Used vehicles are too often being priced using irrational, flawed and outdated assumptions that are undermining profit, according to Dale Pollak, a U.S.-based auto retail expert and founder of vAuto.
That’s because prices are usually determined based on how long the vehicle has been sitting on the lot. The temptation is to price everything for maximum margin on day one and then discount if it starts to sit, he said. But that’s a mistake.
“For some reason, we believe that the number of times the sun — a star in the sky — has risen in the east and set in the west over our vehicle somehow is an accurate measurement of that vehicle’s opportunity,” Pollak said during a presentation to a dealer audience Nov. 28 in Toronto. “Calendar does not equal profit potential.”
Instead, he encouraged pricing managers to view used cars as bananas: “There’s some green, some yellow, some brown, and some rotten,” said Pollak, also founder of vAuto, a software tool aimed at helping dealers better manage their new-and used-vehicle inventories to optimize profitability.
Brown and rotting bananas need to be discounted and sold quickly, while yellow and green ones can be priced higher and held onto until the right buyer comes along, he said.
“That is what any rational, prudent businessperson would do with an eye towards optimizing the return on that set of inventory,” said Pollak. “It just happens to be exactly the opposite of what we do with cars.”
He compared two sales that look identical on a balance sheet: A $50,000 car, with a $2,500 margin, sold in 60 days versus a $15,000 vehicle that sold in 20 days with the same margin.
“They are the same two grosses but are they the same two outcomes for your used car business?” he said. “Not one of us would ask the question, ‘Wait a minute. How much did we have to invest and how long did we have to hold that investment to make $2,500?’”
Pollak’s team did a deep dive into data from millions of used vehicle transactions and came up with three key factors that had a significant correlation with return on investment: the vehicle’s cost relative to the market; its supply-demand ratio; and its popularity or retail volume.
The idea, using this approach, is to categorize inventory into four tiers: Platinum, gold, silver, and bronze. Platinum can be priced the most aggressively and held onto, while bronze vehicles should be discounted on day one and sold quickly like a rotten banana, he said.
The data, though, showed many dealerships priced their bronze inventory — the ones with the highest cost, longest market day supply and lowest retail volume — as if they were their most prized assets, he said. Conversely, platinum vehicles — lower costs, high demand and market popularity — were often priced as if they were in distress and needed an urgent sale.
“You’re pricing your highest risk investments essentially not to sell and you’re distress pricing your best cars,” said Pollak. “You’re selling your best cars in a third or half the time, and you’re hanging on to your toughest cars twice as long. Nobody can defend that.”