Used cars – when supply is short, dealers need to focus even more closely on performance improvement
Right across Europe, all dealers are currently looking for more used cars to resell, in order to compensate for the reduction in new cars sales (mainly due to chip shortages) and to take advantage of current high levels of profit opportunity. Some dealers have told us how they are taking back used cars they sold two years ago at the same price, and then reselling them again at a further profit! Clearly this situation is exceptional, and the used car market will eventually settle down again to its usual level, but now is a good moment for dealers to update their strategies and processes.
Some years ago, we suggested some ‘golden rules’, in the form of objectives and KPIs, for dealers to follow to improve their used car effectiveness. These ‘basics’ are still valid, but we have recently updated some of them to reflect the innovative strategies, approaches and tools we are seeing across markets.
The following table shows the ‘new’ list of actions and objectives that dealers could adopt or implement in order to grow their used car profitability. Although there are dealers in Europe who have really focused on optimising used car performance, particularly in the UK, for many dealers their performance falls below the potential that can be achieved mainly through applying better processes and disciplines:
Source: ICDP
Let’s take a quick look at each of them:
In order to find new sources of used cars, dealers need to develop the tools and systems that will help them to buy used cars ‘actively’ from private customers (so without the customer going on to make a purchase). Sourcing selectively this way could represent between 10%-15% of a dealer’s total used cars retail sales, even more for dealers who take a more aggressive approach. This sourcing is potentially very profitable because dealer can select cars where they have a good experience and profit potential, with a simple process separated from any purchase negotiation.
Also to ensure adequate supply of used cars to sell, dealers need to assign trade-in objectives to their sales staff; we would suggest that 80% of new and used cars sold (to private customers, where their existing car is not going back directly to a leasing company) should be accompanied by a trade-in on acceptable terms.
To make the trade-in process as effective as possible, dealers need to use online evaluation tools and/or offer home evaluations from salesmen or other staff, and these solutions should be used in at least 50% of digital leads. Shortfalls in this level of usage indicate that the approach offered is not user-friendly.
In order to maintain good used car profitability, it is important that reconditioning costs incurred should be constantly verified against the original estimates, with a reasonable objective of 95% on or under budget.
Good stock turn is critical (45 days as an objective for a typical European dealer, which equates to 8 times per year), and part of this should involve setting specific bonuses for sales staff to sell used cars as soon as possible (e.g. a special bonus for sales within the first 15 or 30 days)
In order to attract potential new customers and to promote their own brand, dealers should organise special used car events, which might also draw on the support of external partners (e.g. hotels, exhibition centres, restaurants, shopping malls, etc.); dealer marketing teams could be tasked with organising at least one used car initiative per month
Ancillary services (such finance, extended warranties, insurance, service packages) are an important element of used car profitability (dealers should target 70% of retail used car sales as including ancillary service sales); in order to improve their penetration, dealers should implement online tools able to visualise and incorporate these ‘extras’ into the the monthly fee quote the customer can generate
In order to increase transparency and therefore customer trust, dealers should give the customer the ability to download a certified used car history (including the service record) for at least 80% of used cars listed online.
In the current environment, where many innovations and new entrants are changing how the used car business is approached, and how competition between different players works, many dealers need to ‘step up’ the sophistication of their processes and KPIs to improve their performance in all areas of their used car business. ICDP will continue to highlight new opportunities and best practices in used cars across all types of player, and will be conducting more research into this topic in the coming months.