competition. This traffic actually accounted for 24 percent of total website traffic. Yes, nearly one in four customers came to these dealers websites through a route giving the competition a chance to steal them.
It’s critical that you figure out a way to convert these searches into direct traffic. So what’s the solution?
- Review your advertising with your ad agencies. Odds are that your website address is not memorable enough in your advertising materials. In a majority of cases, the address is not featured prominently enough, sometimes not at all. Your website address should be a major focus of your ads.
- Too many ad agencies believe their No. 1 job is to drive traffic to your store. Too many ads are focused on the pre-Internet goal of getting people to go straight to your dealership. The problem is that a majority of customers visit your digital dealership in order to decide if they want to visit your physical dealership, so instead of fighting that reality, you should be focusing your agencies on driving traffic to your website. If you can give customers a compelling reason to visit your website first to see your inventory, you have a better chance of breaking through the clutter.
The Internet is a pay-for-performance world, and you need to manage your traditional ad partners this way. Work with your vendors to improve the memorability of your website address in your ads. After implementing a plan, check to see if the organic traffic using your name moves from the risky search engine path to direct to your website. That way, you’ll be able to hold your vendor accountable and — most importantly — drive more traffic to your website for the money you’re already spending.
At every digital marketing conference I attend, there are multiple presentations filled with dealers asking where online traffic is coming from. The truth is this information is readily available to you — if you know where to look.
If Internet shoppers don’t look at your cars online, they are unlikely to come to your showroom to buy a car. That’s why it’s not enough to know how much traffic you’re getting — you need to know how online shoppers are reaching you.
Typically, there are three top sources of traffic:
- Direct traffic. This is your best source of traffic. Because these are the shoppers that entered your website address to go directly to your site, they bypass any opportunity for your competitors to intercept them. Some of this traffic may come from returning customers, but it’s often driven by other forms of advertising. That’s why direct traffic is a great way to gain insight regarding how your traditional and digital ads are working. It’s also a critical reminder to emphasize your website address in your advertising materials.
- Organic search. These are visitors who find you through search engines such as Google, Bing, and Yahoo. This traffic typically comes from two sources:
- Those who typed your company name into a search engine, which means they were familiar with your brand
- Those who typed a term that led them to your website, such as “Phoenix Chevrolet dealers,” indicating strong search engine optimization performance for that term. I’ll talk more about this in a future post.
- Search engine marketing. These are the sponsored links that appear above and to the right of organic search results (Google AdWords are the most popular type). This is an underleveraged opportunity for dealers that we’ll dive into in my next post.
If you’re interested in finding out the sources of your website traffic, talk to your vendor about how to use Google Analytics, which can tell you where the traffic from your site is coming from. You can then go into the dealer analytic portals of Autotrader.com, Cars.com and other sites to compare with each other and your website. Since this can be labor intensive it’s easiest to have it in one place with a tool such as MAX that combines the various sources in one location to help you measure and manage your online traffic.
My next post will cover optimizing spend and testing.
Every dealer knows that the inventory that turns the fastest is often the most profitable. This is compounded by the carrying cost of the vehicle (often cited as $10 to $25 per day), for both reasons, the longer a car remains in inventory, the more it eats into your profits.
That’s why it’s critical to measure and improve “Time-to-Market”, or how long it takes for a car to get through the service department and become fully merchandised online. But for many dealers, the problem goes undetected because they fall into two common traps:
- First, cars spend too much time in the service department. We all know that the customers of pre-owned vehicles are the service department’s top customers. But we also know that because the service department is focused on serving retail customers, this can lead to inventory that moves through the reconditioning process slowly, resulting in expensive fresh inventory. For many dealers, it’s hard to maintain visibility on this process, which makes it difficult to manage.
- Second, the handoff to digital marketing is too slow. When a car completes reconditioning, too often there’s lag in getting vehicles fully merchandised online.
It’s obvious that a vehicle unavailable for sale prevents a quick turnaround. But that’s also true for a vehicle that’s available for sale but isn’t visible to consumers on the Internet. So what can you do about it?
You can’t improve what you can’t measure, and there are three easy ways to get started:
- Measure your “Time-to-Market”
- Compare the date a car was received in inventory to when it was fully merchandised online. This simple metric allows you to keep a pulse on both your service activities and digital marketing efforts. Cars should make the transition from service to digital marketing in three to five days.
- Identify potential gaps in your current process
- By tracking vehicles that fail to meet this goal, you can identify opportunities for the teams to work more efficiently, as well as hold people accountable for their responsibilities. There will always be outliers — vehicles waiting on a title or critical parts on order, for example. But by measuring time-to-market, you will be able to identify those outliers and focus on vehicles that had a breakdown in process.
- Accelerate your “Time-to-Market
- Before a vehicle enters the service department, have the digital marketing team immediately take three exterior photos and post them online immediately (in states where this is appropriate). This will help speed the process of getting a vehicle fully merchandised online once it’s reconditioned.
Remember: if you measure it, you can manage it. A number of tools, including MAX, make it easy to monitor these metrics. Just make sure you set up alerts that keep this information in front of you on a regular basis. Once you get a handle on where the bottlenecks are in your time-to-market, you’ll be able to make your digital marketing efforts more efficient, and your inventory more profitable.
My next post will cover the importance of understanding exactly where your online traffic is coming from.
Our previous post explained the importance of converting your vendors to a pay-for-performance ad model. That is, knowing your cost per lead across your various online traffic sources. When it comes to measuring your cost per lead, we see top performers achieve at $70, while typical dealers perform around $100.
But once you have those figures in hand, what tactics should you employ to get the most from your online ads? First, make sure your online ads are standing tall. Here’s what I mean.
- Include all the details that influence a customer’s decision. Dealerships can be chaotic, making it hard to manage the finer details of your online ads. But the reality is that you’re a digital dealership now. You would never leave gaping holes in your front line or on your showroom floor. But too many dealerships post incomplete listings, leaving gaping holes in your digital dealership. Photos, prices, and complete vehicle descriptions are essential components to drawing customers to your dealership.An AutoTrader.com survey found that dealers who include original photos and prices with their postings had significantly greater traffic to their vehicle detail pages (VDPs) than those who didn’t. Including this information increased VDP views by 140 percent and shopper interaction by 110 percent. And don’t try to cut corners — the survey revealed that listings with stock photos didn’t perform much better than listings with no photos at all.
- Monitor your ads. Staying on top of the details requires a commitment. The old saying “you can’t expect what you don’t inspect” isn’t just a cliché. You need a digital performance management system in place to measure the effectiveness of your ads. A digital performance management system, like MAX, can alert you to issues in your online inventory that need immediate action, such as missing photos or vehicle information.
- Make sure a human is keeping tabs. Technology alone isn’t enough. You also need someone in place who’s responsible for overseeing the program. Whit Ramonat, executive vice president of Penske Automotive Group’s central region, regularly reviews an exception report that shows him which of his dealerships have cars with incomplete online listings, or no listings at all. Because he employs this and other digital performance measurement practices, Penske’s dealerships are among the top performers on most benchmarks across all sites.
The bottom line is that the more customers that click through to your VDPs, the more likely they are to interact further with your listing, including details on your dealership. And as I mentioned in a previous post, when your sales force knows where your leads are coming from, they’ll be better positioned to get the necessary “ups” to close a sale.
This is the first of three posts to show you how to reach the ranks of the top performers. My next post will cover the importance of getting your inventory online quickly.