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Jeffrey Schwartz

Jeffrey Schwartz President and CEO

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New-vehicle Sales Up, but Margins are Squeezed: Enter CPO, Bringing New Profits to All!

If there is a bright spot in the economy these days, it’s the auto industry. Pent-up demand, lower interest rates, great product, and easing gas prices are driving consumers online and into showrooms, ramping up sales for dealers across the country. But it is not all sunshine – at least for new car dealers, who are feeling increasing pressure on margins (attributable to some of the same factors that are also driving sales[1]), with consumers paying, on average, $500 less for a new vehicle than they did a year ago.[2]

Advantage used? We think so.

As any dealer will tell you, margins are traditionally higher on used vehicles (more than ten times higher according to NADA data[3]), and while constricted inventories in a hot used car market dampened that opportunity of late, this year's robust increases in new sales are bringing growth in trade-ins (56% of new car buyers who own a vehicle intend to trade it in!), providing more precious used inventory.  Analysts are predicting strong sales ahead for used dealers, and inside that relatively rosy used car story is another even brighter ‘margin’ story ready to break out, the CPO story.

Consider: June 2012, was the 2nd-best month in the history of the certified pre-owned vehicle market. Yep! The second best month in history! Certified pre-owned sales are up 9.5% in 2012 following a steady three-year growth trend.  This is fantastic news for the used car industry … and a huge opportunity for dealers…especially as new certification programs mean they’re no longer limited to only OEM programs when it comes to offering the type of comprehensive certification that consumers will actually embrace.  Industry data confirms that OEM-certified vehicles move faster and that consumers will pay a premium for them, and while this is good news and means better margins, only a fraction of a dealer’s used vehicles will qualify. That’s where high-quality, non-OEM certification programs, that extend the scope of eligible vehicles, step in. For instance, our SureSale program, which allows dealers to certify vehicles up to 15 years old and 150K miles. 

But do the same margin advantages apply with these new CPO programs? Today we can give a resounding “yes” to that – according to the aggregated data from our SureSale Certified program.

Our data shows that, surprisingly, not only are non-OEM certified vehicles selling faster than the OEM-certified variety, they are dramatically increasing those all-important margins.  This is not just happy news for independent dealers, who have been without access to a truly effective CPO marketing program, but for franchised dealers who are feeling the crunch of compressed margins, even as new vehicles are flying off their lot. Because far more of those trade-ins they’re taking from over 50% of their customers are now eligible to wear that consumer-friendly, profit-driving certified badge of honor, participating dealers can go a long way to making up those lost new car margins. Consider the eye-opening results dealers are reporting after just six months of participation in the SureSale certification program: these certified vehicles are moving at a rate that is over 60% faster[4] than that of the average used vehicle (and 10 days faster than the average OEM-certified vehicle) – and they are pocketing an additional 23% (or $2,300) per-vehicle sales premium on average.[5]  Plus, because the program smartly integrates extended protection plans, dealerships are generating an average of $1,500 in additional revenue on those one in four customers who are opting for that program. 

There are about 35 million used vehicles on the market and yet less than 2 million were sold through OEM CPO programs last year. With CPO sales happily rocking the profit center of the used car market, we believe that that center can significantly expand, and that far more of those other 30+ million vehicles can be properly and rightly certified. The customers that are shopping ‘used’ want and deserve the peace of mind of more high-quality certified programs and vehicles – and dealers deserve the marketing differentiation, rapid turn, and yes, above all, the increased profit margins they provide.
 

To stay current on the CPO industry, go to www.jeffreyschwartz.com or follow me on Twitter @JeffreySureSale.

 

 



[2] According to Kelley Blue Book - http://mediaroom.kbb.com/new-car-prices-down-500-year-over-year

[3] In 2011 the average dealer made $23 in profit on new vehicles and $269 on used – so more than ten times more profitable, according to  NADA, 2012

[4] Based on March-May sales data, 55% of SureSale vehicles turn within 20 days. The average days in inventory for a used vehicle is 49 days (TrueCar.com - http://blog.truecar.com/2012/05/22/may-2012-truetrends-shortest-and-longest-days-in-vehicle-inventory/.)

[5] Based on analysis of SureSale vehicles' sale price + addl. VSC revenue averages (all SureSale vehicles 5 yrs and older sold March-May) compared to averages on similar vehicles (Y/M/M) from KBB suggested values (average of wholesale + 'as-is' + retail pricing).

Jim Bell
Great things to consider Jeff and thanks for the great post. The other thing that you didn't touch on is the fixed ops part of the transaction. Dealers have to make sure that they are front row ready and fully serviced before selling them certified. Then that same customer is more likely to come back to that dealer for any repairs or services. On top of that, they are even more likely to purchase a new vehicle from you if you have everything in place for your fixed ops to be top notch.
Ashley Poag
Jim I agree with you about Fixed Ops. Karl Chevy does a good job of certifying every inch of the vehicle beforehand. That’s why they are the number one pre-owned Chevy dealer. Also, there are accessories. Dealers can also make up loss margins by selling hundreds of dollars per car on accessories. Both of these things increase the chances of the customer coming back for other services at the dealership.
Ashley Poag
Jim I agree with you about Fixed Ops. Karl Chevy does a good job of certifying every inch of the vehicle beforehand. That’s why they are the number one pre-owned Chevy dealer. Also, there are accessories. Dealers can also make up loss margins by selling hundreds of dollars per car on accessories. Both of these things increase the chances of the customer coming back for other services at the dealership.

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