To be a successful auto dealer in today’s economic environment, you must be willing to adapt to changing conditions. For example, used vehicle departments have historically contributed about 25% of an average dealership’s overall operating profit. But you may want to exceed that figure in order to increase profits.
Auto manufacturers continue to squeeze dealers by reducing new vehicle gross profits. And at the same time, many people are focused on paying the absolute minimum they can afford these days, which means many traditional new car buyers are choosing a used one the next time around. As a result, running a more efficient used vehicle department could be critical to surviving in today’s economy.
Unfortunately, the used vehicle department can sometimes be misunderstood or mismanaged by dealership owners. The success of the department essentially boils down to better inventory control. To boost the likelihood of profitability, consider these 10 practical steps to consider:
1. Make sure the right person is in charge. Your used vehicle manager sets the tone for the department. He or she must have the requisite knowledge and skills and enlist a competent staff to handle the sales.
2. Know the market inside-and-out. Analyze the sales trends in your dealership and compare the results to vehicles in your inventory. Consider the makes and models sold, as well as the price range of vehicles purchased, to determine what type of inventory is best for your particular market.
3. Once you understand the market, determine if you want to obtain vehicles other than trade-ins. Otherwise, will you obtain inventory from factory sponsored auctions or other channels?
4. Appraise all used vehicles on the lot. It doesn’t matter if the vehicle was purchased or traded in. Use a standardized checklist to ensure that all appraisals are consistent and accurate. Don’t adjust appraisals to make new car deals.
5. Recondition vehicles intended for retail sale. The objective is to improve the appearance and operation of a vehicle to attract customers and move vehicles quickly. Not only will this improve the gross profit on used vehicles, it can also enhance the image of the dealership. Conversely, failure to pay attention to this aspect could result in headaches.
6. Once used vehicles are ready for sale, continue to monitor their condition. For instance, you might have each salesperson drive a different unit each day and report any deficiencies to you. This can facilitate regular inspections of your inventory and allow sales staff members to familiarize themselves with the inventory.
7. Turn over inventory every 30 days. As a guideline, successful dealerships can generally sell used vehicles within a 30-day period. If you’re keeping vehicles in inventory for a longer period of time, you risk losing out on income, not to mention incurring additional costs for disposing of inventory. The maximum “shelf life” should be 90 days.
8. Don’t disregard low-cost vehicles. The loss exposure on a used vehicle is its cash value. The average gross reflects the amount of profit you’re trying to achieve when selling any used vehicle. You may be surprised at how profitable the low end of the market can be when you figure out your average cost per unit and sales profits.
9. Adjust inventory prices. One common practice is to revalue older units in stock by reducing the cost of the oldest vehicle by $100 for each used vehicle added to inventory until the vehicle is sold. This may enable your dealership to sell older vehicles so the money can be invested in other inventory. Extra incentives to move these vehicles are usually not required.
10. Reward your best salespeople. Don’t let all the “glory” go to the new vehicle sales department. One approach is to develop a compensation plan based on the total gross of both the new and used vehicle departments. Consider other incentives for making the used vehicle department a success.
As you know, it can be more difficult to sell used vehicles and sales people often need greater knowledge and aptitude in order to close deals.