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Tony Rhoades

Tony Rhoades VP, Product

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Margin Compression is for Losers


The National Automobile Dealers Association recently forecast 2016 U.S. auto sales at 17.7 million units. 

Clearly, car sales remain vigorous! 

Yet, margin is being sucked out of every transaction by price transparency, federal regulations, and too many old-school ways of doing business. 

In response, pessimists’ cry: 

  • “You can’t make money in new car sales anymore.”
  • “Regulators have handcuffed profitability.”
  • “It costs too much to get good used cars.” 

But, dealers like yourself look for better strategies to win! 

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”  ~ Winston Churchill

One option at your disposal is process disruption. Used strategically it counters margin compression that otherwise erodes profits and adds cost to every car you sell. 

Here are three proactive disruption strategies that can make a difference for you: 

Cut Ownership Cycles in Half: The latest analysis of U.S. vehicle registration data by global market intelligence firm IHS reveals length of ownership is now an average of 67.9 months.  That’s an increase of more than two years since 2006!   

It’s your job to disrupt this disastrous cycle and bring your customers back into the market in half that time. 

How? Call your customers at the right time with the right message. 

Sixty-three percent of consumers in a recent AutoAlert-commissioned survey said they’d like to upgrade their vehicle every three years or less but their dealership isn’t making that happen for them. How aggressive are you in your efforts to disrupt customers’ normal trade cycle? Unless you execute a determined data mining effort and notify customers about their upgrade opportunities, they’ll not raise their hands. 

Using old ideas to sell cars today simply raises the white flag to margin compression. Instead, think like the big name retailers you shop. They study customer data with a passion, as if their business depends on it, which it does. Data mining helps them identify buying patterns and opportunities, such as how to create demand where it might not exist. 

Take advantage of the intelligence available in your own customer database – and identify those owners in an upgrade, warranty, mileage, or end of contract position which qualifies them to buy again today. Create your own demand by pursuing customers early and often from the showroom, the service drive, and by telephone or direct mail.  Inform them you want their current vehicle and if interested, would gladly upgrade them to a newer model, today. 

Dealers who mine their database to create demand add 20% or more to store sales volume. And, because disruption-driven deals aren’t as subject to price sensitivity they close at 21% higher new car gross and 17% higher used car gross, when compared to traditional channels such as online leads and walk-ins. 

Acquire Better Inventory:  Need fresh pre-owned inventory?  Find your own customers driving the cars you need and upgrade them today for an immediate win-win!  Internally sourced trades or private party purchases should account for at least 60% of your used car inventory.  Trade cycle disruption generates this inventory which is also higher quality, needs less reconditioning, and gets to the frontline faster than inventory acquired at auction.  The net result of which is reduced holding costs, and higher retail gross margins. 

Add up the auction fees, transportation costs, and time and you’ve lost as much as $600 to $800 in gross margin on every unit you buy at auction.  Add the additional recon expense for those second rate vehicles and that’s hundreds if not thousands of dollars which could be flowing straight to your bottom-line.   

With data mining and better inventory acquisition strategies, turning the tables on margin compression is a lot easier than you might think. 

Improve Inventory Turn:  Gut instinct kills margin – If your used car manager isn’t managing by the numbers, get them up to speed or show ‘em the door!  We all know the importance of improving turn to increase profitability yet we continue to use the same tired strategies hoping for different results.  

Instead, manage turn by managing customer trade cycles.  Equip your used car managers with disruptive data-driven tools that show which of your previous used car customers can upgrade today.  Find buyers within your own database for that fresh high grossing gem that traded yesterday, before it even hits the front line!  Also, find retail buyers for those aged units before the clock runs out and the auction creates losses that go straight to the bottom-line.     

Your customers are ready and waiting for you to call and show them how.  Margin compression isn’t waiting! 

Margin compression is a worry for losers. For those dealers with fight in them, it’s an opportunity to execute a determined data mining effort to disrupt trade cycles, acquire better inventory and sell more cars today! What are you waiting for? 

Tony Rhoades is vice president, Product, for AutoAlert, Inc.  A former member of the U.S. Air Force Space Command, Rhoades spent 16 years delivering results in various automotive retail sales, finance, technology, and e-commerce roles, the majority of which was with Gunn Automotive Group dealerships. He has also served on the dealer advisory boards of several industry technology providers, and is a sought-after speaker for automotive industry events and conferences. 




Chris Murray
Frankly, although all of the suggestions are completely correct you left out the one tide that lifts all boats; SALES TRAINING! The best margin on any car deal will ALWAYS come from superior selling techniques. Dealers and General Managers manage from the statement and their 20 group composite only to be left struggling, year after year, with the same issues. Up market or down the incessant whining heard from dealers and managers never changes. I for one am fed up with listening to it. I sat in a 20 Group Meeting in Dallas last year with the Fixed Op side of the meeting and I was mildly encouraged when one dealer shared his success through actually training the people to sell as opposed to finding ways to out-source their employees work. Take a few minutes tomorrow and sit in the showroom, listen to the chatter amongst the sales staff, listen to their interactions with floor traffic, listen to their phone calls and then ask yourself if they are really prepared to do the job. Take a few more minutes, present your managers with a problem and see how they try to solve it. Listen carefully as they define a plan of attack to go forward and ask yourself if they are really capable of executing the plan or are they blowing smoke? Teach them how to sell! Teach them how to manage! Teach them how to teach and you will win in any market, up or down!

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