For the past several years, I've been making a case for a new method of used car management that I call "Velocity." The basis for needing a new strategy for making money in used cars is that fact that the Internet has transformed the used car market into an efficient market.
In an efficient market, buyers and sellers have relatively equal knowledge of choices and alternatives. With the Internet providing shoppers the ability to see every vehicle in the market and how they are priced, why should we believe that we will get lucky as often as we used to? Do we believe that better negotiating tactics will overcome customer's knowledge of identical choices and alternatives? Do we think that blowing up more balloons in the showroom or putting a bigger gorilla on the roof will make the difference? Simply stated, the business has changed, average front end grosses will not be what they once were, and we need to change the way we are operating to remain profitable.
The need for such a profound change is very difficult for many dealers to embrace. Instead, many continue to price vehicles in the hopes of capturing the large grosses of the past. In reality, this is the worst possible strategy to achieve profitability in today's used car marketplace.
Once and only once a dealer comes to terms with the reality that the old front end grosses of the past will not return, the only remaining question to be answered is how the lost profits will be replaced. The obvious answer is that they can only be made up with additional volume. Achieving additional volume, however, requires a dealer to stop pricing every vehicle with a large mark-up in an attempt to recapture the large gross profits of the past. To do so is like shutting the oxygen off to a patient that is in desperate need. The correct approach is the Velocity method of management which advocates opening the valves wide by pricing vehicles at or close to their true transaction point. Under these conditions, traffic and sales immediately increase and used car operations experience a vitality and vibrancy that had been long lost.
In order to successfully implement the Velocity strategy, dealers must have new technology and information to make better decisions. Specifically, they must know which cars can be priced high and reduced slowly if necessary, and which vehicles need to be priced low and reduced quickly if necessary. To know this difference, is a "must have" for a Velocity dealer.
The technique that Velocity dealers use has two steps. First, the Velocity dealer takes special care to know the individual physical qualities of each and every vehicle. Some vehicles are special, some ordinary, some replaceable, and some simply one-of-a-kind. Such qualities certainly matter in making the pricing decision. After the physical qualities of the vehicles are assessed, the second remaining consideration for knowing which vehicles should be priced high and which should be priced low is an understanding of their current supply and demand. Vehicles with high demand and short supply can be priced with thousands of dollars of mark-up while vehicles with high supply and low demand need to be priced aggressively for a quick sale and a possible finance opportunity.
Equally important, the Velocity dealer must change the negotiating culture of their showroom to support their new pricing strategy. The sales people need to recognize that an approach more oriented to volume than extraordinarily high average gross is needed. Therefore, Sales Managers must fully comprehend that the dealership's vehicles are priced to sell, not to negotiate. To this extent, documentation replaces negotiation in the showroom experience. Information is powerful and the Velocity dealer can use their superior knowledge about each and every competitive vehicle in their market to demonstrate to the customer that the offered price is truly a great value.
The move from a traditional used car model to a "Velocity" model is a journey. Habits and practices that were successful in the past need to be replaced with new ones. The good news is that today, many hundreds of dealers are making the Velocity journey. These dealers have found value in networking with one another. Their shared experiences, challenges and successes help them navigate and serve to reinforce the rewards. The growing community of Velocity dealers is enjoying the rich rewards that are still available to those that are willing to adopt the necessary new strategies and tactics.