This may be the simplest and easiest way to get out of the NEWSCAR business and into the used car business. Most new car dealers are not in the used car business. Most are in the NEWSCAR business. That’s when the average cost per unit in your inventory keeps creeping up and up and before you know it you are too close in price points to your new car inventory.
That’s not to say there is not a market for program cars or certified cars. There certainly is, but those segments of your inventory really have to be controlled. What happens is when the average cost of your inventory moves up and up and the factory comes out with rebates, incentives, low interest rates, employee purchase plans, or if the government comes out with programs like Cash for Clunkers you get crushed because you are sitting there with all that high dollar inventory.
If you don’t believe what I’m saying is true I have two easy experiments for you to do. Take out your financial statement and go to the used car page. To do this correctly you will need to chart out each month for the entire year. On that page you will see a column that has used car sales dollars in it. Simply put that’s as if you sold one car for $10,000 and one for $20,000, thus you had $30,000 in Sales Dollars. That in and of itself doesn’t mean much to you. Now, subtract your total gross profit from that sales dollar number for each month. That will give you your cost of sales. Divide the cost of sales by the number of units each month. That will give you the average cost per unit sold for each of the twelve months. I know, I know pretty simple stuff. Hang on…
When we do this little experiment here is what we generally find: the month in which you had your greatest retail sales is the month in which your average cost per unit sold was the lowest for the entire year. And, the month in which you had your worst retail sales your cost per unit was the highest for the entire year. So, the bottom line is the more you press your average cost down, the more used you will sell and the better off you will be. You end up getting in the used car business and out of the NEWSCAR business. You end up selling more units with fewer dollars tied up. Oddly enough most of your problem cars go away. Your ability to get on a 45 to 60 day aged inventory goes way up.
The easiest way to manage this from the Dealer’s standpoint is to drive your used car manager nuts about what their average cost per unit is in stock each day. Surely you have some way of pulling what your average cost is per unit every day? There is no set of circumstances you can lay out that negates this concept. So, if you were to say any of the following, you would be wrong:
- We do a great job with highline cars. (Irrelevant.)
- We do a great job with high dollar pick-up trucks (Irrelevant.)
- We do a great job with high dollar SUVs (Irrelevant.)
- We don’t have software that can separate our inventory by Cars, Trucks, SUVs and Wholesale Pieces (Irrelevant.)
None of this matters. It’s like your “up log.” It’s consistently inconsistent. It’s ok as long as you are always using the same measuring tool. So how do you drive your used car manager nuts about this number and make it work for you?
First, require that your used car manager print the report every morning, circle today’s average cost, and put his/her initials inside the circle and lay it on your desk. I like to take this page and tape it and the previous day’s page to the wall in my office. What happens is anytime someone walks in my office they look at the number to see where we are today. It creates peer pressure and accountability of the used car department and especially the used car manager.
Every time I see the used car manager in the hallway I will ask them “what’s your average cost?” If I see him 10 times, I’ll ask him10 times. The more you aggravate your used car manager about this number the better off you will be. For me in the past it’s gotten to the point where all I had to do was just wink at them and they will spit it out.
So, what’s the magic number to get to? There is no magic number. Every dealer’s number will be different. If you are at $14,500 today your mindset should be how do you get to $14,000, then $13,500, then $13,000 and so on. The more you press your average cost down the better off you will be. I find it interesting that when I’m speaking to a group, they think they are hearing me say go out and buy cheaper cars. No, that’s not what I’m saying. I fully realize how hard it is to buy cheap cars. But, what I am saying is it’s not so much about what you buy, but what you don’t buy. If you are buying a high dollar car you have to buy it with great caution. You need to either have it sold, or have data to back up that it’s going to move fast.
One of the most important things you can do is to quit letting “Bubba and the gang” have your cheaper cars. There is absolutely no reason to not retail any vehicle that has a piece of life left in it. You can present all the excuses you want, and they are just like the rear anatomy that we all have. Don’t say well, we don’t want to be in that business because it creates customer issues. That’s all a bunch of bull. Don’t say it’s because we spend too much money on them in service. That’s a bunch of bull.
There is no question that if you just pay closer attention to what you are buying and what you are keeping to retail that your average cost will go down. Only good things end up happening. As you monitor your average cost it is going to bump up from time to time. There are two reasons for this. First, it’s because you traded in some high dollar stuff, which you will naturally have to do and second it’s because you got goofy and went to the auction and bought some high dollar cars. In both cases it’s a matter of paying attention to it daily and getting back on track.
I’m often asked two questions:
1. What should my target goal be? There is no target, just try to get it lower than the day before.
2. Can I press my average cost too low. The answer is no. Don’t be concerned with that. If you do a good job with $25,000 SUVs, you will still sell $25,000 SUVs, but by pressing your average cost down it just makes you that much better.
The other thing you should look at each month is what your average cost in stock is today, vs. your average cost of what you sold last month. Nine times out of 10, what you are actually selling is not reflected in your inventory. You might find that your average cost in stock is $14,500, but your average cost per units sold last month was $12,500. What’s happening is you are selling the cheaper stuff and the more expensive stuff is sticking around and you have too much of it. Imagine that?
That’s all I’m gonna say, Tommy Gibbs