By Merritt Critcher, Director of Product Management, DealerSocket’s Inventory+

Knowing your operation’s core inventory is your best weapon against margin compression. A veteran car guy explains why and reveals a better way to measure turn.

When it comes to managing inventory, you can’t be successful unless you’re prepared to be. Processes need defining, and questions need answering. For dealers who subscribe to the Ideal Inventory Model (IIM), that means determining which vehicles make up their core inventory.

To understand why the IIM is now the leading approach to managing inventory, we must first recognize how far the industry has come since the days when the prevailing strategy was to hold onto a vehicle until you could make a profit. The realization that your cost increases and your odds of selling a car decrease the longer it sits on your lot gave us those 30-, 60-, and 90-day standards. The industry evolved further, with dealers quickly understanding they could sell more cars the faster they turned their inventory.

The problem — and where most used-car managers lost their way — is merely turning vehicles quickly is not enough, because it’s a balance between cost of goods, profitability, and how quickly you can sell the unit. Enter the IIM, a philosophy rooted in the belief that every dealer has a core set of inventory from a profit and turn perspective.

Managing the Casino

Unlike the now-debunked Velocity theory, the Ideal Inventory Model places the commodity tag not on the car, but on the spot on which it’s parked. Think of it like managing a casino, with slot machines taking up every parking space on your lot. To determine which ones perform well, you’re going to need to calculate how much you’re making per slot machine. And if you’re losing money on a particular slot, you’re probably not going to hold onto it or buy more of the same.

The same principle applies to vehicles that perform poorly at your dealership. And the way you’re going to know if you have a poor performer is with the IIM’s Profit Per Day calculation. Simply divide the profit made on a sold vehicle by the days it took to sell it. So if you made $2,000 in profit on a car that took 20 days to sell, your profit per day on that vehicle is $100.

That’s a great standard on which to operate. In fact, achieving anything over that means you’re running a highly successful operation that stocks unique inventory (typically lease vehicles and trade-ins). But let’s say you generate $1,000 in profit on a car that took 10 days to sell. Your profit per day would be $100. Now, wouldn’t that vehicle be more valuable than the one you sold in 20 days? That’s two opportunities in finance and two opportunities at a trade-in in the 20 days it took me to sell the other vehicle.

That’s the mindset of someone who subscribes to the IIM. These individuals know that nine times out of 10, a core vehicle will sell for a higher price than what it’s going for in the market. That’s why nonluxury dealerships, both import and domestic, generally operate best when core vehicles account for 45 percent to 55 percent of their preowned inventory.

Your Data vs. the Market

That profit per day example also demonstrates why shifting your focus on your dealership’s transactional data is essential. Knowing how well a car performs in your market is important, but knowing how well a vehicle performs at your store, in particular, determines your exit strategy.

When you’ve identified a solid performer, there’s no reason to get down in the gutter with every other dealership engaged in a pricing war. You simply need to differentiate your car based on the description you write and the pictures you take.

The other reason you don’t want to rely on market data alone is you risk getting the same recommendations every other dealership in your region is getting. When that happens, wholesale costs for the same vehicle increase, which leads to those profit-squeezing, race-to-the-bottom pricing wars. That probably sounds familiar for dealers who focus on “market performers” vs. core inventory.

By analyzing your historical transactional data, you know what your customers are buying — not what your competitors’ customers are buying 25 miles down the road. The point here is it’s not about having the lowest price; it’s about merchandising vehicles better so you can ask for a little more. Hey, you know your cars better than anybody else, so why should everyone else’s price drive your pricing strategy?