I hear the following from dealers several times a week: “That car doesn’t work for us.”
“Why?” I’ll ask.
“We tried it before and we got burned” is a typical reply.
“Well, let’s take a look,” I’ll say.
This “look” at market data is always illuminating. Often, I’ll find that market data for the “we got burned” vehicle in question suggest it isn’t really the loser a dealer believes it to be. Instead, the problem lies in the way the dealer acquired the vehicle and/or managed its life cycle and exit strategy.
Here’s a look at the top three reasons the vehicle isn’t always the reason “we got burned”:
1. The dealer overpaid to acquire the unit. This is decidedly easy to do in today’s marketplace. Wholesale prices are high and projected to remain so for the coming months. Likewise, many dealers rely on buyers to acquire inventory without giving them market data-backed guidance on the maximum price they should pay at an auction for every unit. Similarly, few dealers hold buyers accountable for a vehicle’s retail performance—even though the hand-raising at auction has a direct effect on a unit’s retailing potential and its likelihood to become a “we got burned” unit.
To address this, I’ll recommend that dealers track the “cost to market” for every vehicle they intend to acquire. The metric reveals the margin between a vehicle’s maximum wholesale purchase price and the average retail prices for the same/similarly equipped vehicles in a dealer’s market. By knowing this margin before acquiring a wholesale unit, dealers are more effective at buying vehicles “on the money” and calibrating their retail asking prices and profitability goals to meet their market.
2. They “missed it by that much!” Remember this line from TV’s Get Smart? It often comes to mind as I compare the “we got burned” car to the same/similar vehicles in a dealer’s market. I typically find color, equipment and trim packages for the “we got burned” unit that could have been winners, had the dealer been aware of them. I also find instances where the “we got burned” vehicle is too loaded with equipment and options to make it a market winner.
The key here is understanding the retailing strengths and weaknesses (or opportunities and risks) for every vehicle you might acquire. Today’s technology and tools provides these insights through metrics that assess “market days supply” and “demand.” The “market days supply” metric measures how fast a particular unit, based on its mileage, color, equipment and trim configuration, is likely to sell in a market, given the frequency of recent sales and the competition from the same/similar competing vehicles available in a market. The “demand” metric is more forward-focused, culling real-time consumer preferences for specific vehicles.
When dealers pay close attention to both metrics, they’re far less likely to regard any unit as a “we got burned” vehicle. Instead, they’ll view every vehicle as a potential opportunity and use the metrics to determine whether the opportunities outweigh the risks.
3. The dealer applied “pipe dream” retail pricing. It’s not uncommon to find a “we got burned” vehicle with an asking price that’s 20% or 30% higher than the market average for the unit. I can discern this gap by evaluating the vehicle’s “price to market” metric—or the relationship of the vehicle’s asking price to the same/similar competing units in a dealer’s market.
When I show a dealer this disparity on the “we got burned” vehicle, I’ll often discover the dealer either a) added a standard $3,000-$4,000 mark-up to a unit without considering how the asking price might fare in relation to competing vehicles; b) felt compelled to set a high price to make up what a buyer paid at auction or an appraiser gave for a trade (see #1 above); c) included a significant pack in the retail asking price as a hedge against wholesale losses; or d) hadn’t made any pricing adjustments during the unit’s time in inventory to account for depreciation and shifts in marketplace preferences.
Each of these scenarios amounts to what I call “pipe dream pricing” — or a blend of smoke and hope to devoid of market data. Today’s used vehicle buyers are too knowledgeable about the fair market value of a vehicle to even consider a unit that’s priced outside the range they deem acceptable.
I’m not suggesting here that every “we got burned” vehicle is a winner. It might be, and often is, for reasons noted above. Most important, dealers should recognize that today’s technology and tools, and the market-based metrics they offer, provide the intelligence and insights necessary to determine the exact vehicles that will/won’t work for a dealership, and how best to position each one for retailing success.
Anything less is playing with fire.