Back in 2018, we had the opportunity to meet Billy Beane at the Hireology Conference in Chicago.  Aside from being a great conference held by Adam Robinson and his team, the opportunity to hear Billy speak and meet him was a memorable experience.  Billy Beane is the legendary General Manager of the Oakland A’s who together with Paul DePodesta changed the way Major League baseball teams scouted and signed players.

Billy and Paul were able to do this by using statistical analysis of players that at first appearance, weren’t the typical heavy hitters most MLB teams were pursuing.  Hearing Billy speak firsthand about the approach that he and his management team left me thinking about how much the used vehicle market has changed over the past ten years. 

The advent of vAuto has given dealerships the ability to identify the fastest turning, highest return on investment vehicles in any market using, you got it, statistical analysis. 

As the Velocity method of used vehicle inventory management has evolved and after reading Dale Pollak’s newest book, Gross Deception, has had me thinking a lot about how a good cross section of dealers now have that same statistical capability that a decade ago was only being applied by a handful of dealers.  This translates into the ability to determine the when, what and where for used inventory sourcing when used diligently. 

Every individual that we have contacted about buying their vehicle is a customer (human) interaction.  It’s very easy to classify these as “leads” or “opportunities” but the reality is that each of these vehicles represent a human interaction.  Often the person behind the vehicle was already apprehensive about working with a dealer and doesn’t completely understand the value proposition behind selling their vehicle in this manner. 

It's tempting, when first starting to acquire vehicles directly from consumers, to lowball or at least undervalue potential acquisitions that are directly from consumers.  Setting low or very low cost to market pricing for consumer acquisitions often leads to not acquiring the vehicles or worse, providing a consumer with a negative experience that in turn creates negative reviews. 

Where at the auction, we often bid up to buy the desirable, fast turning vehicles we need to replenish our inventories.  We will often do the same to put a deal together on a new vehicle, adding to the value to make the deal happen. 

Why don’t we factor in the cost differences when acquiring private party vehicles?  If we know that an identical vehicle that can be acquired from a private party seller would cost us additional auction lane fees, transport and other associated costs, we should be factoring these acquisition costs, or at least be considering these costs when buying from a private party. 

One of our most common objections from consumers and dealers when starting a private party acquisition program or buy center is that the sellers’ price expectations are too far apart to make the purchase.  We believe the above is one of the common causes for being “too far apart” in pricing. 

We put together a list of factors to consider when buying vehicles directly from consumers that will help to put the pricing for private party acquisition channel into perspective. 

1. 1. What would this vehicle cost me if I were to buy it at auction? (including fees) 
2. 2. What is the average “cost to market” metric for the vehicle?
3. 3. What is the “market days supply” for the vehicle? 
4. 4. What is the “retail sales volume” for this vehicle? 

Using a transparent pricing model, factoring in the additional cost of acquisition of the same or similar vehicle at auction, the cost of not providing a premium consumer experience and the rapid “time to line” a private party acquisition presents, I think most of us would be willing to go a little further or add money to the consumer offer. 

In fact, using the same principles above Carmax and now Carvana have transformed the private party acquisition process into a positive consumer experience that is frictionless and mirrors so many of the other Internet enabled processes that provide us with convenience and value. 

Going back to Billy and Paul from the Moneyball approach, if we change our perspective about hitting the grand slam or home run on every vehicle we put a price on and begin using the statistics that we have access to already, we can instead hit singles, doubles and triples while acquiring more vehicles and improve the consumer experience in this arena, we too can develop an all-star approach to acquiring vehicles from consumers. 

While it’s no secret that the used vehicle market is continuing to become a primary driver of profitability for franchise dealerships, other used vehicle retailers are already ahead of the curve in terms of inventory sourcing and honing their acquisition strategies.

We’ve watched auto retailing titans like AutoNation continue to focus on used vehicle operations
as part of their business plan and CarMax continues to dominate the market with their multitude
of locations and large inventories. Carvana, a relatively new player, has entered the space and
expanded rapidly over the past two years.

It’s not a surprise as new vehicle prices continue to rise, and customers hold on to their vehicles
for longer than at any time in history. When we put into perspective sales numbers for
automotive retail, new vehicle sales totaled 16 million in 2019 with used vehicles far outpacing
that coming in at 40 million vehicles sold. The challenge a strong used vehicle market
presents for all automotive retailers is inventory sourcing.

Auctions purchases are more competitive than before with the aforementioned used vehicle
retailers scrambling to replenish their inventories. Trade ins are a great source of inventory but
less predictable in terms of acquiring the fast moving, high return vehicles. What many dealers
have overlooked or are just beginning to capitalize on are “buying cars from customers” what
has traditionally been referred to as buying vehicles at the “curb”.

An advantage that large scale used vehicle operations like CarMax and more recently Carvana
have is that they are buying vehicles directly from customers wherever and whenever it is
possible. This acquisition strategy makes a lot of sense in terms of both acquisition cost,
building the brand experience and providing customers with another reason to interact and
conduct their business with these automotive retailers.

In a recent quarterly earnings conference call the CEO of Carvana, Ernie Garcia, has repeatedly
stated that Carvana is focused on buying cars from customers as their main source of used
vehicle inventory. In fact, Carvana has grown this acquisition strategy over 300% in the
past year. A recent Automotive News article wrote the following.

As Carvana grows rapidly in size and scope, the number of vehicles the online used-car retailer
buys from consumers has skyrocketed — and CEO Ernie Garcia expects that growth to
continue. “Whereas traditional trade-ins are restricted to the number of customers
buying from Carvana who also have a vehicle to sell, buying from consumers in general,
regardless of whether they intend to purchase, is an almost limitless proposition”.
Logically, there's no natural ceiling on how big it can be," Garcia said in September at an
investor conference in New York.

The direct from consumer acquisition strategy is why Vehicle Acquisition Network was founded.
Our industry leading software platform and training makes buying vehicles from customers more
efficient and effective. With data compiling, customized search criteria and rapid CRM
communication methods, a dealership can implement a customer acquisition strategy while
strengthening the dealership position within their market. We believe this profit center is far too
valuable to outsource to a third party.

If you’re interested in discussing buying cars from customers in more depth or you would like to
learn about the VAN software platform and training, you can reach us directly at 855-952-4949.

One of the most important, yet overlooked, metrics in a used vehicle operation and key to managing the pre-owned inventory effectively is maintaining an efficient time to line metric.  Time to Line is the concept that refers to how long it takes for a vehicle to become “retail ready” for the front line of the pre-owned lot.  This metric entails accounting for the following;

• - Transportation of the vehicle to the dealership

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- Mechanical inspection of the vehicle

• - Repair work on the vehicle (mechanical, tires, brakes)

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- Reconditioning of the vehicle

Developing a tracking system or utilizing software like Rapid Recon (https://rapidrecon.com/)  that tracks and monitors the time and location of each pre-owned vehicle is the most efficient way of managing this important aspect of the pre-owned inventory.

Holding costs refer to the carrying cost of inventory incurred from the operation of the pre-owned department.  These costs include storage and fixed overhead excluding variable expenses.  NCM and NADA data estimates that the average holding per day, per vehicle is forty dollars.  Many dealers have shown even greater daily holding costs. 

• - At $40 holding cost, a 12-day time to line costs a dealership $480 per vehicle

• - At $40 holding cost, a 16-day time to line costs a dealership $640 per vehicle

When compared to the average gross profit per vehicle on the sales side, we realize that slow time to line processes directly impact the net profit.  Time to line is an invisible cost from the front end of the pre-owned department, it’s only when we calculate the holding cost factors that we realize how much a slow or inefficient process can impact the bottom line. 

Needless to say, if you look at this from the other side of the coin, reducing the amount of time to line will also reduce your holding costs.  Here at VAN, we are constantly on the lookout for best practices to improve time to line.  Acquiring vehicles from private sellers is a great way to dramatically improve time to line, transportation costs and several days of the associated holding costs are eliminated as consumers bring their vehicles to the dealership. 

We’ve interviewed Dennis McGinn, CEO of Rapid Recon; Mike Anderson of Rikess Group and benchmark methods that support the improvement of your time to line metric.  Below are a few of the best practices that we see supporting a strong time to line metric.

• - Assigning a Service Advisor to oversee the repair and reconditioning for pre-owned

• - Agreeing on threshold approvals for the most common repairs and replacements

• - Prioritizing and sequencing the repair and reconditioning work to be completed

• - Tracking the stages of repair and reconditioning processes at all times

• Examining your pre-owned work flow, implementing a monitoring system to review for efficiencies and refining these processes will result in thousands of dollars of savings per month, avoid losing track of vehicles and reduce the stress of getting pre-owned vehicles ready for sale.  

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Developing a department or team to acquire private party seller vehicles within a dealership is a valuable and, at times, challenging pursuit. There are huge benefits to becoming a seller advocate. Having this service provides a steady stream of clean, fast turning and high return on investment vehicles delivered to the dealership doors.

It also provides a tremendous opportunity to get in touch with consumers in the market the dealership would have otherwise never connected with.

We often say – today’s sellers become tomorrow’s buyers.

Putting the consumer at ease

One of the challenges is that consumers selling their vehicles are often skeptical that the dealership has the intention to sell them a car, not just acquire the vehicle they have for sale.

For good reason, the sellers know that the primary business of a dealership is to sell vehicles. In the interest of full disclosure, we certainly won’t turn down the opportunity to trade the vehicle in for a more suitable or newer vehicle if the seller is interested.

For the majority of consumers selling their vehicles, they want a fair market value and a straightforward transaction without the hassle of selling their vehicles on their own.

Our top performing VAN dealers recognize this seller concern and make it their goal to put them at ease very early in the acquisition process. They provide value to the consumer in the form of seller advocacy.

Becoming a seller’s advocate

Top buy centers explain that in the initial conversation he assures sellers that he is interested in acquiring their vehicle. At the same time, commit to being an advocate for them in the form of providing an expert consultation for their classified listing.

They explain some of the factors that make a listing appealing to buyers and offers pointers on the vehicle description. Photo staging and other areas where the seller can improve their potential outcome.

Once a seller realizes that a dealer is genuinely interested in helping them sell their vehicle, top buy centers say that they become more of a consulting source than a dealer interested in selling them a vehicle.

Providing value for vehicle sellers

In addition to providing advice and guidance with regard to selling a vehicle, dealerships have a number of other ways to provide value to a seller in their market including,

- Vehicle history report that usually costs the seller to obtain.

- Mechanical inspection by a professional mechanic.

- Estimates on repairs that may be needed to sell the vehicle.    

There is a term in sales that states “a sale occurs when an equal or greater amount of value is demonstrated to the consumer in exchange for the cost of the product”.  I believe that this concept also applies to acquiring vehicles from private sellers in the For Sale by Owner (FSBO) space.

Private sellers want to get as much value from their vehicles as possible, which is understandable.  Our mission as acquisition professionals serving the FSBO market is to relate the value of doing business with us rather than have them persist in the private seller market.

Time, security and ease of doing business are the three major components we utilize to illustrate the value of doing business with a dealership rather than attempting to sell the vehicle on their own.

1)    Time: In today’s fast paced world, we often find ourselves without time to get everything we would like to do completed. Time is a premium that equates to money.

2)    Security: Selling a vehicle can be a daunting experience. Meeting strangers at your home or in a parking lot and attempting to exchange cash and titles is not safe.

3)    Ease: No one is better equipped to advise a seller on titling, tax and managing positive or negative equity in a vehicle than a dealership. We are the best seller advocates.

When we leverage these three components while delivering a premium guest experience and transparent processes, we create value that exceeds the difference in the amount of money the seller would have received by selling their vehicle privately.

We will have also provided the seller with a memorable experience, giving them the best first impression of our dealership.  The process gives us the opportunity to present our dealership in a positive light as a member of the community and a great place to do business in the future.  This is what we call “Value Based Acquisition”.

Recent customer experience studies have shown that over 80% of buyers state that money was not the most important factor in purchasing a vehicle.  This relates directly to the value based concept that we are discussing and can be transferred to the acquisition process.

Making the process of selling a vehicle transparent, efficient, safe and easy while delivering a premium guest experience will result in more successful acquisitions as well as developing positive relationships with consumers in your market.  

Managing modern pre-owned operations in a profitable manner has become an increasingly difficult venture in today’s competitive and aggressive market.  With increasing costs for the acquisition of market priced, fast turning inventory and higher costs to transport, recondition and bring that inventory to front line condition there must be a constant review of pre-owned processes in place.

In this article I examine four ways that dealerships can manage and improve their profit margins without eroding customer experience or the quality of vehicles.

1.   Reducing Throughput Times

Holding costs increase relative to overall costs on an annual basis as well as repairs and reconditioning becoming more expensive it is more important than ever to move your new inventory through service and clean up as rapidly as possible.  When examining your throughput times, it’s critical to track and monitor how long it’s taking to effectively move vehicles through the transport, service and detail procedures.  There is a hidden margin erosion in holding cost days that should be considered when examining your processes.  Each additional day that it takes to complete inspection, repair and reconditioning an average calculated cost of $34 a day continues to mount. Closely examining time delays and reducing those bottlenecks without sacrificing quality is the leading way to improve your “time to market” for pre-owned vehicles and reduce overall costs.

2.   Service Repair Approvals

The greatest mutually beneficial relationship in pre-owned operations is the one that pre-owned has with the service department and vice versa.  These two departments support each other and both drive value to the overall dealership. Service is the number one provider of services for the pre-owned department and pre-owned is the best customer for the service department.  Even though these departments are mutually beneficial they are not always working together dynamically.

Often times, the service department has to seek approval for even common tire and brake replacements on pre-owned vehicles. Ask yourself if these approvals on common repair orders for tires, brakes and other items that are common are necessary.  Determining specific thresholds where tires and brakes are necessary repairs for safety, it makes sense to give service the ability to approve those repairs based on the thresholds without pre-owned approval for each repair.  Service having the ability to approve the most common repairs based on thresholds will considerably speed the throughput times.

3.   Reconditioning Vendor Review

It’s a likely that your pre-owned department is utilizing the services of a reconditioning vendor to outsource common services such as detail, dent removal, bumper repair and wheel refinishing.  It’s a great exercise to examine those costs on a monthly or quarterly basis and carefully review the policy in place for pricing structures.  Monitoring and tracking the cost, turnaround and time it takes to provide these services will likely show room for improvement.  There are often processes put in place by your vendors that make procedures much easier for the vendor but may limit your ability to rapidly get the repairs and reconditioning completed.

The first step in improving these vendor relationships is to analyze how much work is being provided to the vendors and how long the work is taking to complete on a per car basis.  Providing incentives for increasing the speed of these repairs and keeping the quality intact will have a significant effect on efficiency and subsequently profitability.

4.   Alternative Inventory Sourcing

Reducing throughput time directly increases your inventory turn by keeping fresh inventory flowing into the pre-owned department.  Sourcing inventory exclusively through auctions can take days, even weeks by the time the inventory has been properly inspected and reconditioned.  Trade in vehicles can be reconditioned more quickly but often are not the market oriented, fast turning vehicles targeted by dealerships.

Implementing a strategy and process for acquiring private seller vehicles in your market is an effective strategy for improving your average throughput time and increasing profitability, by purchasing from private party sellers you are eliminating a large percentage of the time it takes to get vehicle’s front-line ready and the dealership has the ability to target the highest return on investment, fastest turning vehicles.  There are a number of effective tools available to dealerships for sourcing and acquiring private seller vehicles in your respective markets.

Pre-owned efficiency isn’t all that different from a professional baseball team managing a season. Both are based on averages and should be viewed as marathons not sprints.  Baseball seasons consist of well over a hundred games throughout a season, when a strategy is implemented and followed along with a consistent review of processes and their results it’s possible to incrementally improve a baseball team’s performance throughout a season.  The same is true with a pre-owned operation, consistent and effective review of your processes can increase your profitability by incrementally improving your pre-owned department effectiveness.