For years, the trade-in process has been almost an afterthought for dealers, a necessary step to close the deal, but not something that generates much (if any) profit.
In a 2019 Dealer Profit Study, MAX Digital found only 15% of dealers said the trade-in was a top profit source. Less than half of dealers are under-allowing on the trade-in, with an average of only $250 per vehicle.
They’re missing a golden opportunity, especially in today’s market. I’ll explain why — and share concrete steps to make trade-ins both profitable and customer-friendly.
Here are six reasons trade-ins should be a top priority for dealers:
Profits are shrinking.
When a dealership sells cars, they deserve to make a profit. But it’s not always the case. According to NADA’s 2018 Midyear Report, dealers are selling the same number of new cars as they did last year, but making less on them.
In MAX Digital’s study, 60% of dealers reported new-car profits were down the past two years by an average of $170 per vehicle.
“There’s no money on the front end of a car deal anymore, especially on new vehicles, so you have to make it somewhere,” says Brad DeSelms, sales director for Fremont Management Co, which owns 13 dealerships across Wyoming and Nebraska. “The best way to do it is on the trade.”
Customers want a better process.
The traditional process – in which a sales manager takes the car for a test drive and then returns with an offer scribbled on a piece of paper – creates tension and distrust with potential buyers.
They often assume they are getting a low-ball offer, especially if they have visited a valuation website and have an expectation of what they should be offered. This negative experience can ruin the deal.
Used cars are in-demand.
Most buyers aspire to buy a new car, but rising new-car costs drive them to purchase used. Dealers need to fill that demand by bringing in trade-ins at a higher rate.
Used-cars are more profitable.
Margins on new cars aren’t what they used to be. Dealers consistently see higher profits on used vehicles compared to new. Used cars also allow dealers to diversify inventory and not be constrained by what the manufacturer builds. With more profits to be gained, dealers should increase their used-car inventory with more trade-ins.
It can help with retention.
Not only is the trade-in process stressful for customers, dealership staff don’t enjoy having the difficult conversation either. A customer-focused approach makes for a smoother process for both sides. It can help dealers tackle the staggering 80% sales consultant turnover rate, as reported by NADA in 2019.
Trade-ins are better than auction.
Dealers focus a lot of time and energy on acquiring vehicles from auction. However, they are competing against other bidders, which drives up the price.
In contrast, a trade-in is an auction of one. That gives a better opportunity to acquire the car at the right price, avoid auction fees and transportation costs and end up with more margin.
Ready to make some changes?
Here are six concrete steps to create a profitable, customer-focused trade-in process:
Evaluate your current process and set goals.
Take a close look at your current trade-in process and how you’re training your staff to handle trade-ins. Is your process consistent? What can be improved? Evaluate your appraisal close rate. Top performers can close well over 50%, but know where you are and what it takes to get to the next level.
Consider a certification process or, at a minimum, document the process for consistency and clarity.
Get the customer involved.
When customers are involved more, they see the logic in how you price the car. Start by allowing customers to evaluate their own cars alongside the salesperson. Walk around the car together and discuss scratches, worn-out tires, etc. Ask them to rate the individual vehicle components on a 10-point scale. Hint: Most customers will rate with an eight or below.
This process allows you to bridge the gap between what they think the car is worth and what you will offer them.
“When we get the customer interacting in the trade, all the armor comes off. They feel very powerful that they are actually appraising the vehicle themselves,” DeSelms says. “It slows the customer down and makes them think about what their car is like.
“We all know we’ve got that scratch on the car we’ve forgotten about, or the tires have never been changed and there are 35,000 miles on them.”
Collaborative trade-ins are less stressful. This is particularly important for women and Millennials. Many of them find car buying the most stressful, yet they represent the largest car-buying groups today.
Digital platforms can aid in the trade-in process. They eliminate paperwork and provide all the needed information right at the dealers’ and customers’ fingertips. When you can show a customer a fact (including third-party values) on a tablet in front of them, it makes them feel involved and prevents questioning.
Take a “we buy” approach.
Offer to buy the vehicle whether the customer buys from you or not. The priority is to get customers into your dealership and provide a great experience. If it’s a positive interaction, the customer will come back or tell a friend. It is the springboard to the whole relationship.
Consider a “buy center.”
Taking the “we-buy” approach one step further, you can have an official buy center, touting free appraisals. It’s a good way both to drive traffic and source local inventory.
Marketing and social media can help you target the vehicles that are most valuable to you. Keep in mind a buy-center model is not for everyone. You must make sure your hiring and training are aligned with the goal of making positive customer interactions first and foremost.
Open a bargain lot.
If a dealer wants to go all-in with a “we-buy” program, consider opening a bargain lot with less desirable, late model cars (average sale price around $3,000-$7,000). Dealerships such as Luther Automotive, a 37-store group in Minnesota, have had success with a bargain lot, finding it drives traffic to their other store.
Bottom line, there is a place for every car that comes through your dealership. And if it doesn’t work in 25 days, you can take it to the auction.
There is no one size fits all trade-in strategy for dealers. The important thing is to take one or two steps forward. Secure a consistent process. Make it more customer-friendly by getting the customer involved. In time, consider a “we-buy” approach or even a buy center or bargain lot.
The trade-in is not only a dealership’s most profitable source of inventory, it also is the driving force for success in today’s digital environment.
It will be increasingly difficult for dealerships to be profitable if they’re not getting better at trades. Collaboration, evidence, and transparency are the keys to driving a more profitable, customer-friendly trade-in process. (Tim Scoutelas, left)
Tim Scoutelas is Director of Strategic Accounts at MAX Digital. He has 24 years of experience in the automotive industry, including his role as a Car Purchasing Manager at CarMax where he appraised more than 16,000 cars and was part of the CarMax.com start-up team.