This blog post originally appeared on our Auto Dealership Group Management blog.
Last year I rolled out what I considered a simple and effective objective for the Used Vehicle Departments in a large dealership group. I was addressing a room full of dealership General Managers (GMs) and Used Vehicle Department Managers (UVMs); about 60 people. My aim was to let our dealership teams know what was expected of them with regards to gross profit.
The crux of the presentation was to set an objective that each car should contribute 10% of its cost to the dealerships gross profit in 45 days. Basically to state it conversationally, our inventory age and gross per unit expectation was:
“If you are going to take the full 45 days to sell the car, I want to see a 10% (of cost) gross profit ($1,500 on a $15,000 car) in the till. If you turn it in 23 days, I’m satisfied with a 5% gross profit. If you are going to drag it out to 70 days, I want 15%.”
The constraint was lot space, not the target percentage. I wanted them to know that if they wanted to sell volume, it would be fine if they had a lower GP% target. That is, if your average turn is 20 days, $750 gross profit on a $15,000 unit is fine.
I had more than one GM tell me it was complicated so I drew him this:
My objective seemed unusual because most believed that, in practice, after a certain age, a vehicle’s expected gross profit drops (or at least that is what most of them experienced).
Its true though, when a car doesn’t sell in 45 days we feel we most likely screwed up somewhere in the process of stocking and selling the car. But maybe not. If we didn’t screw up then why didn’t the car sell? It could be any number of factors such as:
- The vehicle wasn’t in pristine shape. That is, something was wrong with the car that kept customers from offering us top dollar for it.
- The salespersons involved in showing the vehicle didn’t use their best selling skills nor did they always follow the approved selling strategy.
- The Desk Manager didn’t use their most aggressive negotiating position in working offers up to the 45 day mark.
- The car wasn’t well represented on the internet. That is, it wasn’t described well or the photos weren’t good enough to get the car on the customer’s short list.
One factor I didn’t include in the list is that the car wasn’t “right for the lot”. In the days before internet marketing I would say that could be a big factor; not so today. If you have a new car franchise, then your lot is fine for most cars you want to stock and market on the internet. I say most because, even though your lot may be a good place to sell all vehicles, your staff may not be skilled enough to represent Lamboghinis and Ferraris.
So the same graph above may actually, in practice, look like this for some dealerships:
If a UVM experiences a relationship like this, it does not prevent him from meeting our expectations, it simply compels him to make sure all units are sold prior to the 45 day mark. If, for some reason, he keeps a car beyond 45 days, he knows he is expected to make a home run on the eventual sale of the unit.