By Josh DeYoung, Vice President of Sales, Velocity Automotive

Strap in because the rest of 2023 could be a bumpy ride for auto dealers. Several factors are converging to create a perfect storm of conditions that threaten used vehicle profit margins, including rising interest rates, waning consumer confidence, a potential recession, falling retail prices and a tight supply of three- to four-year-old vehicles due to fewer leased vehicles hitting the markets.

However, there is some good news. Unemployment remains low and new vehicle prices remain high, which means that plenty of car shoppers will qualify for financing and will opt for used vehicles. Demand should remain stable throughout the year.

Regardless of market conditions, 75 percent of auto dealers are placing a greater emphasis on their used-vehicle business this year, according to an Automotive News survey conducted in January 2023. Top strategies are accepting less gross profit per used vehicle sold and reducing retail prices and profit targets.

While a decline in used-vehicle gross profit might be expected, it’s not inevitable for all dealers. Focusing on the following strategies can help to keep your profit margins higher than the market average.

Smart Acquisition Strategy

Being smart about how much you pay for inventory is essential. Pay too much, and the potential for profit sinks; offer too little, and you send the trade somewhere else.

Most dealers rely on inventory management software as a guide for how much to pay for used vehicles. However, this software alone does not tell the whole story. Market prices are aggregate and do not include every detail about what makes one piece of inventory more valuable than another. With so much technology today, sometimes it isn’t easy to properly value one car from the next.

Working out the true value of a vehicle requires the use of the original factory window sticker data. Which features and packages are included on a particular vehicle? Does it have upgraded technology? Managers have long used this data to assess vehicle value, but historically this data has been challenging to obtain or access, especially at an auction.

Fortunately, it is now possible to access window sticker data from your inventory management software app on your smartphone. This eliminates the need to log in to another system, download PDFs from the internet or call staff from remote locations. So, managers can easily access window stickers to calculate offers rapidly and confidently so that you can obtain more vehicles at the right price, setting you up to make a healthy margin.

Improve Reconditioning

According to J.D. Power, the average number of days it takes for used vehicles to sell at franchise dealerships is 42 days. Some factors affecting this time lag, such as transit times, are largely out of the dealer’s control.

The recon process has a huge impact on how long a vehicle is at the dealership, and this process is firmly within the dealer’s control. Many dealers don’t track recon as closely, or their methods are outdated and inaccurate. I recently worked with a dealership that took up to 21 days to get their vehicles fully retail ready. This causes great cost and loss. Ideally, once a vehicle is received at the dealership, the recon process should take no longer than five to seven days.

Digitizing the process and integrating recon information with your CRM is an effective fix for this problem because you can’t fix what you can’t measure, and you can’t measure what you can’t see. Visibility from within the existing systems that your staff uses makes it easier for managers to hold service staff accountable for deadlines.

Additionally, the CRM is where salespeople, BDC agents and sales managers live for a good part of their day. Providing insight into the recon process from within the CRM allows your sales team to see which vehicles have been received and where they are in the recon process. Keeping salespeople in the recon loop further helps accelerate the sales process because they can estimate when a vehicle will be ready for retail and set appointments with interested customers.

Merchandise with Transparency

Consumers want to complete more of the car-buying process at home, which means they want more information upfront to help make a decision. According to the Capital One 2023 Car Buying Outlook survey, only 21 percent of consumers believe the car buying process is very or fully transparent, versus 68 percent of dealership principals and employees. Dealers need to close this gap. And you do this through transparency and making the information consumers require easily available to make a buying decision.

The more data you provide, the more car shoppers will trust you, and the more sales you will make. If they have to surf the internet to find information about your car, they will soon land on your competitor’s website. You must captivate and engage today’s shoppers – or – risk losing the deal. You don’t have to reveal how much you paid for a vehicle, but being transparent about dealer add-ons, interest rates and other fees helps alleviate typical customer obstacles to buying.

Additionally, try automating touchpoints with consumers. For example, what is the automated lead response when you receive a lead? Instead of telling a car shopper they have to wait and talk to a salesperson, set up an automated response to include a complete digital portfolio of their vehicle of interest; this includes window sticker data, service recon records, CarFax, Google reviews of your dealership, links to value proposition videos, and other information that a car shopper can’t get from the vehicle display page (VDP). Open rates on these automated emails are as high as 70 percent.

Another automation that increases customer engagement is price change alerts. When a customer record is associated with a vehicle of interest, and there are price changes on that vehicle, an email is automatically sent to the customer, alerting them of a price change. Salespeople have too much going on to remember to do these little things, and automation is a great way to keep customers engaged.

While most dealers are prepared to accept less gross profit per used vehicle sold, it doesn’t mean that your dealership has to. Fight to keep every dollar of gross, using technology to streamline your acquisition, recon and merchandising strategies.