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Price Is Right: 5 Ways to Combat Margin Compression

March 3, 2020

Two industry veterans share their five-point plan for pricing pre-owned inventory to attract more eyeballs and achieve your sales and profit goals.

It takes skill, technology, and a keen eye focused on sales and prices at your dealership and in your market to yield desired profit margins when pricing pre-owned inventory, say Winston Harrell and Nick Oakley.

As two dealership veterans who now serve as strategic-growth managers for inventory at DealerSocket, they combine their expertise to present strategies, practices, and tips to help calculate prices for your online inventory that will attract eyeballs and foot traffic to meet your dealership’s sales and profit goals.

Tip No. 1: Price at the Point of Acquisition

Have a pricing strategy at the point of acquisition; in other words, know how a vehicle fits into your dealership’s marketing plan and your market, and know the vehicle’s best price, Harrell says.

  • Post the vehicle for sale online four or five days after it is acquired as a trade-in but before its reconditioned. An inventory management tool, such as DealerSocket’s Inventory+ mobile app, puts the power to do just that in the hands of appraisers.
  • Using the tool, you can scan a vehicle identification number to verify a vehicle’s equipment, obtains its invoice price, and ensures it is properly stocked. Inventory+’s mobile app can also be used to take preliminary photos.
  • Certification — which calls for reconditioning, a warranty, and a retail price premium when comparing noncertified vehicles of similar make, model, and mileage — matters. “If I don’t have the margin for it, I may not certify that vehicle,” Oakley says. “I wouldn’t price a non-CPO vehicle against a CPO vehicle. Those are the things we look at when pricing vehicles.”

Tip No. 2: Price Similar Vehicles in “Brackets”

That means vehicles of a similar make and model should be further categorized and priced to compete based on attributes such as trim level, optional equipment, or whether it’s certified, Oakley says.

  • Take a late-model midsize sedan of a specific brand. Many of those vehicles in the market are mid- or upper-midtrim-level vehicles missing certain optional equipment, such as sunroofs and navigation systems.
  • “I’ll know those vehicles typically come from a rental company,” Oakley says, “and the market is flooded with them, which typically drives the price down. “When looking at those cars that have specific features that rental-car companies usually don’t buy — navigation, sunroofs — I bracket that as nonrental. I know that vehicle is more valuable, so I will price it differently.”
  • A vehicle priced lower than other vehicles of like make, model, and mileage doesn’t necessarily sell faster or better than its peers. Neither does one that is priced significantly higher, Harrell and Oakley note. “Vehicles need to be priced accurately, so a customer doesn’t think there’s something wrong with it,” Oakley says.

Still, shoppers are going to look for price first, Harrell adds. So having some attention-grabbing product with less content and a lower price that also fits the dealership’s business model “is always a very good strategy to have,” he says.

Tip No. 3: Know Thy Market, its Radius, and What Affects It

Know your dealership’s marketing radius and your nearest competitors. For example, dealerships in rural areas might have customers who are willing to drive three hours to buy a car, but consumers in major metropolitan areas won’t travel more than 30 minutes to a dealership.

  • Inventory+ by DealerSocket can set a market radius unique to each vehicle. A Ford dealer located in a metropolitan area that sets a market radius for a mainstream F-150 XLT for, say, 25 miles could set the radius for a high-performance, low-availability F-150 Raptor at, say, 100 miles, because “people are willing to travel that distance for that vehicle,” Harrell says.
  • “Seasonal” vehicles should be priced to sell at certain times. For example, in the northwestern part of the country, convertibles don’t sell well in winter versus summer, when drivers want to drop the top. Therefore, I wouldn’t keep as many convertibles in stock from October to April as they are unlikely to sell. It would be ideal to price this vehicle to sell as fast as possible if October is approaching, Oakley says.
  • Price your vehicles to appear on the first page of a search engine. “I don’t need to be No. 1 in those engines because 90% of the time, customers don’t just look at a top car,” Oakley says. “They’ll look at the first page or page and a half before they move on.”

Tip No. 4: Employ an Inventory Management Tool that Provides Historical Transactional Data

Know what you can sell and when you can sell it for the most profit. If you lack historical pricing and sales information in your inventory tool, you’d have to do it yourself by extracting data from your dealership management system, “and it’s not really set up for that,” Harrell says.

Inventory+ offers a pricing report that can help, filtering sales by make, model, age, and more. It also serves up historical data such as:

  • The number of vehicles of a particular make and model in a market;
  • The prices of those vehicles;
  • A dealership’s sales and price performance with specific vehicles and the vehicles’ market values at the times they were sold;
  • The vehicles’ book values; and
  • The number of those vehicles the dealership wholesaled, the wholesale prices and whether a loss was incurred on those units.

“So I have those factors I need to make an intelligent decision,” Harrell says.

Tip No. 5: Have a Pricing Strategy for Aging Inventory

Some dealerships engage in aged pricing — also known as turn pricing — meaning that an unsold vehicle’s price is reduced at set intervals as it ages.

  • Set standards for how long you will keep a vehicle before reducing its price, Oakley says. “I price a newly acquired vehicle a little higher than I normally would to maximize my profitability on that unit,” he explains. “But after 60 days or 45 days, I’ve held onto that vehicle for a really long time, and maybe I want to get rid of it by day 90. Then I need to start lowering its price, so when people search online and see it, they say, ‘Hey, this is a great deal.’ ”
  • Pay attention to book values when reducing the price of aged inventory. “If I’m not taking into consideration what the market is doing and changes in book value, I may reduce the price by, say, 2%, but that book value may have changed by 3%,” Harrell says. “Now, I’m in the position of, yes, somebody wants to buy the car, but I can’t get it financed at that amount.”