Use best practices, not bargains, to increase gross profits

Publish Date: 
Apr 2, 2012
By Tory Hornsby

Ever wondered how some dealers can hold such high margins while you’re left fighting to make $400 per unit?

If you’ve ever thought to yourself, “I wish I could make a little more gross profit per unit sold,” you’re not alone. And I’ve got good news! Bringing in more gross profit doesn’t depend upon your location, your buying base of customers, the brands you carry, or your competition — and it’s certainly not dependent on luck. While these factors certainly can impact the culture in your operation, holding margin comes down to exercising knowledge and skill — which you can easily implement in your dealership’s daily operations. Every dealer wants to make more money, but most think the only way (or the best way) is to simply sell more units. This is not always the case. Let’s look at two dealerships who are pushing for growth, albeit using different tactics.

Dealership A is a metric dealership that sells 600 units per year. It averages $500 in gross profit per unit sold, which earns the store $300,000 in GP per year. Dealership A’s plan is to grow its unit sales by increasing its advertising into other markets and offering bigger discounts to lure in prospects and encourage customers from outside of the area to pay a visit.

For an extra $1,750 per month in advertising, this dealership brings in more business — selling an additional 150 units, for a total of 750 units. Though they’re excited about this 25 percent increase in business, they fail to see the significance of their gross profit falling a little lower than normal. In fact, they’ll find that it’s dropped from an average of $500 per unit to $425 per unit sold.

The mistake is that management believes that with this increase of units sold, they’ve got to be making more money.

Let’s take a closer look: Dealership A has increased its unit volume to 750 per year at an average gross profit of $425 per unit sold, which earned $318,750. Now factor in the additional $1,750 per month in advertising ($21,000 per year), and we find that the store actually has worked harder, but has lost $3,000. This number doesn’t include the additional salesperson payroll, additional man hours from administrative staff, and general wear and tear on the facility.

Now let’s take a look at Dealership B, which is also a metric store selling 600 units per year at an average gross profit of $500 per unit sold. This currently earns the store $300,000 in gross profit per year. This store also wants to make more money, but decides to go about it in a completely different way than Dealership A. Management begins by focusing on improving staff selling skills and learning how to hold margin. This training focus enables the sales staff to provide premium service, which in turn helps its repeat and referral business. This motivation to increase profitability actually causes unit volume to drop.

While the store fights for every single dollar and every single deal, Dealership B ends up selling 50 fewer units than the previous year, with only 550 units rolling out the door.

While it wasn’t able to achieve the goal of $1,000 gross profit per unit, the store increased it to an average of $750 per unit sold. Under the dealership’s efforts, this earned the store $412,500 in gross profit. This is a more than 30-percent, six-figure increase over its previous year.

Margin beats Volume
Here are tips you can implement to help increase your margin:
• Use a sales process and train your staff to follow it. If you don’t know where you currently are, it’s very difficult to find your final destination.
• There are two emotions in selling — desire for gain vs. fear of making a mistake. Create a bar chart focusing on increasing the desire for gain.
• Stop inviting negotiations. It’s hard to believe your salespeople are doing this, but they are every time they add a word like best, starting or retail in front of price.
• Never pause or allow silence after you give a price. Build value and then ask a question.
• Allow less back-and-forth when desking a deal. Every time you go back and forth, you’re dropping the price. Get the sales manager involved earlier in the process. Sometimes a new face, or the symbol of authority is enough to get a “yes” buying decision before you give up your margin.

Your dealership can implement these best practices, just focus on them one at a time. Remember, a good deal isn’t a number, it’s a feeling.

This story originally appeared in the Dealernews April 2012 issue.