By Desiree Homer
Your appraisal-to-trade ratio is one of those key metrics that varies by market but is typically driven by your sales and service teams’ abilities to perform. It can sometimes be challenging to track and improve, considering the number of variables. But some dealerships are monitoring and managing their ratios with profitable precision. We wanted to explore what these dealer owners were doing, to share some of the tools, tips, and best practices to help you sharpen your pencil in your process.
Assigning Key Appraisal Staff & Responsibility
Having the wrong people in charge of appraising can be a costly mistake. Many experts suggest it is a common one at that. Reflect upon who is responsible for your appraisal evaluations. Be deliberate about who you assign to handle the appraisals and trades. It may be a top-performing sales member or a dedicated team of appraisers. Regardless, those responsible for this crucial metric need to be extremely skilled and knowledgeable. Training should be ongoing as well, to make sure your staff stays on top of the latest trends and tools. The person in this position should not only come in on every in-person trade deal on the floor. He or she should also be handling 90%+ of the calls or online valuation inquiries too. Having too many people addressing your appraisals and trades can result in inconsistencies.
Do you have a set process to determine the ACV?
Put a magnifying glass to your current process. Having a detailed outline of your process can remind each member to button up on each evaluation step. Driving the trade-ins is critical. So often, sales reps and even managers are eager to pencil the deal and overlook asking pivotal questions about the vehicle’s condition or cut corners when checking the history of the trade. Your process should also include a chain of command regarding those staff members who are allowed to bump the ACVs. Bumping to get a deal done now can have costly implications to profits later. That decision should be left to you or key members of management who understand the full cycle metrics of over-estimating.
Contribution Factors to Lower Ratios
Packs, excessive reconditioning charges, and aged inventory are the primary contributors to a lower appraisal-to-trade ratio. Consider a deeper dive into your pack assessment. Miscalculating reconditioning is one of the areas in which many dealers see mistakes. In a way, you’re guessing at what could be wrong with the vehicle, and there’s no real way to predict the future. However, you can incorporate an over-estimating practice as a guide to preventing those errors from costing thousands. Sure, you’ll have those instances when an unforeseen malfunction ended up depleting the return on a car. But you’ll also have those cases in which you estimated a transmission repair, that ended up being a computer and software fix instead. When a car eventually hits 60 days, and it’s time to wholesale, it won’t sting as bad if you were able to mitigate your losses on conditioning.
Vehicle Evaluation Tips
In addition to dedicating members of your staff to the appraisal process and driving every potential trade-in, there are a few other best practices that can help keep your pencil sharpened.
- Run an Autocheck or CarFax on every trade
No matter how trustworthy the customer is, a vehicle history report can be an invaluable tool that keeps you from over-investing in the wrong cars.
- Review Black Book, NADA, or Kelley
It’s often recommended to check the pricing with at least two of these resources.
- Leveraging the appraisal-to-auction differential
Crunch the numbers to compare what this trade-in vehicle would cost you to buy at auction. This process will help you determine whether you’d target that unit in the first place, as a way to meet your inventory openings. This differential can help you decide what emphasis should be placed on reconditioning.
- Transparency in quoting to the customer
Many dealers say using third-party tools, like AutoTrader, can reduce negotiation pushback on acceptable quotes. When the appraiser takes the time to evaluate the vehicle with the customer, and then use tools like these to demonstrate a starting value, customers tend to be more accepting of your offer. It helps set the expectation with them of a general ‘ballpark number,’ so when you assign your official number to their trade, they’re more prepared to agree with it. One dealer using the Trade-In Marketplace (TIM) said, doing this third-party quote first is “the best closing tool I’ve ever seen.”
Appraising from the Service Drive is Lucrative Business
Profitable dealers will create a process within their service drive that generates leads by offering appraisals when vehicles are in for service. As customers bring their cars in for maintenance, your parts and service employees have an opportunity to introduce the idea of trading in that vehicle for a shiny, new one. If your service writers don’t routinely make efforts, it may be time for training to arm them with specific tools and knowledge to recognizing a good trade-in when they see one. Not every service writer can or wants to, for that matter, sell anything. However, they can be in a position to identify a selling opportunity to then hand-off to someone on the showroom. Incentivizing your service writers for every customer they deliver to the appraiser or sales team can help motivate them always to be mindful of those trade-in opportunities.
It’s critical, as you know, to put people in positions at which they excel. So, while it’s important not to make your service drive staff be salespeople, it’s equally essential to assign the dedicated appraiser to the process. No one has more of a trained eye to spot vehicle and mechanical problems than your service teams. However, as previously mentioned, to keep your ratios tight, consistency within your appraisal process is the best method. Allow your service writers to do what they do best – provide quality customer service in maintenance and repair efforts. Let your sales staff do the selling, and your appraisers do the valuations. The strategy is to drive leads from the lift and produce additional appraisal opportunities that lead to more sales.
Following Up Is Often Overlooked
Not closing the deal on the customer’s first visit can be frustrating. Those customers who leave without deciding are only gone forever if your teams don’t follow up. For those who may not be sold on a new vehicle, can often be lured back to look at recent inventory. Some customers maybe weren’t pleased with the value of their trade. You can entice them back with an offer to have their vehicle independently evaluated and quoted by a third-party organization. Keeping the lines of communication open with them increases your chances of bringing them back and making a sale. The ‘be-back bus’ won’t be back if you don’t give it a reason to come back.
Appraisal Tools as a Supplement, Not a Process Replacement
There are suites of software tools out there to help your appraisers discern the most realistic and profitable numbers. It can be easy to be sold on various platforms guaranteeing the best results. But ultimately, your margins will vary by market, meaning you should hone in on those tools that make the most sense for your dealership. A few examples of popular appraisal tools that you might be using or could explore include, Maxdigital.com, VAuto.com, or VinSolutions.com. These products help to pull real-time market data and assign a value instantaneously. They can ensure you’re getting the best wholesale price on vehicles, but it is not intended to take the place of the other appraisal value steps in the process. Having digital tools to help you pencil more profitable numbers is great. But, relying on them exclusively can leave money on the table.
Dealers with the Strongest Ratios Are Doing These Three Things
In addition to establishing guidelines for appraising vehicles, the dealers with the strongest appraisal-to-trade ratios are doing a few things.
Seeing the Big Picture & Beyond the Deal
It’s about seeing beyond the deal at the desk. One dealer in New York shared that his strategy is promoting his dealership as the venue for the highest trade-ins paid in his area. He targets vehicles that are good fits for his inventory first but then takes that customer engagement to the next level. He cites that he views each appraisal as an opportunity to create two new customers, one that agrees to trade in and buy, and another who will buy that trade later. He expands to say this presents double the chance of additional profits in F&I and servicing down the road.
Analyzing the KPI for Performance Improvements
You can’t change, fix, or improve a process that you don’t know is struggling. The savviest dealers track their appraisal processes religiously to keep those acquisition costs low. They will assess two pivotal benchmarks, the look-to-book ratio, and the cost-to-market ratio. In reviewing these metrics ongoing, you can identify trends of appraisers putting too much money on the vehicles. The latter can help you pinpoint your percentage allowances for reconditioning, packs, and gross profits.
Better Data Tools, Not Magic Wands
Instead of searching for digital tools to replace the valuation process altogether, smart dealers look for tools to help them track and manage the process and data. It’s important to remember that while much of your business is in the numbers, your front line is in the people business. Don’t eliminate the customer engagement opportunity. Instead, look for tools to keep your arsenal that help you make profitable decisions about trades, values, and to identify improvable trends.
The key takeaway here is that while some of your KPIs can seem like moving targets, with different variables often based on soft skills and case-by-case basis, you can make enhancements. When closing in on your appraisal-to-trade ratios for profitability, be precise about those aspects of your process, which you can control. Be continuously monitoring your data without losing sight of the big picture. Engaging some of the best practices of other successful dealers can help you continue to operate with a sharp pencil at every deal.