COVID-19 confirmed that you don’t have to be the cheapest to move pre-owned inventory. Inventory management expert says it’s time for a new approach.
By Darren Militscher
For years, auto dealers were told they had to price pre-owned vehicles at 92 percent to market to move them. Of course, dropping prices forces your competitors to lower theirs, and so begins the race to the bottom. The problem with that approach is it has sucked billions of dollars out of the automotive market, with dealers struggling to average $1,500 in front-end profit per vehicle retailed even before COVID-19 hit.
The pandemic and the inventory shortage it caused confirmed that you don’t have to be the cheapest. In fact, many dealers started pricing vehicles at 115 percent to 135 percent to market and generated more gross profit than they have in years. They’re operating with less staff, less overhead, fewer days’ supply and making two to three times more gross per vehicle than before the pandemic.
Do we have to return to normal? Or is it time to reset the market and create a new normal — one in which dealers can enjoy healthy margins again? I would argue the latter, and the way to do it is with data — not just data from your local market but the transactional data from your store.
3 Inventory Categories
Every store and brand has a different customer profile. What sells well down the street may not sell well at your store. So, instead of pricing used vehicles based on what a model sold for 3 miles away, price it based on transactional data from your store and whether that model falls into one of the following categories:
1. Core inventory: A vehicle is considered core if you have sold three or more in a 90-day period at an above-average profit. More weight is given to the last 14 days, which is approximately half the average turn time of 35 days (or whatever your average turn time is).
If you’re a Nissan store, a pre-owned Altima is probably a core vehicle for you. If inventory data over a 90-day period shows you’ve sold four vehicles with an average turn time of 22 days and an average gross profit of $2,000, you don’t need to be the cheapest in town. Typically, I recommend pricing core vehicles at 110 percent to market. Again, since the pandemic caused inventory shortages, I’ve seen many dealers be successful pricing core vehicles at 115 percent to 135 percent to market.
Every parking spot in your lot is prime real estate, so fill up as many spots as possible with core vehicles. Knowing your core vehicles also helps with sourcing decisions. Just because Kia Optimas are selling in your market does not mean you should go to auction and overpay for one if it’s not a core vehicle.
2. Noncore Inventory: These are your one-off sales, typically trade-ins and mostly off-brand. Maybe you’ve sold one model in the last 45 days but haven’t been able to reproduce that sale. I recommend pricing noncore vehicles at 100 percent to market, because you don’t have enough transactional data to guide you.
3. Priced-to-Sell Inventory: Models in this category perform terribly. The goal is to move these vehicles as quickly as possible, so you can restock your prime real estate with core vehicles. If you’re part of an auto group, you might want to send this model to a store where it will perform better. I recommend selling vehicles in this category below market value. Cut your losses, move on and don’t restock.
Tactical Pricing Changes
Once you’ve priced your vehicle, the next step is to drive the market up. Do this by raising the price, then dropping it back down temporarily. Repeat. One used-car director I know raised the price of a vehicle $1,000 above asking every Friday for three consecutive weeks. Try raising prices just before the weekend, then dropping them back down during the week.
A benefit of this pricing tactic is you’ll have a few customers camped out on your vehicles, waiting for a price drop. When you raise the price, they’ll get confused. They may even call to ask why you raised the price. Explain to them it’s a market adjustment. The vehicle is in short supply and high demand. Then let the shopper know that if he or she can get to your store today, you’ll honor the old price. You’d be surprised how often and how well this tactic works.
We all have an important question to ask: Was the belief that consumers always buy the cheapest ever really true? Data from sales transactions since March 2020 indicates no.
I see an opportunity here to reset the market, draw a line in the sand and reclaim your gross profit margins. Use your inventory tool to help make intelligent pricing decisions, based on transactional data from your own store and your local market data. If this strategy doesn’t work for you, you can always rejoin the race to the bottom.
Darren Militscher is a nearly 20-year veteran of the automotive industry who serves as a Senior Strategic Growth Manager for DealerSocket. He started his career working on the inventory management solution that would become Inventory+. Email him at DMilitscher@dealersocket.com.