Re-Think Reconditioning and Improve Profitability

By Dale Pollak

In an age where the mar­gin between the cost to acquire and retail a used vehi­cle is shrink­ing, there’s pres­sure to re-vis­it the recon­di­tion­ing costs deal­ers have tra­di­tion­al­ly passed along to cus­tomers. They can no longer count on the age-old axiom that $1 spent for recon­di­tion­ing will trans­late to a $1.25 return.

This real­i­ty is dri­ven by two fac­tors:

  • First, today’s shop­pers, whose ini­tial review of used vehi­cles occurs via online vehi­cle list­ings, can­not ful­ly appre­ci­ate a dealer’s “extra mile” of recon­di­tion­ing when they exam­ine pho­tos of a car. In my day, this wasn’t the case as a vehi­cle shopper’s first review of a vehi­cle occurred on our lot.
  • Sec­ond, the mar­gin com­pres­sion for used vehi­cles makes it more dif­fi­cult for deal­ers who “go the extra mile” to account for recon­di­tion­ing costs and com­pet­i­tive­ly price their used vehi­cles. This often trans­lates to slow­er-mov­ing inven­to­ry and age-dri­ven price reduc­tions, which com­bine to erode front-end gross prof­its.

For these rea­sons, many deal­ers are look­ing for ways to trim recon­di­tion­ing expens­es and ease the down­ward pres­sures on their front-end gross prof­it mar­gins. The fol­low­ing best prac­tices have helped deal­ers reduce up to $400 from their aver­age recon­di­tion­ing costs per vehicle—and increase their front-end gross prof­it mar­gins:

1. Charge less than retail rates for recon­di­tion­ing labor and parts. A grow­ing num­ber of veloc­i­ty deal­ers are aban­don­ing the prac­tice of charg­ing full retail rates (or more) for the parts and labor required for recon­di­tion­ing. The deal­ers are reduc­ing their rates by up to 20 per­cent to min­i­mize the costs they must recoup in their retail pric­ing.

2. Scale back the scope of recon­di­tion­ing when appro­pri­ate. Deal­ers note that a deci­sion to scale back recon­di­tion­ing is subjective—it depends on the car and the tar­get cus­tomer. How­ev­er, these deal­ers say their effort to nar­row the scope of recon­di­tion­ing has had lit­tle dis­cernible impact with cus­tomers. If it does, deal­ers say cus­tomers appre­ci­ate their efforts to make a car “right” and close a deal.

3. Use low­er-cost replace­ment parts when appro­pri­ate. This would not apply to used vehi­cles that require OEM parts for cer­ti­fi­ca­tion pro­grams. For oth­er vehi­cles, how­ev­er, deal­ers say they can reduce recon­di­tion­ing costs by using qual­i­ty, non-OEM parts when appro­pri­ate. In par­tic­u­lar, deal­ers say they can save as much as 50 per­cent on the costs of high-vol­ume replace­ment parts such as brakes, rotors and tires when they look for non-OEM alter­na­tives.

Dale Pol­lak, founder of , can be reached at 630.343.9016, or vis­it him on his blog at .

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