The list of English proverbs quoted by organizational leaders is so long that it gives Santa’s list a run for its money.  “There’s no such thing as a free lunch,” “Hope for the best, but prepare for the worst,” and “Actions speak louder than words” are favorites of those looking to inspire the ranks and preach diligence.  While there is merit in many of these statements, there is one proverb that is not only misplaced, but extremely dangerous. 

If it ain’t broke, don’t fix it.

Almost all of us have heard this phrase, many of us have used it ourselves.

Typically, it’s better to fix things BEFORE they break.  Optimize and improve continuously. Something in place can be fully functional, working fine and doing exactly what it’s supposed to do, but not be as optimal as it could be.  In the mid-1800s, you would write a letter or even a telegram, then wait patiently as it was delivered posthaste and ultimately receive your reply.  While the construction of telegraph networks sprouted up over the country, The Pony Express would work to ensure that communication was as speedy as could be.  They advertised a 10-day delivery timeframe from San Francisco to New York City, a significant improvement at the time.  When the networks were finally attached in 1861, that 10-day window was reduced to near real-time, and a more optimal means of communication was established.  The telegraph was a predecessor to Henry Ford’s infamous (and most likely never spoken) “faster horse.”  We live in a world where are continually looking to optimize processes and speed results – ask yourself if that would happen if we simply waited until something breaks?

The proverb also fails to consider a different popular adage: “The only constant is change.”  Just because you and your company are kicking back and riding the wave, doesn’t mean the rest of the world is content with watching you sit on top of the mountain.  Change comes from all sides:  within your own industry from competitors or partners, outside industries that you never saw as direct competition, or even from new industries that don’t exist yet.   The hotel industry probably didn’t see individuals offering up rooms in their own homes as a viable alternative to their model.  In the summer of 2010, Airbnb reported 47,000 people stayed with Airbnb hosts.  By the summer of 2015, that number reached 17 million.  Hotels are no longer competing with each other to win the business of travelers; they are competing with residents in the same markets.  While price remains a cost-based proposition, Airbnb is also moving towards becoming an “experience provider” that offers a strong value proposition to would be travelers. The old way of doing things has been challenged and a new competitor is climbing the mountain.

Here’s an example from the auto industry from my time at Cars.com.  Mitch Golub became the President of Cars.com when it launched in 1997, transitioning from life at the established and powerful Tribune Company to the life of a new, online digital company.  For those of us who have the pleasure of knowing Mitch, we know how great of a story teller he is, and he has plenty of stories to tell.  I remember Mitch talking about how difficult it was in the beginning to help teach car dealers what the new world of car shopping was becoming.  Consumers were moving online, quickly accessing information to inform their purchase process and looking for available inventory via the Web.  Dealers were stuck in the old world, allocating all their marketing dollars to radio commercials, TV spots and print ads in the newspaper.  There was nothing “broke” about this model at the time, “it’s the way things have always been done, and will be done” was a common response to the new value pitch.  Building and managing a strong online presence was a value proposition argument that lasted well beyond the late 90s into my time there in 2009-2012.  In some cases, it still goes on today, even though 88% of car shoppers use the Internet during their vehicle shopping process.  Dealers who adapted to and sought to strive in the changing industry have established themselves as market leaders and continue to develop new and better experiences for the 88% of us who utilize the Internet for car shopping. 

The world in which we live is ripe with innovation, so much so that the word “disruption” is becoming trite.  Companies are finding ways to optimize current processes and creating viable alternatives to continue progression.  At DRIVIN, we believe the wholesale market is next in line.  The process by which dealers buy and sell used inventory is antiquated, time consuming and inefficient.  Dealers have accepted this process as a way of life, the same way they accepted print, radio and TV advertising as “the way things have always been done.” At the end of the day only one participant in that model truly benefits: the auction itself. Using advanced data and analytics along with a personal inventory consultant who advises our dealer partners, DRIVIN is helping dealers identify which vehicles to dispose, identifying buying dealers who want to stock those vehicles, and backfilling the open inventory slots with better vehicles that optimize inventory.

Much like online advertising, those who adapt first will have a distinct advantage over those sit idly by.  While nothing is broken, the process isn’t optimal and DRIVIN is climbing the mountain.  The time for a better wholesale model is now and as we know, “all good things must come to an end.” 

Previously, I posted about the effects of Loss Aversion. It sparked some great conversations with dealer partners and industry colleagues alike.  As a follow-up, I’d like to share some additional biases I have seen while working with dealerships over the past seven years, and provide real examples, along with potential pitfalls that can follow these biases.  I will touch on automotive scenarios that tie to these biases and provide external references for those who want to read more.  As an added bonus, our favorite rock band Kahneman and Tversky will make an encore appearance!

Recency Bias

I recently met with the used inventory team of a major dealer group in the Midwest, and one of the sales leaders offered a great example of Recency Bias: “I want to get out of the habit of selling a car, making a good spread on it, then running out to buy five more of that car to try and repeat its success,” he said. This is a perfect example of a dangerous outcome that can be realized when falling victim to Recency Bias.  From the time you stocked that VIN to the time you sold it, the market changed.  Other dealers in your area may have stocked similar VINs, consumer behavior may have changed or an influx of the same MMYT may be coming through in wholesale channels.  Before jumping back into another matching VIN, take the time to do your due diligence on the market to ensure you have a high probability of selling another matching VIN, which ensures that there isn’t a better high-probability option out there.

Negativity Bias

I was on a dealer visit with one of our account execs when she suggested a certain type of MMYT to one of our dealer partners.  “We think there is a demand shortage in your market for this type of vehicle, and based on our data, you should be a prime candidate to move this type of off-brand vehicle,” she said.  Unfortunately, this was the response: “I bought one of those four years ago and got burned.  I’ll never stock (insert brand) again!”  Negativity Bias leads back to our buddies Kahneman and Tversky, falling under the Loss Aversion umbrella.  When we experience events with negative outcomes, they have a more profound effect on our psychological processes than positive events.  This means that when this evil little VIN breaks our hearts and gets us in trouble, we immediately dismiss it as a viable option for our current and future states.  There are many reasons a VIN can lead to a bad result on a dealer’s lot, and with rare exception, it should never lead to a team member automatically eliminating that MMYT forever.  Whatever happened one, five or 10 years ago is ancient history; things have most definitely changed.  You may have even worked at a different franchised dealer brand or independent lot not positioned to move that VIN.  Don’t let one negative result influence your future decisions!

Overconfidence Effect

Many of the most important decision makers within a dealership are seasoned veterans of the industry, men and women who have spent years learning the ins and outs of the dealership, their markets and their customers.  Experience can be a great teacher, but a potential side effect of more experience is a narrower focus on what is possible, what information is available now and how we can be better at our professions. When speaking with dealer partners about our data-driven approach to identifying used vehicles and explaining why and how we come to those conclusions, we sometimes hear, “I buy based on my gut, and it’s been working well so far.” Or,“I’ve been doing this for 20 years and I know what sells.”  These should not be viewed as competing positions, but rather complementary ones.  You can strengthen your performance by adding data to your experience and expanding your decision-making arsenal. I am not suggesting you ignore lessons learned based on experience. I am stating that we all need to be open to the fact that the only constant in life is change.  Whatever we have learned as a result of experience should constantly be challenged to ensure our knowledge is still relevant and understand how we can improve.  The Overconfidence Effect is the barrier to growth, and falling victim to that bias can let your competition leap-frog your performance. 

Confirmation Bias

Following suit from the Overconfidence Effect is one of the most prominent biases in this list, the Confirmation Bias.  We are prone to search out information that strengthens our current position as opposed to challenging it, whether that information is from outside sources or from our own memory.  I was once in a friendly debate with a GM about getting out of a VIN that had been on the lot for more than 60 days.  In order to prove his point, he called in his used car manager, Mike, to whom he said, “Mike, you’re going to sell this retail right?” After which, Mike replied, “You bet, we sold the same type of car a month back and this one is ready to go next.”  So the GM called in someone with an obvious bias to sell this car and that person’s argument was that he sold a similar one, so based on that experience this one will sell too.  They doubled down on confirmation bias in one conversation.  After flipping the script to focus on reasons why this VIN wouldn’t sell, we started to punch some holes in the viability of this VIN being a profitable exit via retail.  The end result was a seven-day timeline to sell retail, or else DRIVIN would find a dealer who needed to stock that VIN, avoiding auction fees and transport.  While the VIN didn’t end up going retail, the partnership with DRIVIN minimized loss on that VIN and we were able to target a better VIN for their current lot makeup. 

Outcome Bias

Let’s play a game.  I am going to roll a standard six-sided die, and if it comes up one or six you give me $20. If not, I give you $20.   Deal?  Of course you take this bet.  Assuming that the die isn’t loaded you have twice the likelihood of winning as I do, for the same amount of money bet on each side.  We roll the die, and sure enough, a six is rolled.  You lose; I win.  Does that mean you made a poor bet?  No! The outcome was poor but the decision was sound, and in the future you would make that bet again and again – at least until I went broke.  The same goes for buying used inventory for your lot.  A vehicle can be primed to sell for all the right reasons, and sometimes the VIN just misses.  The opposite can also take place, where luck is on your side and suddenly you have the desire to repeat that win, even though the odds are against you.  It is imperative to focus on the process of making that stocking decision and not focus on individual outcomes.  Not every VIN you stock is going to be a homerun; sometimes you’ll strike out, but as long as the process you have in place continues to help you improve your inventory stocking decisions, you continue down this path. 

Conclusion:

Iterative improvements lead to the impactful changes dealers can make and they must realize that as long as you’re doing better than you were before, that is a good thing.  Biases can impede this progress, causing us to revert to the old way of doing things even though we can always find ways to improve. No matter how much we embrace change, it leads us to the unknown. I encourage all of our dealer partners to continue be cognizant of these biases on their respective roads to improved used retail sales. 

You may not have heard of them, but Daniel Kahneman and Amos Tversky are rock stars.  Their band name doesn’t have the same ring as say, Hall & Oates, but these men helped develop some of the most influential theories in the history of Behavioral Economics.  One of their primary focuses centered around decision making; more specifically how humans can make irrational decisions based on biases and heuristics stemming from a variety of sources.  As a result of his work Kahneman received the Nobel Prize in Economic Sciences, and one of the foundational findings that led to that award was his work on Prospect Theory.  This article will focus on one of the principle findings made within Prospect Theory called Loss Aversion and will tie the concept of Loss Aversion to the car dealer’s decision-making process related to inventory management. 

Loss Aversion states that the effect of a loss is more impactful than the effect of a gain.  For instance, the pleasure gained from receiving $1000 is not equal to the pain felt from losing $1000; the latter is much more impactful.  Tiger Woods offers a golfing analogy that helps expound on the point: “Any time you make big par putts, I think it's more important to make those than birdie putts," Woods said. "You don't ever want to drop a shot. The psychological difference between dropping a shot and making a birdie, I just think it's bigger to make a par putt."

Prior to jumping into the article, if you want a quick “Dummies” synopsis to reference, click here

One interesting finding in the analysis is how people, in general, are risk averse when it comes to gains and risk seeking when it comes to losses, something referred to as The Reflection Effect.  Here is an example from a 1981 Kahneman and Tversky paper titled “The Framing of Decisions and the Psychology of Choice”

“Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the programs are as follows:

If Program A is adopted, 200 people will be saved.

If Program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved.”

Which would you choose?  In a sample of 152 people, 72% of respondents chose Program A.  Now let’s see what happens when two new programs are introduced.

“If Program C is adopted 400 people will die.

If Program D is adopted there is 1/3 probability that nobody will die, and 2/3 probability that 600 people will die”

Now which would you choose?  In a sample of 155 people, only 22% chose Program C, which is the identical outcome to Program A above! Program A = Program C and Program B = Program D in terms of expected outcomes, and simply changing the wording to emphasize gains and losses causes a complete switch of preference! We contradict ourselves based on the phrasing of the same problem. 

Luckily in the automotive world we don’t have to make decisions like the one above, but in terms of inventory selection and management we fall victim to Loss Aversion.   When our DRIVIN Sales and Trading teams speak to dealer partners, we hear statements like: “I can’t sell that car unless I make $X on it,” “My GM will kill me if I get rid of that VIN without making money on it,” and finally “I’ll hold that car as long as it takes to sell.”    When we hear this feedback I can only help but think of Loss Aversion as the culprit, the fear of taking a hit or having a purchase decision looked at as a failure when in reality doing nothing is making the matter exponentially worse. 

When dealers source inventory from auctions, trade-ins, or other available means, the emphasis is on maximizing potential profit from the transaction.  Using years of experience in the industry, availability of inventory in the market, and forecasted sales and pricing data from various software tools, dealers target specific VINs that hopefully turn quickly and profitably.  But in instances where the ideal scenario doesn’t come to fruition the dealer must flip the line of thinking from maximizing profit to minimizing loss.

A compounding factor is that the vehicle value is NOT static.  As a vehicle sits on a dealer’s lot, depreciation takes its toll, financing charges add up, consumer behavior shifts, and the used inventory in the market adjusts.  Our Analytics team has begun performing a preliminary analysis to find the probability of moving a VIN after stocking it for 90 days and, while the % changes based on market, the national average is about 18% thus far.  Loss Aversion clouds better judgement of wholesaling that VIN and targeting something that has a higher propensity to sell. 

This decision making framework requires dealers to answer questions such as “What happens if I sell now? What do I lose?” then compare that scenario to “What is the risk of keeping this inventory and incurring additional losses? What do I lose by passing up the opportunity to sell today?”  This type of decision needs be objective as it relates to the bottom line and shift away from the biases caused by Loss Aversion.  Leadership within the dealership needs to shift its focus away from reprimanding buyers and used car managers for not making money on every vehicle but rather encouraging them to make sound decisions to get out of vehicles that aren’t moving.  Arming your team with the best data to stock the right vehicles for your used lot is imperative and will lead to better long term results, but the process is not perfect.  Tough decisions will always be required. 

When viewing aged inventory on your lot you can make more rational decisions around exiting inventory that carries both real and opportunity costs and sourcing vehicles that fit the needs of your shoppers.  Not every vehicle you stock is going to sell quickly and profitability, whether it is due to a lack demand, competitive pricing or just plain bad luck.  The lesson is to minimize the negative effect of this loss by getting out of that inventory before it continues to suck money from your bottom line.