Are You Chasing Flawed Metrics?

For years now, we have heard dealers proclaim their high gross per used vehicle sold as if it were a badge of honor. While this metric is important, many dealers fall into the mental trap of thinking that if this number is improving, so will the entirety of their dealership. Unfortunately, this is not the case.

Here is a great example. We spoke with a dealer who did everything in his power to make sure his high gross per used vehicle sold was better than the year before. To achieve this, he was having his recon techs work for the used car department and not the shop, and then only billing out the actual cost of labor to the used car department. Of course, this is not recommended as he was stripping his store of profits for the service department, just to pad a number that has nothing to do with driving dealership profits!

A lot of you reading this are probably thinking that we’re crazy, but bear with us. Nowhere on your personal financial portfolio is there a line for dollars per unit. There IS a line for total dealership gross though. What we should all be striving for is to increase gross as much as possible. We want all the profits we can gain; every single penny. This is the number you should be wearing as a badge of honor, as it is the true measure of success of your dealership.

How to begin improving dealership gross

First, look at your annual turn rate. Do this for both cars and trucks at your current inventory level, with your current sales rate. If your monthly number is 0.5 it means you sell your inventory 6 times per year and that you have a 60-day supply of vehicles on the ground at the end of the month. What would happen to your store’s overall gross if you were able to increase the turns from 6 to 7? How much more gross would your dealership make? To find this out we need to understand what dealership activities are affected by the sale of a used vehicle, and then do some math. You know you will sell more cars, but what about your gross return on investment? How much money are you keeping from every car you sell? If you are turning your inventory one more time per month, you will retain that percentage of your inventory for this additional return.

We often tell dealers that the brand (or franchise) is the heart of the dealership. It’s why you are there, why your customers are there, and it’s of the utmost importance to the health of your store. So, if the franchise is the heart of the dealership, then used vehicles are the blood. There is not a department in the dealership that isn’t impacted by the success or failure of used vehicle sales. Every profit center’s gross in the dealership rises and falls by the sale of a used vehicle. That’s why we must look at how other departments will be affected if we increase the turn by one.

How to calculate

1. Find the internal gross for parts and service, and multiply by the growth factor. Easy! If you want to go from 6 turns to 7, simply divide 7 by 6 and come up with a factor of 1.16666. That will be the resulting increase in gross for each department for one additional turn.
2. We also need to add in the F&I used gross and multiply by the same factor. Add these numbers up and the result is the value of adding one more turn in your dealership.

The results

We recently did this exercise for all the dealers in a 20 Group and used the group’s average numbers for the year. What resulted was a staggering average of $299,000 additional dollars per year. Wow! Armed with this motivation, the group came up with a list of the things they could do to improve the speed of their used vehicle department. The list is as follows:

• Daily Trade Walk – Allows everyone in the sales department to know what’s in stock as soon as possible.
• Trade email – Send an email out to all associates, including those who are not present for the trade walk, describing the newest inventory and confirming pricing.
• Take pictures and post them immediately – Many dealers take pictures at appraisal time, so they can get the vehicle priced and online as soon as possible.
• Have a meeting with the service/recon department – Explain what’s in it for them, and as is shown above, if the recon process is sped up, then so speeds up your ability to add more gross.
• Help speed recon – This is done by making it a priority to make an appointment for all incoming inventory.
• Price the vehicle – This is especially true for “B” bucket cars at their intended transaction price out of the gate. Your first gross is often your best gross, especially if you look at gross return on investment.

These were just a few of the things the 20 Group came up with and they were all determined to make it happen. We hope you have also become inspired to make it happen at your dealership!

Stop chasing old metrics

Unfortunately, this is not the only example of old metrics that dealers love to chase. In our next blog, we will look at hours per RO, and how too much emphasis may be costing you customers and gross profit.

Learn more from Jerry Powers and the other automotive consultants by joining an NCM 20 Group, scheduling dealership consulting, or registering for retail automotive training in our NCM Institute. Your bottom line will be glad you did!