“The internet has ruined the car business.”
“I’m not interested in a race to the bottom.”
“There’s an ass for every seat.”
Yes, my friends, in the year 2017, dealership general managers still say these sentences. What’s worse is that they’re not even being ironic. And in this era of record-setting car sales (yes, despite what you’ve heard, 2017 is going to be the fourth-best sales year in history), some of them are even able to keep their jobs.
But smart dealers know better. They know that the internet is their friend, that being the cheapest sometimes really is the best strategy, and that no, there most definitely is not an ass for that 2013 Malibu that’s priced at 117 percent of the market average.
Why are they so smart? Because they understand a seemingly simple concept that can get quite complicated when dealers try to execute it. That concept? It’s called “turn.”
What’s turn? It’s most easily understood as this: Turn is how quickly a dealership disposes of a vehicle — notice I didn’t say sells a vehicle. Turn is calculated from the day a dealer acquires a vehicle, whether it’s at the auction or via trade-in. Each and every day that a car sits on a dealership’s lot, it’s costing him money to own it, due to a combination of depreciation, interest, and fixed operational costs (the average daily holding cost for a franchise dealership is roughly $30 per car per day). Therefore, the quicker the dealer sells it, the more money he makes on it.
Easy concept, right? Well, yes, but not as easy for either you or the dealer to take advantage of as you might think.
Ideally, it should take no more than 3 days to ready a car for sale, but a number of things can keep a car from even making its way onto the lot. If a dealer buys a used car from an auction, either in person or online, the clock starts ticking the minute he pays for it. Transporting the vehicle sometimes takes several days, depending on the location of the auction. Even trade-ins can be held up by things like having to get the title from the lienholder.
Then, nearly all used cars need some level of reconditioning. Reconditioning, or “recon,” is the process in which dealers prepare a car for sale. This means anything from a simple wash and vacuum to a brake job to significant body and mechanical work. Smart dealers employ newbie service techs and detailers to handle recon exclusively — they know that the time they save by dedicating headcount to this process more than pays for itself in the long run. However, old school dealers kick newly acquired inventory to the back of the service bay, only to be serviced when all of the warranty and customer pay work is done.
After the car is reconditioned, it must then be photographed for the dealer’s website, as well as any third-party sites like Cars.com or Autotrader. Savvy stores employ an intern or entry-level person to photograph each car the minute it’s through recon — some even snap a set of three exterior photos before recon is performed, so they can throw it up on the website immediately. Slightly less savvy dealers employ a third-party, like Dealer Specialties, to take pictures of inventory for anywhere from $15 to $25 per car. This can be a problem, as they typically only visit a lot once per week. So if the photographer comes out on Tuesday, and the dealer acquires a car on Wednesday, six days is automatically added to the turn on that car — nobody will even click on a car online without a photo. You might as well throw a blanket over it.
And the old schoolers? Why, they will go weeks without a photograph of a car. Many of these old-timers won’t take pictures of new cars, period, relying on stock photography instead. Tick, tock. Every day a car sits unphotographed is a day its chances of being sold are significantly reduced.
But let’s say our old school dealer friend finally gets his car through reconditioning, and he’s taken photos of it. Now he’s ready to sell! So he throws a price on the windshield that’s 10 percent above the market average, hoping to hit for a big gross profit up front. And yes, about one out of 50 times, the dealer sells the car for that inflated number, padding his pockets slightly and justifying his decision to overprice his entire inventory.
However, the other 49 times, the car just sits there. According to J.D. Power, nearly 90 percent of car shoppers research online before visiting a dealer. There’s just no way that a buyer will see a car that’s priced significantly over market and select that car. In fact, cars that are 10 percent or higher over the market average get clicked on less than one percent of the time on classified sites.
So, after 30 days of just taking up real estate on the lot, the dealer will adjust his price to be more in line with the market’s valuation. And as we learned earlier, it’s costly to the dealer to have that car sitting there — that 30 days could have cost him as much as $900 in holding costs. Now he’s only got another 30 days or so before he has to start paying interest on that car to the bank. Not good.
What does a smart dealer do? He prices the car to sell from day one, putting his car slighty under market average. Mr. Smart Dealer knows that he doesn’t have to be the cheapest car in the market — he just has to be within range. He knows how much gross profit he makes on each car, and he prices accordingly. He doesn’t try to hit home runs, because he knows he’ll strike out more often than not if he swings for the fences. Rather, he’s happy to make a smaller profit and then reinvest that money in another car, where he can profit again. Wash, rinse, repeat. By the time our old school dealer finally sells his car at a price the market deems fair, our savvy dealer could use that same money to turn two or three cars, making triple the money.
But let’s say that, for whatever reason, the car doesn’t sell, and we’ve reached the 60-day mark. What does the old school dealer do? Why, he just keeps on keeping on, believing that someday, there will be the right customer for that 2013 Honda CR-V that’s exactly like every other 2013 Honda CR-V within 100 miles of his rooftop. 90 days come and go. 180 days. Soon, the dealer is decorating a cake celebrating that CR-V’s birthday, the car having depreciated thousands of dollars over that year. Not only that, it’s cost him interest on his floorplan loan and taken up valuable real estate on his lot.
Our savvy friend is having none of it. Once the car hits 60 days on the lot, he’s dumping it. He’s got what’s called a “hard turn policy.” It’s either getting sold to a customer at a wholesale price, traded to another dealer within his group, or dumped at an auction. Is it possible he’ll lose money this way? Yes — even probable. Does he care? Not at all. Better to lose a thousand dollars now and reinvest that money into a car he can sell then continue paying the costs of interest and depreciation. You win some, you lose some.
So how does knowing any of this benefit you, the customer? Well, not in the way you might think. There are some third-party sites that reveal how long a car has sat on a dealer’s lot. You might be thinking that if a car sits on a dealer’s lot for 100 days or more, you’re more likely to get a good deal on it.
That car that’s been on the lot longer than it takes the NHL to play a season is probably being sold by an old school guy who’s gonna stick to his guns in hopes of recovering some of the margin he’s lost by owning the car for so long. What you want to do is find a dealer that turns inventory quickly — look for a dealership that doesn’t have a single car over 75 days old. Those guys are constantly monitoring the market and adjusting prices accordingly. When a car reaches 60 days, they’d rather sell it to you at a loss than have to transport it to the auction.
So be patient, be smart, and look for a dealer who knows that for every car, there is a season.
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