What's going on when the controller and accounting team are at a loss to explain how their dealership is consistently growing net profits while front-end grosses are softer than they'd been in years past?
Well, it's clear that they're stuck with an old-school mentality that focuses on profit per vehicle retailed, not on competitive pricing that leads to quicker inventory turns.
Fortunately for the dealership, their front-line team seems to have transitioned to a velocity-based inventory management system that uses modern data technology to determine what sells best in a market, what vehicles turn quickest on the lot and consequently what vehicles a dealer should stock.
A velocity-based mentality is not easy to achieve at stores where managers have long focused on PVR as an elemental read on whether a used-vehicle department is healthy or not.
It's difficult to let go of practices and beliefs that have been with us all these years.
And, even velocity dealers and used-vehicle managers who have achieved improvements in net profits across multiple departments still have to contend with skeptical owners, partners and accounting departments that believe they'd make even more money if they just ratcheted up gross profits a bit more.
The challenge for velocity dealerships is balancing the gross profit expectations against the need to turn inventory.
This ever-important balancing act is typically achieved by vectoring the metrics of market days' supply, price to market and cost to market to get the best shot at a gross profit while a vehicle is fresh in inventory.
Some traditional dealers and used-vehicle managers simply can't get off the “PVR juice.”
It is an addiction to a tired business model that has long outlived its usefulness and has been replaced by something much better for dealerships and for the industry.
They'll hear that gross profits on individual deals don't matter as much as they used to, and they'll hit a mental wall. It goes against everything they were taught to believe back in the day.
But the dismissal of velocity metrics and management principles misses some benefits that are powerful but may not be readily apparent.
These benefits are a natural byproduct of the application of a velocity-based philosophy and gain momentum as they are utilized.
Benefit 1: Inventory that's ready to move.
Velocity dealers and used-vehicle managers are more likely to stock vehicles with favorable metrics for market days' supply. So, in some ways, by implementing the velocity management strategies the pressure to move inventory is already reduced because these stores buy the right vehicles.
Benefit 2: Less pressure at point of sale.
Velocity dealers have the market and pricing data to know when vehicles can command big grosses, and when leaner margins are more appropriate, given market dynamics.
They link pricing to match what customers already know. The result: more deals, less negotiation and fewer discounts to arrive at a win-win selling price.
Benefit 3: The ability to “dial in” for dollars.
The velocity-based metrics and management principles support a high level of proficiency and productivity because the dealership can adjust prices, when necessary, to bring in customers.
The expertise one develops is uncanny. Some even know the time and day of the week that will result in more calls and traffic as a result of pinpoint price changes.
Together with the storewide efficiencies and net-profit gains that flow from adopting velocity principles, a velocity approach to managing used-vehicle operations is the way to “get off the gross” and back on the road to profitability.
Dale Pollak, founder and CEO of vAuto, Inc., is a sought-after authority on maximizing profits from used-vehicle operations. He is at 877-828-8614 or [email protected].
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