Will this Study Change the Future of the Used Car Market Forever?
The Study
The used car industry has some preconceived notions of how their market is supposed to work. A general rule of thumb for the industry in the past has been that a dealer’s average used vehicle inventory should be under 30 days old. That is to say, a dealership’s goal should be for at least half of the cars to be sold within 30 days of arriving on the lot.
However, some new data from J.D. Power (formerly NADA) could suggest that this may not always be a good rule of thumb to follow. Every year since 2009, the average investment in a used vehicle dealer’s lot has gone up, and the average profit has gone down. Could this mean serious trouble for the used car market? If investment in a lot goes up, shouldn’t profit follow suit?
Implications
This new data suggests that the best outcomes are derived from when dealers optimize between turn (the amount of time a vehicle stays on a lot) and gross profit. Traditionally, turn and gross profit have had an inverse relationship. When the amount of time it takes to turn a vehicle goes up, the gross profit goes down. Some research has suggested that turn cannot ever get too high, as long as the total gross is not affected, but studies have shown that this is not true. There is a point at which the average gross can dip too low, and the total gross will also fall with it.
When it comes to the turn of a vehicle, facts prove that the passing of time will diminish a dealer’s profit potential. However, different cars can age at different rates from each other. It is not uncommon for one vehicle to hold its potential a lot longer than others, and vehicles can be at any stage of potential when you add them to your lot.
Out with the Old…
How do used car dealers decide whether or not a vehicle is profitable? Dealers have often assessed cars by how long they will sit in the lot – that is, by the calendar. It is not inherently untrue that time is a poor measure of the profitability of a vehicle, because time will diminish a car’s potential – it is good to take time into consideration while making the decisions of when, where, and how to price a vehicle.
Even so, the calendar is a flawed measurement of a vehicle’s potential, because not every vehicle has equal potential on Day 1, and not every vehicle will have diminished at the same rate by Day 45. The time that one holds a vehicle does not directly equate to the profit that the vehicle holds.
… In with the New
How should a dealer be judging the profitability of a car? Firstly, dealers should change when they are appraising a car’s profitability in the first place. If a car has been on a lot for 45 days before it is realized that it has low profitability, it is too late to reverse the bad purchasing decision made prior to moving it onto your lot. One should be judging profitability before purchasing every vehicle before joining a lot.
The next question is how to determine the profitability of a car. This is complex since there are many metrics that a car should be calculated by. To accurately configure a car’s profitability, one must consider the market days’ supply of a car, its cost-to-market ratio, the supply and demand of cars like it in the immediate area in the past 45 days, etc. Since many of these factors do change over time,
these metrics should recalculate at least nightly in order to maintain an accurate perception of car profitability. As you might already be able to tell, this process would be very intense and time-consuming.
The Solution
Used car dealers no longer need to worry about calculating vehicle profitability or paying exorbitant prices for high-end software to do it for them! Laser Appraiser Dealer Studio is an affordable application that analyzes the market around a dealership and can direct buyers to cars that will provide the best margin. Desktop rates each car on your lot by the metrics of volume, market days’ supply, profitability, availability, performance, and trend, so that you can have the most accurate perception of how successful the cars on your lot should be. It even comes with a pricing calculator!
Sure, the used car market is changing, but that doesn’t mean that your dealership has to be left behind. No matter the size or location of your dealership, our desktop Dealer Management System is sure to be a fit for you. Stop using the calendar to judge the profitability of your car, and start using live data delivered straight to your desktop device.
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