In a recent news article, Cox Automotive SVP Dale Pollak shared a sneak peak of what he promises to be better metrics for determining the price of used-vehicles. Pollack claims that pricing a vehicle based on ‘days on the lot’ is a measure of operational efficiency that is as outdated as the sundial.
What’s Wrong with Age-Based Pricing?
‘Days on the lot’ is a primitive way to determine a vehicle’s ability to make a meaningful profit contribution, or as Pollack puts it, a vehicle’s “Investment Quality”. This antiquated method of vehicle valuation comes from a time when data was limited and dealers were left with little more than gut instinct to determine a vehicle’s price.
With today’s technology and inexhaustible streams of data, however, it’s possible to evaluate investment quality the day a dealership acquires a vehicle. If a dealership overpays for a vehicle on day one, the best decision might just be to wholesale it on day 2 and reinvest in another vehicle that will turn a profit.
“If you know on day one, are you better off dealing with it today or 59 days later?” Pollak asked.
Determining a Vehicle’s Investment Quality
Pollack’s new approach to pricing is based on technology and data and promises to provide better metrics for making pricing decisions, regardless of vehicle age. Pollack has evaluated investment quality of used vehicles at several dealerships using these new methods. He uses platinum, gold, silver and bronze designations to identify which vehicles have the greatest profit potential.
The most eye-opening discovery Pollack made through these evaluations is that more than 80 percent of “platinum” vehicles were priced to move, while “bronze” vehicles were priced much less aggressively.
So, how do you determine a vehicle’s investment quality? It comes down to common sense while interpreting data. If a vehicle is cheap relative to demand, “that’s a car you should not price to move,” said Pollak. “You could afford to be patient to get the best profit.”
Managing Overall Investment Quality of Your Entire Inventory
In an article written by Pollack back in November, 2017, Pollack talks about the importance of minding your Cost to Market metrics as a way to improve the investment quality of your entire inventory.
He writes:“The Cost to Market metric is useful to dealers in two ways. First, the metric tells you, from the moment you acquire a vehicle, what your likely retail gross profit margin will be. Second, it helps you monitor, on an individual vehicle basis, how much potential profit resides in a vehicle.”
Pollack suggests that overall inventory Cost to Market average should be 85%, but makes it clear that this is an average. If vehicles have a low Market Days Supply, or other unique characteristics, it is definitely safe to acquire these vehicles at higher than 85% Cost to Market, as they are likely to sell fast.
Meanwhile, common vehicles that are less special and more abundant (like rental cars) should have Cost to Market ratios much lower than 85%.
We live in an ever-changing world. The way we made business decisions 5 years ago is not the same as the way make business decisions today. And the way will make business decisions 5 years from now will likely look different than decisions made today.
With all of the changing technology, however, the basic principles remain the same. When used vehicles are acquired right and prices are optimized, profits will be maximized.