According to data from the National Automobile Dealers Association (NADA)¹, the average gross profit for a used car is $2,337. While the operating profit margin may vary significantly², the national average is likely between 1 and 2%. 

With narrow margins, dealership owners should maximize their profitability where possible by introducing new strategies or paying close attention to existing work. How can you improve your operating margins in an increasingly competitive marketplace?

Buying the Correct Used Vehicles

It helps to have a granular understanding of your market and its demographics. This strategy will help you source vehicles likely to sell quickly, so they don't take up valuable real estate on your lot.

Buying for Your Market

Are you missing any potentially low-hanging fruit? What types of vehicles do other dealerships in your area sell, and is there an opening for you to focus on an unmet need? For example, are there enough truck dealers in the area to satisfy the likely demand, or should you focus on this strategy? Do other dealers emphasize SUVs and not sedans, meaning you should sell more sedans?

Buying for Your Customers

It also helps to develop a demographic profile of potential customers in your trade area. When you understand elements like gender, income level, and lifestyle, you can see how these factors might influence the type of vehicle they're likely to purchase. 

Don't forget geographical factors. If you're in a densely populated urban area, you may find that smaller cars are more popular due to parking issues or traffic. In colder climates, vehicles with heated seats may increase sales.

Remember that economic factors can significantly affect the type of vehicle a prospect may buy. Fuel-efficient and more affordable cars may sell well in areas with low average incomes.

Reconditioning Cars More Efficiently

You can reduce the time it takes to recondition a car before it is suitable for sale and, by doing so, should lower your costs.

For example, you may want to set up a standardized process with a clear, repeatable, step-by-step procedure, from initial inspection to final detailing. You may need to invest some money to train your staff so they are more uptodate with the latest technologies and repair techniques. This strategy could improve the quality of work and speed up the overall process.

You may also want to identify software solutions, such as Rapid Recon³. These tools may help reduce the average days in recon (ADR) and enable you to see and control exactly where the vehicle is in real-time. The company claims you can get any car to a "sale-ready" condition in three to five days.

Recon sometimes requires specialized skills or equipment, and a dealership may not always have these elements on-site, so it can be beneficial to outsource these tasks to a professional service provider.

You may also find it useful to use non-OEM parts if you source them from a reliable, quality provider. Ensure this technique does not disqualify any vehicles from existing certification programs.

Looking Beyond the Lot

When you've identified your ideal vehicle inventory and upgraded your reconditioning process, look outside the lot, and consider other improvements.

Optimize Your Marketing Spend

Information from NADA suggests that the average dealership spends $695 per vehicle sold⁴ (although this information may include both new and used vehicles). However, it is a significant amount based on the likely profit margin, so optimizing the marketing spend where possible is important. 

Refer to your demographic research and ensure that you focus on areas where your prospect will likely be. You'll find out where your audience typically appears (for example, on social media) and should only spend money on those platforms.

Try to avoid generic messaging and tightly customize that message instead. Personalize any ads to improve your chances of getting your message through and attracting the correct type of customer. You can use programmatic advertising and algorithmic tools and technology to target your media buying precisely⁵. Investigate solutions such as the "demand-side platform," where you can buy ad inventory across multiple platforms simultaneously.

Consider Add-On Services and Products

Many potential (and profitable) services and products are available to a used car dealer. Have you considered some of the following:

• Service Contract and Maintenance Packages: These can bring in customers for tire changes and regular maintenance to generate steady income.
• Extended Warranty: These cover the cost of certain issues and problems once the manufacturer's warranty runs out.
• Insurance Products like GAP: A product such as "guaranteed asset protection" (GAP) can often be attractive to consumers as, in the event of a significant claim, it helps to cover the difference between the outstanding finance balance and the actual cash value.
• Window Tinting: This solution can be particularly attractive in warmer climates and is a potentially profitable add-on.
• Roadside Assistance Programs: You could sell programs that offer lockout assistance, emergency fuel delivery, flat tire changes, and towing (amongst others).

Sourcing Used Car Inventory Online

By working with ACV Auctions, you can ensure that your dealership always has the specific inventory you need. We are the leading online car auction for dealers and will help you find used vehicle inventory nationwide with trust and transparency. 

ACV provides the best condition report on the market and can ship any vehicle fast and at a fair price, regardless of where you buy it from. We also offer straightforward and flexible financing solutions.

Due to our thorough inspection and data, buyers can make $316 in additional profit per vehicle when sourced through ACV. So, why not start working with ACV by registering today?

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Sources:

1. How Much do Car Dealers Make? Retrieved on August 28, 2023 from https://www.onlineautodealered.com/career-central/how-much-do-car-dealers-make

2. Car Dealership Profit Margins. Retrieved on August 28, 2023 from https://www.thefreemanonline.org/car-dealership-profit-margin/

3. Rapid Reconditioning. Retrieved on August 28, 2023 from https://www.rapidrecon.com/

4. Local Car Dealers Upped Ad Spending 4.2% during First Half. Retrieved on August 28, 2023 from https://www.insideradio.com/free/local-car-dealers-upped-ad-spending-4-2-during-first-half/article_19b5308a-37eb-11ed-a7a3-6f81d69b76da.html

5. What Is Programmatic Advertising and How Does It Work? Retrieved on August 28, 2023 from https://www.searchenginejournal.com/what-is-programmatic-advertising/462655/#close