Two Secrets to Increasing Dealership Profit

Whether you’re struggling or doing just fine, every dealer is interested in making more money.

Dealerships are complex operations. And that can make managing processes difficult, even if you have a well-trained team.

We spoke with automotive merchandising expert Jasen Rice for a deeper dive into the two most impactful areas a dealer can focus on to maximize profits. Jasen is the owner of Lotpop Inc., a consulting company that helps dealers manage their inventory, pricing, and internet processes.

Prologue: Data Can Be Useless

When Lotpop arrives at a dealership, the team’s first priority is pulling data out of the used car management system and CRM. At first, all of this information means little to nothing.

“Data is data,” Jasen said. “But until you can see the trends and the cause and effect, you can’t do much with it.”

The team uses a system called Lotscore that uses key metrics from the dealership to connect the dots and show relevant trends. Lotscore gets results much faster than a manual review. Once a dealer knows where they stand and what’s causing the loss in profitability, he or she can start making plans to fill those gaps and fix the broken processes.

Smart strategy isn’t just data-driven, it’s trend-driven.

Secret Number One: Inventory Age

The first thing a dealer can do to increase profits is to look at his aging policy.

“Get rid of age,” Jasen said. “Meaning, have less than 5 percent – maybe 10 percent – of inventory over 60 days old. You need to get that gone.”

One of the biggest hurdles to tackling an aging problem is service lane turnaround time. When you bring in a piece of inventory from a trade or auction, it is important to fine-tune your reconditioning process.

“The ideal turnaround target is 3 to 5 days,” Jasen said. “But probably only 10 to 20 percent of dealers out there can actually get that done. Most dealers are running 12 to 20 days. If they can get it to at least 7 to 10 days, we can start seeing decent results. At 3 to 5, you’re going to really see huge results.”

According to Jasen, aging and recon go hand-in-hand. A slow service lane can be the clog in the pipe that prevents you from refreshing your inventory at the optimal rate. And an expensive one at that. Jasen estimates the average holding cost of a vehicle is $40 per day. Already at 10 days in, that’s $400 of added cost.

Secret Number Two: Tiered Pricing

Lotpop’s pricing strategy compliments its stance on aging. If a vehicle is finished with recon and merchandising and is ready to sell, it should be priced according to its age.

Assuming that 70 to 80 percent of a dealer’s inventory is replaceable, and the vehicle is on the lot by day 10 or 14, then it shouldn’t be any higher than 99 percent of the market price. This recommendation changes as time wears on.

“By day 30 on average, you should be around 95 percent market price,” Jasen said. “Now, that doesn’t mean every car has to be at 95 percent. You’ll have some at 98 and some at 93 percent, but average is 95.”

Depending on your market, that percentage will also change. For example, a dealer in South Florida would need to be closer to 80–90 percent since it’s a highly competitive market. The dealer, or his consultants, must also understand which cars deserve to be at 98 percent and which should be at 93.

So, if secret two is all about price reduction, where do dealers draw the line?

“Basically, you go until wholesale makes more sense,” Jasen said. “And I recommend going $500 under wholesale.”

But that’s not a hard number. You have to consider auction transportation and fees. Also, wholesale means you’re missing out on the chance of a trade-in and any F&I money.

For some dealers, the value of a referral might be worth holding off on wholesale even longer. If you’re willing to pay a few hundred dollars for a positive referral, then factor that into your pricing decision. Customers who get great deals are often more than happy to leave a review on Google or Cars.com. One good deal could lead to an entire family tree of sales.

Related: How Carvana and Online Car Buying Will Affect Dealerships in 2019

Next Up: What’s Really Costing Dealers Gross

Stayed tuned for part two of Lotpop Lessons, where Jasen discusses trends in the automotive retail industry and his theories behind them.

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