7 Tips for Increasing Used Car Margins
With new car sales down for the first half of 2019, the used car market is definitely driving current growth in automotive. An abundant supply of newer models, an exploding customer base and less volatility — these factors should make selling used vehicles an easy path to profit.
Or is it really?
For independent dealers, that may not necessarily be the case. Smaller players don’t have the infrastructure and resources of franchised new car dealerships or national companies like Carvana and CarMax.
Running a small business also presents a different set of challenges. Profits on used cars — in real dollars, not percentages — are generally smaller than those on new vehicles. Extra expenses can have a sobering impact on the bottom line.
The solution is to improve profit margins. Improved profit margins mean more money in your pocket. More money means more funds to grow your business, more time to do things you love and less worry about making ends meet.
To achieve better profit margins for used cars, you need to deploy a two-pronged effort: increasing sales and reducing costs.
Here are seven tips to improve profit margins and grow your dealer business:
Tip #1: Update your Sales Strategy
When the Road to the Sale (RTTS) 10-step process was conceived, the internet was in its infancy and dealerships were the gatekeepers of vehicle information.
Fast forward to 2019, and car buyers have evolved dramatically. The most significant changes are in their shopping behavior:
- Smart buyers. Consumers are smarter due to the easy availability of information online. Dealers need to serve as consultants, not salespeople.
- Transparency. Buyers expect transparency, especially when it comes to pricing. Provide vital information sooner rather than waiting for the end of the conversation.
- Competitive pricing. Real-time pricing is critical in an age where mobile phones enable instant comparison shopping. Ensure that your prices are comparable to what’s available in your neighborhood.
- Better buying experience. Buyers want to reduce the amount of time spent at a dealership. Minimize the time a buyer has to spend at your dealership by providing more information online and streamlining applications.
It’s not enough to keep up with these changes, but to factor them into your sales strategy.
Learn more: how to leverage modern buyer behaviors to grow sales.
Tip #2: Choose the Right Vehicles for Your Market
In an ideal world, every vehicle sells quickly at an optimal profit margin. In the real world, that’s not often the case.
Smart dealers use data to determine which vehicles to stock. You need more than just a “gut feeling” in today’s market. Use your real-time market data tool to answers the following questions:
- What are the top-selling vehicles in your metropolitan area?
- Which models have sold the best for your dealership?
- Which vehicles are in low supply compared to demand?
Find out how the right data can help you make informed decisions on which vehicles to pick, increasing the likelihood of faster, more profitable sales.
Tip #3: Improve Your Website
Today’s car buyer kicks off shopping research online, making a user-friendly website imperative. Your website is your online storefront and it has one mission: Getting customers to your dealership.
The best independent dealership websites have three key elements, each one addressing a specific buyer’s issue:
- What is your solution to a customer’s problem? You need a clearly stated value proposition.
- Why should customers trust you to solve their problem? Supply them with testimonials and social proof.
- What should a customer do to get the problem solved? Provide a clear call to action.
Read on about how to build or improve your dealership website.
Tip #4: Improve Reconditioning Practices
Auto reconditioning is essential to transform weary-looking trade-ins into vehicles that customers want to drive. In addition to giving a used vehicle a new lease on life, reconditioned vehicles move off the lot faster (there’s nothing like that new-car aroma!) and allow you to issue warranties and certifications– items that only increase customer trust.
Some reconditioning best practices include:
- Non-OEM Parts. Reduce inefficiencies by using quality, non-OEM parts. Make sure, however, that these don’t disqualify vehicles from any certification programs.
- Fast Turnaround. Complete reconditioning within 3-4 days of acquiring a vehicle to reduce turn rates and increase gross profit.
- Ready to Sell. Acquire vehicles that require less work. Their faster turn rates can offset the cars that need the extra work.
- Reconditioning Team. Have separate teams for reconditioning and customer orders to eliminate conflict.
- Recondition for Wholesale. Dealers are more likely to buy a vehicle in terrific shape, just like retail customers.
Although it is a sound investment, reconditioning costs need to be closely monitored because they can quickly add up. Understand how to assess what reconditioning practices make sense or not in order to protect your profit margins.
Tip #5: Avoid Third Party Lead Providers
Have you ever felt like third party sites are stealing your money and your customers? That’s because third Party sites aren’t lead generators. They’re lead pirates.
Dealers around the country have a ton of complaints about third party services, including:
- Low quality of leads
- High cost of business, with rates increase by as much as 20% annually
- Your listings are buried under sponsored posts
- Competitors are advertised on your listing
I know what you’re thinking: “But I don’t know where else to get leads.” Luckily, there are now online marketing services that more accurately target in-market customers and send them directly to your website, not to a third party. Plus, you also only pay for the buyers that visit your site.
Tip #6: Optimize Marketing Spend
An independent dealer’s marketing spend is limited—especially compared to an OEM—so it’s critical to ensure that your dollars are going to services that actually drive sales.
In advertising speak, ‘optimizing’ means constant removal of tactics that don’t work in favor of those that do. Some ways to optimize your ads:
- Target the right audience. Cast too wide a net and you’re wasting money on people who are unlikely to buy. Determine your right audience and platform to focus your efforts and increase your conversions.
- Customize your message. You lose buyers when you blast a generic message that is irrelevant to them. Find out how personalized ads improve your chances of attracting the right customer at the right time.
- Ensure your programmatic ad tool is pulling the right data. Programmatic is never a set-and-forget routine. Your programmatic tool should pull not just inventory but also real-time and third party data to determine ad placement and frequency.
Tip #7: Improve Inventory Turn Rate
All dealers know that aging inventory gets costlier by the day. It hogs space that could be used for fresher, more profitable vehicles, not to mention the costly upkeep of cars on the lot.
If inventory gets too old, you’re stuck making a hard decision: drop the price and hold out for a retail customer, or cut your losses at the wholesale auction. While inevitable, dealers want to avoid these scenarios at all costs.
Keep your inventory turning at a healthy rate:
- Ensure your inventory is true to your niche. Dealerships today are not the shopping mall of choices they used to be. Determine your niche, stock up on the vehicles that embody that niche, and target the specific in-market audience that is looking for them.
- Update prices regularly. Our study of 40,000 dealership sites found out that turn rates can increase by 33% if prices are updated regularly. Vehicle marketplace algorithms favor updated listings over old ones.
- Make your prices easy to find on your site. Buyers who land on your site will bounce off if they can’t find prices easily or if they’re asked for an email address to get this information.
Find out how to improve inventory turn rates with these actionable tactics.
Improving Used Car Profit Margins: Always a Work In Progress
Improving profit margins is a marathon, not a sprint. Apply these tips to improve your key performance indicators over time and consistently hit your monthly, quarterly, and yearly goals.
For example, in working towards Tip #3—improving your website—create a goal to grow web traffic and increase the number of contact forms filled.
To achieve Tip #7—improve inventory turn rate—make it your goal to lower your inventory turn rate to 30 days.
With resolve and savvy, any independent dealer can improve their margins and compete with the big guys. Let us know in the comments if you have any other tips to share.