By Kathryn Pomroy
Generally, dealers make more money selling used cars than new. For the ninth consecutive year, 2019 is showing a continued upward trend in used car profits from sales – with 40.4 million expected to be sold by the end of the year, up from 39.6 million in 2018. Most dealers agree this trend is probably due to the high price of new cars, as well as nearly 300,000 additional vehicles coming off lease in 2019 vs. last year.
As new car margins collapse, used-vehicle sales, on average, become more profitable. And the gap is widening. The National Automobile Dealers Association data shows that the average used-vehicle sale last year saw a gross profit of just over $2,000, almost twice the average $1,200 on each new vehicle sale.
Comparison Shopping Online
As expected, the Internet has given buyers the advantage when interpreting new car pricing, and shoppers have a pretty good idea of how much a dealer stands to make on every sale. Because most dealerships advertise cars on the Internet, the market also tends to be less prone to wild fluctuations. Besides, as there is more variation among used cars, buyers have a harder time comparison shopping used cars and dealers have an easier time hiding profit margins.
It’s also a fact that dealerships, in general, tend to get used cars more cheaply by picking them up at auction or from customer trade-ins. One dealer, located in WI, says used car dealers aren’t legally bound to reveal how much they paid for a vehicle. “It’s a whole different ball game when selling used cars. We buy cheap, then get customers into new cars. That’s a win-win for the dealership.”
Naturally, Kelly Blue Book and NADA put a value on a used car, but they can’t be taken literally. If a vehicle looks good and test drives with no apparent problems, the customer is none the wiser.
Extended Warranties & Service Deals
The finance department is another way for dealerships to score by selling extended warranties and other services. It’s amazing how often front-end losses are offset by back-end profits made by the finance department. For instance, you may lose a few hundred dollars in the sale of a used car, but make it up with extended warranties and service agreements.
Most dealers will also address shrinking margins by adopting more focused inventory management strategies. That way, they can optimize which used vehicles they buy at auction to meet market demand, bring those vehicles to market more efficiently by spending less time reconditioning vehicles, with pricing, or photos, and retail them quickly so they don’t stay on the lot for an extended time.
Online Marketing
Online marketing is the new billboard. David Zysblat, CEO of Clasiq says, “If you don’t have an online presence or advertise your stock on online marketplaces, you are missing out on the stampede of virtual foot traffic that browse online sites every day. Think about it, sites like CarFax, Vroom, Cars.com, CarGurus, and more are often the first place customers look for used car inventory. Most sites allow users to search by geographic location, offer help with auto loans, find out the history of the car, etc.
Because there is more gross profit in a used car than new, it’s important to effectively market your used inventory, particularly online. That’s where over 81 percent of your shoppers are researching their next purchase. Here are a few best practices to effectively market your used inventory.
- Market your inventory. The more traffic you get into your showroom, the more leads you’ll rack up for sales of new or used cars. More than half of your customers that come into the showroom to buy new, will buy a used vehicle instead. So, pitching incentives, coupons, or discounts can lead to
- Most of your customers recoil from strong sales practices. That’s why the shift to online car-buying has caught on so quickly. Even so, about 70% of buyers still say they would rather visit a showroom to see a car in person. Use that to your advantage, but minimize the sales pressure and adapt to consumer’s preferences instead.
- To help consumers understand the value of your dealership, offer post-purchase support. Your website can list your inventory and car features but it can’t provide face-to-face customer service or outline how those features work. Your employees are the experts and positioning them as such will create more reasons for customers to drive to your showroom.
- Post-purchase maintenance is another way to gain an advantage over online disruptors. It’s also a profit-center for the used car market.
- Consumers do business with dealerships they trust. Give them reasons on your vehicle details page to trust you over an online site like Carvana. That means making sure the details of the vehicle are in plain view, such as warranty information, repair records, if it is a one-owner vehicle, if its a CPO, etc. Keep in mind that to maximize your listings show at least 10+ photos of the car, showing interior and exterior features, and also clearly reveal defects in photos to reduce tire kickers and people trying to knock down the price.
Zysblat adds, “Don’t waste time detailing the cars and spending money on paint corrections etc., because you won’t get your money back from it. But, by offering 3rd party finance packages, you can attract customers and maximize your profits. You’re providing an easier option for people to purchase the car, but at the same time you’re selling them the add-on of a finance package to make more profit.” More importantly, you’re actually competing with the online sites, and dealers have the advantage of offering customers a test drive and the chance to “kick the tires.”
It’s no surprise that 82 percent of Millennials say word-of-mouth is a central influencer of their purchase decisions.
Final Thoughts
Maximizing profit from used car sales is a whole new ballgame for dealerships when you factor in online sales. But, it’s the simple truth that reputation matters, maybe more in car buying than most other industries. When a customer buys a vehicle from a dealership, he or she knows if there’s a problem, they can contact the dealer for help. While some online sellers say they offer ‘great customer service’ what you get is often much less.
Still, dealers are scrambling to compete for sales, and there are a number of factors that reduce a dears profit potential in used vehicles that merit scrutiny. Still, most dealers are seeking ways to improve used vehicle profitability. That will never change, but it may become more difficult as customers become savvier.
To learn more about today’s used car market, check out our Season 2, Episode 7 podcast with Dale Pollack, Founder of vAuto, Executive Vice President at Cox Automotive, and bestselling author of the book Velocity: From the Front Line to the Bottom Line. Pollack speaks about the insights behind vAuto’s profit-driven pricing tool, ProfitTime 2.0, which uses data to know the probability of any given used vehicle, on a given day, at a given price.
