Used Unit Margins (R3 Exercise)

Michael  Pokora

The R3 Fundamentals of Vehicle Reconditioning

Used car vehicle margins are increasingly the subject of dealer interest.  Bald tires, stained seats, and blatant body damage are obvious turn-offs to buyers especially with more and more inventory on the market to choose from.  This leaves dealers walking a tightrope on reconditioning spend.  Don’t spend enough and you have a paperweight, slowly decaying from lot rot and becoming the scourge of the sale department who avoids the unit like the plague.  Spend too much and you erase the profit margin on that vehicle leaving you to break even at best, underwater at worse, and your floorplan company all the happier for their cut. 

This narrow window of value-added reconditioning work does exist, but to consistently tap into it and take advantage of the cash flow gains available it takes a concerted and dedicated effort from the used unit team.  It starts with aligning purchasing, sales, and reconditioning on the margin for each unit.  To do this I recommend starting with an “R three” (R3) exercise for your incoming inventory.

The R3 Process

The exercise involves your reconditioning manager (whoever approves the RO’s for each unit), a primary vehicle buyer, your sales manager and three raw (non-reconditioned) vehicles.  Have each one complete their own (or your current company version) multi-point inspection (MPI) independently for each vehicle.  Once inspected have each member take their inspection sheets and categorize the vehicles outstanding attributes, features, defects, and non-original elements into three buckets, "Repair", "Replace", and "Remain". 

Once completed, compare the assessment from each department, listing out the overlapping similarities and discrepancies of each department.  The point of the exercise is to highlight that each department will take a different bias of the vehicle from the onset, but each member adds value to the conversation because of their individual experience.

Start the discussion on the points of commonality between the inspections.  If something is obvious, state why it is obvious.  Next complete an estimated cost of the “obvious” work, considering this the baseline for each vehicle.  Without consideration for any additional work that could be done what margin is possible at the baseline work of common agreement?  If nothing overlaps why was there no overlap? 

There needs to exist a clear minimum for every vehicle, whatever that minimum may be.  If everyone agrees that a vehicle with a flat tire shouldn’t be on the front lot, you’ve created the first benchmark from which to build the conversation. 

Call it a baseline, a standard, a grade, a color, a number, whatever, the point is to calibrate on the language used to describe the product.  This is easiest done by starting with the agreements.  Picking a 2014 Honda Fit with a flat tire as an example, the conversation can now become more refined. 

Repairing a flat would be the easiest and cheapest option, but at what point would you consider a replacement?  Would only the offending tire be replaced or would you replace all four tires?  What about replacing the adjacent tire on the same axel?  The conversation can quickly get into the weeds, but it highlights how fast margin can be eroded from a vehicle.  There is a big difference in investment from repairing one tire to replacing all four tires.  Looking at the cost of each situation relative to the type of product you want to put in front of your customers compared to the profit margin desired on the vehicle is the critical component. 

I've seen these conversations get heated but the point is to focus on how the decision process happens.  When solid arguments can be made both for and against additional reconditioning work what will be the impartial tiebreaker?  How are the business needs considered in these conversations?  Everyone is usually trying to do what they perceive to be best for the business without any overall guidance or data representing what has historically been the most beneficial to the bottom line. 

If increasing or preserving profit margin on your used vehicle inventory is a primary objective for your business, it is critically important to calibrate your departments as to how these purchasing, repair and sales decisions will be made and presented to the customer.  The R3 exercise can be a good starting point for kicking off your used margin initiative. 

Amanda Gordon

Another way to keep recon costs low is keeping your mechanic in check. The average recon for used cars is roughly $800 and saving a couple of hundred spread out over 50+ units can be huge. 

Chris Murray

You cannot honestly and with ant integrity limit or reduce reconditioning costs. If it needs it it gets it. Your buyer or appraiser is the one that needs a tune up. Vehicles should be mechanically and aesthetically evaluated by the Service Department not some untrained and, frankly, uneducated manager that is trying to make a deal.

Sales can put the number on the car all they want but they cannot bury their heads in the sand and decline reconditioning because it will hurt their margin. How about your reputation? Does that have any value?


Patrick Bergemann

Chris is right. If reconditioning gets declined or done at the bare-minimum to keep a better margin, people will find countless objections and either haggle the price to a lower margin or walk away entirely. If they experience that with multiple vehicles, they'll just walk away from the dealer entirely.

If a car can get reconditioned and minimize any objections a buyer has, there is far less friction in the sales process, the customer has an enjoyable experience, the dealer sells at a reasonable margin, and the customer tells their friends that they should trust a particular dealer. Word of mouth spreads and the dealer stays profitable.

These negative experiences have built a poor perception of the industry. Customers expect a hassle and dealers don't build a "brand" for themselves to set them apart from the guy down the street. Dealers have become short-sighted on preserving a current model that isn't even working efficiently.

Michael  Pokora

Chris, Patrick, excellent points, the safety of a vehicle should never be in question.  The issue arises around more cosmetic and optional features were doing more to a vehicle could allow for a higher margin, or result in extra work that just won't make returns for the dealer.  Example: could spending $100 on dent removal justify a $200 increase in sticker price?  The wealth of information, instant customer reviews, and competitive marketplace on used vehicles will hopefully keep the bad apples to a minimum or at least not in business for long.  

Patrick Bergemann

$100 on dent removal might not justify a $200 increase, but the dent or other cosmetic stuff could still be what makes or breaks a sale in general. At that point, I'd argue the $100 was worth it just so the car didn't continue to sit on the lot. One less objection.

Sure, there are people who understand that when they buy used, there are varying levels of "used" and that might mean one model has a small dent and one is pristine. But I'd argue the majority walk in with the mentality that "used or not, this is a big purchase and I want it to be as close to perfect as possible."

Millennials are a prime example (and one of the key demographics in the used market). A millennial is more likely to blame the color of a car and walk away than ask if a dent can get popped out. It's part of the friction-free shopping experience that our culture has created. If the dent was removed in the first place, a salesperson could at least get them to the test drive. Hurdle one, check.

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