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 .