Gross Profit vs Gross Sales – Can You Have Both?

I know it's long and I apologize for it being copied over in it's entirety from my response from earlier in the week on another dealer community - But it's on point.


I apologize is advance for what is sure to be a lengthy response. I plan to:

1. Make an outrageous (but true) statement

2. Tell a story about golf

3. Somehow pull it all together as it relates to pricing cars and holding gross


First, the outrageous statement; Odds are, your dealership is no better prepared, no better set up, to sell preowned cars on the internet than it was 15 years ago!


Now the story about golf; A few years ago a buddy and I set out to get a couple of rounds in on a beautiful spring day. We started on a cheap New England track. It looked like it was a reclaimed hay field with rolling hills, few trees and even less water. We had a great time, swinging hard, knowing it was almost impossible to get into trouble. At one point teeing off of 13, my buddy hit a huge drive pulling it left. His shot ended up in the middle of the 14th fairway with a perfect lie and less than 75 yards to the pin on 13. The two fairways were only separated by a couple of trees and some light rough. I asked if he did it on purpose. “Hell no, but it’s gonna work to my advantage.” And of course it did.


After lunch we drove to the next course. A gorgeous, expensive course that looked like it was carved out of a primordial forest. Lots of water, lots of sand and enough trees to rebuild Chicago after the great fire. As we started unloading our stuff, I looked over and he was swapping half of his clubs out for ones in his trunk. I asked him what he was doing and he looked at me like I was an idiot, which, well, I was. He explained that he was swapping out equipment that he used for distance for equipment he used for control. He was even going to use different balls. He explained that this course was absolutely unforgiving of mistakes. This course put a premium on precision, not brute strength. This course required a completely different game than the course we played in the morning. And, he said, most importantly it required a different mindset. We’ll get back to that mindset thing, I promise.


So, it’s probably time I started to pull this all together, if I can. The internet has brought dramatic changes to car shopping and car selling. I think one of the biggest, high-level changes has been to the balance of power. Fifteen years ago all dealers had about the same knowledge. We all had the same auction data and had the same wholesale guides in our back pockets. We all had consumers beat in the “knowledge is power” game. Now that’s changed. Consumers walk into our dealerships armed with as much or more information, as much or more knowledge, as most of our salespeople.


We have a great new opportunity though. The same information our customers use to empower themselves – full knowledge of the retail market, who’s selling what and for how much – can be used against our competition. Dealers that harness this data have a huge advantage over their competition. We’ve traded an advantage over the consumer for an advantage over our competitors.


Now back to my outrageous statement: Odds are, your dealership is no better prepared, no better set up, to sell preowned cars on the internet than it was 15 years ago! Think about how we priced cars fifteen years ago and why we did it. We put a big mark-up on every car. We advertised heavy in print and consumers (unarmed with any real information) came in. We had professional negotiators work them in an adversarial system and go figure, we won a lot more negotiations than we lost.


If we had a store on the highway, with a big gorilla and lots of balloons we were on the coveted route of the Up Bus. Our customers would put maybe a half dozen stores on their list of dealerships to visit and would shop till they ran out of steam or bumped into a great salesman.


The Up Bus has stopped running. Customers now build a short list on the Internet. And that list is really, really short! The average customer only stops at one or maybe two stores. And this happens only after they find the car they want at the price they want online.


Unfortunately, while many dealers have stopped the old style print ads and embraced the Internet, they’re still pricing the old way. Price high first and plan on negotiating down. They’re playing the game the way they did 15 years ago.


So what’s the problem? Fewer and fewer customers are coming in on cars with big markups. They simply have too much data to be interested in cars that are overpriced compared to the market. So the ups we get are ups on the 30 or 60 day plus cars – the ones that have been marked down. Unfortunately our staffs are all set to negotiate; they are, after all, trained negotiators. But now they aren’t going up against unarmed consumers. They’re going up against consumers armed with full market data. We win a lot less these days.


Our stores, our people, our systems and our processes are all set up to play the brute force game on the wide-open, forgiving golf course. Unfortunately the Internet ensures that we’re playing on the narrow unforgiving course with lots of hazards. The course that rewards precision and accuracy. But we still play it like it was wide-open and forgiving. We’re playing it with the wrong equipment and the wrong mindset.


Let’s look at what happens when we throw out all the old habits and tactics and build from the ground up. We know pricing high and negotiating down doesn’t work well. Pricing high is a formula for turning off the Up spigot. So we price to market and turn the Up spigot back on. Now we have to change the negotiation mindset.


The best of the new Internet-era dealerships don’t have the negotiation mindset – they have the documentation mindset. They’ll use the easily obtained selling prices of their “price-high & negotiate-down” competition to prove that they have a great price before a negotiation ever occurs, justifying - and holding - their asking price. They replace negotiation with documentation, increasing their Ups with competitive pricing (starting on day one) and decreasing the discounts with data pulled from the transparent Internet marketplace.


This best part is this process isn’t adversarial with the customer. It’s amazing what happens when the competition is your enemy – not your customer. It’s you and the customer against those other, nasty, game-playing dealers out there. These Internet-era dealers have systems and processes built for the reality of today’s marketplace. They are turning inventory faster than ever and holding gross because they’ve eliminated the large scale negotiations and discounting of the past.


The new mindset extends to the metrics these dealers monitor. Instead of per-vehicle-gross these dealers track discounts from advertised price. Some even incentivize based on these metrics.


Now take this mindset and put it to work on every aspect of your used car operation. How do you decide what to stock? How do you decide what to pay for each car in inventory? Are these decisions made based on the new transparent marketplace or based on “the way we’ve always done it”. Examine your mindset and each process and I think you’ll discover your store may not be nearly as prepared for the Internet as you thought. Certainly there are exceptions. The exceptions are the guys turning their inventory 12 to 18 times a year and smiling all the way to the bank!


vAuto’s Founder, Dale Pollak held a webinar titled “Documentation Replaces Negotiation: 4 Easy and Effective Strategies to Improving Gross Profit” last Friday. Attendance was huge and Dale followed it up with a good 30 minutes of questions and answers. The response was so good Dale will be repeating the webinar in a few weeks. We’ll announce it here or you can watch for information or subscribe to Dale’s blog at DalePollak.com


Ed Brooks - Sales Director

vAuto

402.427.0157 Phone

Mike, thanks for the thought provoking post. Ed, I liked Golf story. The analogy is fitting. Your comments make alot of sense. This is the DR we have come to know and love.

Well said Ed. I would take it one step further. As the power of information has transitioned to our customers, gross margins have come down, but smart dealers are maintaining their profit margins by cutting costs in this changing market. Consolidating vendors and services, measuring and retaining high ROI lead sources and eliminating non-performers, and much more has helped many dealerships to remain highly profitable. Great post, and I love the concept of documenting the price.

Thanks for the post Mike - a question many of us ask each day.


Ed, I read every word of your comment/article and thanks for sharing.


Grant Cardone said something a long time ago and it stuck with me. People "buy" based on logic/facts not emotion. Close on your customer on logic. Documentation Replaces Negotiation is getting your customer to think logical. Using the right transparent documentation will have your customer thinking logical and not emotional. Most sales people are taught and naturally sell on emotion. Most dealers don't offer sales people the right documentation sell on logic.


Todays economy has conditioned consumers to be more analytical and logical with their purchase decisions.


IF you want volume and gross - Documentation Replaces Negotiation. I believe that and it's something we have sort of talked about here on DealerRefresh in several archived articles.


Such as - &quot;How to Handle the Trade-in&quot; - <a href="http://www.dealerrefresh.com/trade-in-value-the-missing-ingredient-to-holding-gross-and-building-trust/" rel="nofollow">http://www.dealerrefresh.com/trade-in-value-the-m...</a>

As Kevin stated, cutting the low margin performers and consolidating services is also part of the efficiency mix.

I&#039;d like to touch on desking best practices. From a tactical standpoint let&#039;s say the moon, stars and planets are aligned. Meaning expenses have been managed properly and your inventory has the right mix and is not bruised. All components are in place to maximize ROI. Okay, now its time to desk the deal. This is where the rubber meets the road.

If your Sales managers have not embraced this paradigm shift called the internet your efforts are all for not. The internet has created that opportunity where you can effectively increase gross and volume. For example how many of your Sales Managers start the deal at MSRP? How many of them still try to separate a retail customer vs a internet customer? It&#039;s interesting that even to this day the internet dept is tagged as being the &quot;giveaway&quot; dept. But in reality my depts have consistently out grossed that of the retail guys. Why is this? Gross profit doesn&#039;t just come from the selling price. Hold on the trade and set up your F/I Mgr. Exploit all profit centers!!! A linear approach to desking is what has maintained the separation between gross and volume. You CAN have your cake and eat it too.

Jeff, you are so right. The perception has to change first. There is always a way to structure a good deal. If you go into it with a pre-determined mindset that the Internet customer is different, you have already lost. Nice comment.

Great topic. I firmly believe that you can have your cake and eat it too. A good salesperson through both training and intuition understands when you must price to sell and when you must price to negotiate.