Paying The Price

Whether you’re buying cars at the auction, trading for them at the front or buying from the public, the number one reason you can’t acquire more used cars is that you won’t pay the price.

It’s that simple. You and your used car manager can spin it any way you want, but the bottom line is when you or they see a car that you would like to have on your lot you will not step up and pay the price. There are logical reasons for this, most of which need to go away.

Let me dissect this deal for you. The odds are pretty goodthat your internal labor rate is $75 to $125 depending on what part of the country you are in. Your average reconditioning costs are running $800 to $1400 depending on a couple of things.

One of those things would be that you are in the “Newscar” business as opposed to being in the “Used Car Business.” Oh, I know you think you are in the used car business, but you aren’t. “Newscars” is when you carry a lot of late model stuff.

Sure your recon cost is lower because you’re not spending a lot of money on these cars as they still have factory warranty. (Bad strategy that happens when your used car manager gets tired of getting killed every time he/she sends an older car into service.)

Or, if you are a big time “Certified Dealer” then your cost per unit would be higher because of the factory requirements.

So let’s round the reconditioning number off to a nice $1000 per copy. (Do your own math if you don’t like mine.)

The next part of this dissection is those wonderful little packs you add on to protect yourself from paying too much in salesman’s compensation and other little safeguards you feel you have a need for. I come from the “Pack Generation.” Always loved them. The business has changed. I’ve changed and you should change too. (Many of you think I’m against packs. I’m not. If they are working for you I say “Keep using them,” but I question if they are working as well as you think they are.)

On average, hard and soft packs combined run $500 to $1000. So let’s round that number off to $800. When you add my little rounded off numbers from the reconditioning and packs you have a total of $1800. (The problem with the pack and recon “drug” is that it still sorta works and you can’t shake ‘da habit.)

So as I often say, “Here’s the deal.” You are starting off from “jump street” with an $1800 cost disadvantage against those dealers who aren’t doing it the old fashioned way. (CarMax and Texas Direct to name just two of them.)

We can debate the way you charge the sales department in service all day long. But your theory of if we don’t charge them full retail (or close to full retail) that they will just give it away in the sales department is “old, tired and a worn out” theory. (I know, I know, it’s still sorta working.)

You cannot continue to rely on the sales department to prop up the service department. Sooner or later the folks in service are going to have to get better with how they sell and develop your customer base.

Propping up service is much like the unemployment checks people have been getting the last few years. As long as the government keeps handing them checks then there isn’t much sense in them getting out and looking for a job.

What compounds the problem is your pay plan. As long as you keep paying sales people and sales managers on gross you are going to fight a losing battle. Yes, this is a hard one for you to get your head around, but sooner or later you gotta “get real.” There’s a total cultural change coming. You can lead it or follow it. It’s your choice.

Just think about it for a minute. You put killer used car prices on the Internet and now you’re starting to put killer new car prices on the Internet. Aside from doing the right things when the customer shows up, how much control do the sales people and sales managers really have on gross profit? Ok, they have some, but not as much as they used to have.

What if you changed the pay plan and took gross out of the equation? Under that scenario what you charged in service and the need for packs would be irrelevant.

What if you thought of reconditioning as simply another line item expense on your statement just like you think of advertising or supplies? Keep in mind this article is all about “Why you can’t buy more cars.”

If reconditioning and packs were not screwing up your “cost basis” then you could absolutely buy more cars and no doubt you would sell more because you would be in them right and have a pricing advantage over the competition. When I say you can buy more cars, I’m also talking about buying more “trade ins,” which obviously allows you to make both more new and used car retail deals.

There is no doubt this is a difficult cultural shift for your business just like what’s happening to you with the Internet moving you towards “One Price.” You’ve been successful doing it the “Old Fashioned Way,” but you are going to find it harder and harder to do so.

I’ve asked this question a lot lately: What if you had a clean sheet of paper and started over from scratch; how would you do it in today’s world? That’s all I’m gonna say, Tommy Gibbs