The used-vehicle market is heating up, and for dealers, so is the competition. CarMax is expanding nationwide. Along with other used-vehicle retailers, it threatens to chip away at franchised dealerships’ market share.
I find the CarMax success story interesting because their stores don't always offer the cheapest prices. But customers like the CarMax experience, which is something dealers could easily emulate.
Let's look at a few things that CarMax does better than most dealerships.
CarMax's brand is synonymous with transparency. The retailer has a no-haggle policy for used-vehicle prices and trade-in offers. CarMax gives free, no-obligation valuations and offers consumers a price that's good for seven days.
This is proof many consumers don't care about the lowest price. Rather, they care about pricing transparency and fair treatment. CarMax also offers a consistent, consumer-driven shopping experience that fans rave about.
This brand experience is similar to McDonalds. When I was young and on family road trips, we always stopped at McDonalds. McDonalds might not be the best food option in town, but you know it's good and you know what you're getting. Customers know what to expect at CarMax.
CarMax also invests heavily in customer-focused technology innovations. The company has been testing online trade-in estimators, online financing, expedited pickups and home delivery. The retailer recently announced a planned rollout of a complete digital buying experience.
To compete with the CarMax brand, dealers need to increase pricing transparency, invest in digital retailing technologies and design a car shopping experience that consumers will love.
Buy Smart, Price to Market:
CarMax plays Moneyball, hiring MBAs with backgrounds in data science and statistics. Used-vehicle purchases and selling prices are based on pure data.
Many traditional used-car managers still rely on experience, knowledge, gut feelings or emotion when buying and selling inventory. The nice thing about data-based decisions is they take personal bias out of the equation.
Fortunately for dealers there are some great tools available like vAuto that provide the data to buy smart and price to market.
Merchandising and Reconditioning:
At CarMax, decisions to spend money on reconditioning used vehicles are also data-based.
Do you fix a 4-inch (10 cm) scratch on a Camry with 20,000 miles (32,000 km)? Absolutely. Do you fix a similar scratch on a Camry with 120,000 miles (92,000 km)? Absolutely not. What about 60,000 miles (96,000 km)?
Often, reconditioning decisions are based on what we ourselves would want, because we imagine having to live with that car for years. But someone who is buying an older vehicle might not have the same standards.
It also depends on who's buying the car and how they intend to use it. If I'm buying a used vehicle for my daughter, I want to make sure it's in perfect operational order. If I'm buying an extra car for my lake house, I won't be putting many miles on it, and reliability is not as important.
CarMax looks at the data and calculates what works and doesn't work with reconditioning. Sometimes they win, sometimes they lose. If they win more than they lose, they come out ahead.
The advantage to data-driven decisions is they take human emotion out of the equation. Most dealers can remember the car they made a killing on, as well as the car they lost two thousand dollars on.(Wards Industry Voices contributor Scot Eisenfelder, left)
These outliers have a minimal impact on overall gross profit margins. The problem is, we let those emotions impact our next decision, when in fact the decision should be made based on what the data tells us.
There's no reason franchised dealers can't operate the same way. Whenever reconditioning improvements are made, keep track of what you did, how much you spent and whether you got value out of it.
If you're worried a local CarMax is chipping away at your used-vehicle market share, emulate some of their strategies. Create a consumer-driven shopping experience and learn how to leverage your data to stay competitive while maximizing profit margins.
Scot Eisenfelder is CEO of Affinitiv, a marketing technology company serving automakers and dealers.