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Price to Profit, Not to Market

The used car business is more complicated than ever, with the availability of advanced pricing tools and marketing data transparency.

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As a velocity dealer, you’re doing everything by the book to sell your used car inventory. You’re pricing your vehicles to market. You’re tracking the number of days you can hold inventory before selling it. Even your SRP and VRP results are performing well, maybe even surpassing expectations. And you know how each individual product in your inventory stacks up against identical competitive vehicles in your market.

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Yet even as your used vehicle inventory turn rates have increased, your grosses have suffered. You’re selling more, perhaps, but making less on the deals. And trying to make money by losing money has never been a successful business model.

Clearly, something’s not working. How did we get here?

What One Successful Dealership Discovered
Even with all their success, a leading dealership with more than 12,000 units in annual sales realized it had a used inventory problem. For the purpose of this story, let’s refer to the company as Alpha Dealership, a made-up name.

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Like many dealerships today, Alpha Dealership had become a velocity dealer and focused its used car sales efforts on increasing their inventory turn rate. They had invested in advanced used car pricing tools and optimized their used car operations to a great extent. On the surface, it appeared to be a solid strategy, volumes were up and profitability was good.

Unfortunately, their net gross margins were down.

Beware of Price Erosion
The way Alpha Dealership was pricing their used cars was considered the industry’s standard for a “best practice.” They considered three variables: inventory, time to sell and price to market. That practice resulted in high turn rates, which was good, but they realized that their gross profit was eroding. They needed to find a way to squeeze a better ROI out of each sale by considering both turn rates and gross profits.

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The dealership dug deeper into their data and uncovered problems with this so-called best practice. For example, why was their pricing system always pushing them to meet market price? Did SRPs and VDPs support their business model? Were they inadvertently building a business model of discounting a vehicle until it sold? Were velocity and turns the main criteria for delivering ROI? Finally — and perhaps more importantly — was there a way to increase gross profit while keeping the turns at the same level?

Alpha Dealership concluded that a faster turn rate, even at a lower price point, would generate a higher overall revenue and decent gross profit.

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Missing Data Found
Even if a company is already utilizing standard metrics for improving used vehicle inventory turn rates, such as price to market and inventory rankings, they may not be leveraging other key data in their internal systems or outside sources. They could be missing out on data that could help them make smarter decisions about pricing, marketing and disposition of used vehicles.

In the case of Alpha Dealership, the company did everything by the book as a velocity dealer to improve turning their used vehicle inventory. Initially, they were comfortable with the metrics they were tracking but, ultimately, not happy with the results.

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Analytics Rule
There are two major levers for selling a specific used vehicle: pricing and promotion. Used car pricing tools can tell you about the market price and interest in the vehicle based on VDPs and SRPs. However, it’s the dealership’s unique sales DNA that reveals pricing strength and interest in the vehicle.

So, how could Alpha Dealership use that mix of third-party and internal information to determine the specific pricing and promotion decision for each vehicle on their lot?

They needed to apply expert decision intelligence that could crunch through internal and external data sources and calculate the specific pricing and promotion gap. This intelligence showed them where they needed to reduce the price, where they had the opportunity to increase the price and the requirement for promoting the visibility of each vehicle.

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In short, they were able to maximize their used car profitability by using intelligent pricing algorithms.

The Bottom Line
Systematic decision intelligence worked for Alpha Dealership. The company’s used vehicle business generated 11 percent more profit while volume increased 13 percent. When combined with the reduced wholesale losses, their used vehicles business profit improved by 15 percent.

It’s called Big Data Analytics for a reason. Don’t be afraid to use it.

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