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Top performing dealers have discovered the secret sauce that maximizes profit and turn
By Keith Platt—Market Performance, Dealertrack Technologies
Deciding between higher front end profits or faster turn times is the age old best practice debate in the used car business. On one hand, some say “focusing too heavily on front end gross slows turn times and minimizes volume”. While others say “focusing too heavily on turn only compresses front end margins”. Most dealers have been leaning heavily towards fast turn in recent years and as result the national average front end profit has dropped from close to $2,000 per unit down to approximately $1,200. Margins have been compressed largely due to what I call “Terminal Velocity”.
The benefits of turning used car inventory faster are obvious. The faster the units sell the more profitable the entire dealership becomes. Think about it, used cars touch EVERY department in the dealership.
1) New car sales are dependent upon winning the trade in.
2) Parts, service and body shop profit from reconditioning services.
3) F & I benefits from selling financing, insurance and extended warranties.
Faster turns means that all departments have a steadier volume of business. As a result, used car managers have been coaxed and pressured into lowering their prices right out of the gate and sacrificing front end margins to get the turn and volume cranked up to benefit other departments. But some dealers are prematurely dropping their prices on units that already turn fast but are also bringing higher front end profits. Thus the drop in over-all front end margins.
Top performing used car managers have found the right balance to keep the turn times fast while maximizing their front end gross.
What’s their secret to success?
The key is to not fall into the trap of taking a one dimensional approach and only using either the “Velocity pricing” or the “Maximize front end gross” method. The secret sauce is to use BOTH!
To find your Inventory “sweet spot” it’s important to first understand 3 things;
1) Every used car is different
2) Top selling units vary by Franchise type in the same market.
3) Top selling units vary by Market areas
While this may be stating the obvious, there are “industry experts” that have encouraged dealerships to focus only on minimizing price as a percent to retail market pricing across all vehicles and all stores. The problem with that model alone is that it doesn’t take into account dealer nor market transactional performance and at least 2 out of the 3 items above.
It’s not rocket science. A top performing unit at a Mercedes store is different than a top performing unit at a non-franchised/independent store and top performing units at a Kia store will be different than a Volvo store. But there are dealers today making pricing decisions on generalized internet data that does not account for this kind of comparative data.
Profitable dealers use PPD to find the perfect balance:
There is a simple metric that can quickly give a dealer performance optics into both turn and gross. It’s called “Profit-Per-Day” or PPD.
PPD is simple math. It’s profit divided by days to sell. For example if a unit sold in 30 days and made a $1,500 profit the math looks like this: $1,500 / 30 = $50, or $50 PPD. So if the national front end average is $1,200 and the average days to sell is 45, the national average PPD is $27.
Now do the PPD math real quick on your own inventory as a whole. Think about what your average front end profit is and now divide it by your average turn. The sum will be your dealership’s average PPD. There’s your baseline. Now pick out some of your best-selling units and then worst-selling units and compare your PPD numbers.
PPD is The Great Equalizer
Why is PPD so important? It enables you to quickly see what kind of ROI can be expected on each unit. The higher the PPD on a unit the better the combination of turn and profits are. If a unit time and time again has sold fast at or above the market’s price target, why price it below market?
On the flip side PPD also is a game changer for those who inevitably hold onto units too long for more gross. Think about these two 60 day scenarios:
1) 2 units sold in 30 days each (60 days) @ $1,500 x 2 = $3,000 ($50 PPD)
2) 1 unit sold in 60 days @ $2,000 = $2,000 ($33 PPD)
The dealer at $1,500 front end in 30 days ($50 PPD) has sold 2 units (a total of 60 days in stock combined) not only has better front end profit over the 60 days but also gives extra profit opportunity to the dealership for recon, parts, service, finance and an additional customer for repeat business.
Finding the sweet spot is not always easy and in today’s market it can be a moving target. That is why it is more important than ever to have an Inventory Management Solution in place that gives you the real-time PPD metric on every unit at your dealership AND in the market.