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A Bad Business Model

It’s a fact that I travel a lot. And since most of the time I’m spending the client’s money I don’t stay in fancy hotels.

Typical hotels I stay in are Hampton Inn, Hilton Garden Inn, Courtyard by Marriott and Residence Inn. I don’t know this to be a fact, but of those I mention Courtyard has probably been around the longest.

My observation is that Courtyard is the one that is the most stuck in the old way of doing business. They have attempted to make some upgrades but compared to the rest, they seem a bit like a dinosaur. They still are doing business in part because of the law of supply and demand.

Before I go any further I want to admit to you that I realize how difficult it is to change. The problem with changing in the car business is the old model still works. Well, sorta, but the question is for how long?

We all know we need to speed things up in the dealership. The only way we will win is to do volume vs. making $3,000 average on front gross. I’m always afraid that my readers think I’m saying you can’t do a respectable gross. That’s not my message at all. You can, but you can’t do it the way you are managing your used car inventories.

I’ve come to understand that it’s very, very difficult to sell in volume and achieve a super high average gross profit, but I also know that the faster we sell cars the higher the average. The longer it takes you to sell a car the lower the average.

How much better off would you be if you sold more of your used cars in the first 30 days rather than the last 30 days of the life cycle? I keep screaming “Life Cycle Management” and more and more dealers are starting to heed my plea.

Speaking of a bad business model; dealers are fully aware that the biggest disconnect in the dealership is between used cars and the service department yet they continue to let service do its own thing, which in the end creates a logjam with the recon cost, speed and efficiency. It’s so very interesting that when the dealer becomes the “used car manager,” that the roadblocks toward productivity are knocked down overnight.

Ten more bad business models for you to chew on:

1. Because of demand from the factories dealers buy high dollar real estate and build high dollar facilities, built on factory specifications so they can sell their product at little or no profit. Dealer margins on new cars have been cut from a high of 22% in the early 70’s to almost nothing today, yet we still negotiate our selling prices even after your Internet price has driven the customer to your front door.

2. Within these high dollar facilities we have high dollar equipment, computers, floor tiles, colors, etc., dictated by the factory. If you are a dealer have you ever noticed they always have something else to sell you? Often what they sell you, you can buy cheaper elsewhere.

3. The factory works hard to convince the dealers that these fancy facilities create customer loyalty, profits and future sales. For a few customers they do, but for the majority it’s just not true. They buy their next car based on convenience and price.

4. Dealers egos get involved in the creature comforts for un-loyal customers who by and large couldn’t care less. Did I mention convenience and price?

5. Within about an 18-month window dealers lose the customer to the Jiffy Lubes of the world. This time price isn’t a factor because the average oil change at Jiffy Lube is about twice what yours is. It’s all about convenience. “Get me in, get me out, I’ve got things to do.”

6. Customers hate the length of time it takes for them to buy the car and take delivery. Electronic signature will start to creep more and more into the forward thinking dealer’s model. Not because the dealer wants it, but because today’s customers will demand it. It’s not going to be long before the customer will show up, pick up the car and leave. All the hoop jumping will be done online.

7. Dealers abuse the used car department by charging them retail because that’s the way they have been taught. Dealers believe that if they don’t charge them full retail that they will give it away anyway. All that really does is create an additional price gap between what a dealer can sell a car for and the competition. Since this model has worked so well for so long it’s going to be a tough change for most. Those who figure it out will get to reap the benefits big time.

8. By and large dealers are still paying on gross profit when in fact the control over gross at the sales and sales management level continues to erode. Paying on gross has worked very well for such a long time, but change is coming. The percentages you currently pay out to sales staff and sales management will not work in a market of “shrinking margins.”

9. Most dealers believe customers want to negotiate and we can agree that’s true to a point. I hear many dealers say they will never go to “one price.” Then I ask them if they are giving up much off their used cars posted on the Internet? Most say they are holding the line on the cars they sell off the Internet. Makes you go hmmmm.

10. The Internet has become the “Great Equalizer.” The current dealership model doesn’t work well with the Internet. The fact of the matter is dealerships need to make big grosses in order to pay for all the enormous operating costs they are dealing with. If 90% of the potential buyers who are shopping for a new or used car shop online, can we continue to be successful with a tired worn out business model like Courtyard by Marriott?

Ask yourself what would you do if you could start out with a clean sheet of paper. That’s all I’m gonna say. Tommy Gibbs

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