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The Banana Lesson: Calendar Time ≠ Profit Potential

With a metaphor of “ripeness,” learn how using “Days in Inventory” as a measure for all vehicles equally is a flawed premise that causes irrational decisions.

Imagine a banana. We can all understand the ripeness of a banana, that it goes through stages over time. On day one, it's a green banana full of potential with lots of time ahead. A few days pass and you have a perfectly ripe banana. It's in its prime. But it won't stay like this forever because a few more days go by and then you have a bruised banana. I mean, this is not good. Its time is running out and may have already passed. If you were selling it, you'd give it a heavy discount or expect to throw it out soon because after a few more days pass, things get ugly. You've got a gooey, rotten banana and you've got to get rid of it because it stinks. Okay. You see where this is going, right? In some ways, cars are like bananas. Profit potential, like ripeness, will diminish over time. But unfortunately, cars aren't exactly like bananas. Unfortunately, our challenge is a bit more complex. For one thing, while most bananas age pretty consistently, different cars can age at very different rates from each other. So imagine two cars shown here on day one with their profit potential high represented as green bananas by day 15 in your inventory, the profit potential of both cars settle in. Here, let's represent this as both cars being perfectly ripe bananas. But by day 30, it's not uncommon for one vehicle to hold its potential longer than the other. Here, the first car is holding strong, while the second car has become a bruised banana. And by day 45, the factors that make that first car a high potential vehicle still remain high. It's still perfectly ripe. While car two has dropped off the table. It's a gooey, rotten banana on your lot and it's got to go. So what's it saying that these cars are both at day 45 tell you about each one's profit potential. Nothing. Day 45 tells you nothing. But hold that thought. There's another way the car challenge is more complex. With cars, you're not always working with a green banana on day one. Bruised. Perfectly ripe. Green. Vehicles can be at any stage when you take them in. You might even be taking home a gooey, rotten banana on day one. Maybe by accident, but maybe on purpose. Maybe you chose to buy a rotten banana to close another deal. And if that's the case, what is saying that this car is on day one telling you about the profit potential of that investment. The answer is nothing. Saying a car is on day one or day 45 means nothing. The calendar tells you nothing about the profit potential of any given car. Do you see the problem in both of these scenarios and many more scenarios throughout the industry? The calendar is the problem. The calendar is an old and crude form of technology and it tells us nothing about the value of these investments. It's a flawed way of thinking about it. Left over from a different time, we may believe it without even questioning it, but we've got to realize calendar time does not equal profit potential. So how can we know the profit potential of any given vehicle on any given day? Wouldn't it be nice if every vehicle clearly signaled its own profit potential in real time? Signaled it in a way like, I don't know, a banana? Wouldn't that be nice? Seeing each vehicle's quality as an investment in your inventory as easily as picking a good banana from a rotten banana. Well, it wouldn't just be nice. It's here and it works. Introducing Provision ProfitTime. ProfitTime is a new method of management. It's a shift in focus from the number of days you hold a vehicle to the profit potential each vehicle holds. And ProfitTime is a new metric in Provision. It's a leading indicator that's proven to have a strong correlation with real outcomes in the marketplace. So about that margin compression challenge, the one that was pulling the velocity V out of balance. The answer is to stop making decisions on calendar time and start making them with ProfitTime. Optimizing margins on every vehicle, raising average gross and bringing balance back to Velocity. For dealers who are ready. It's time to ditch the calendar. It's time to optimize both turn and gross. ProfitTime. It's time to make money. Calendar time does not equal profit potential. I need to repeat that one more time. Calendar time. Does not equal profit potential. So you see the first reason why every single dealer in the country, every one of you has a pricing profile that is not rational for optimizing ROI is that we are all making decisions on a flawed premise. And whenever you make any decision on a flawed premise, you'll often make suboptimal and sometimes downright irrational decisions. So what is the flawed premise? The flawed premise is that we believe that every vehicle in its first day of inventory life is a green banana. The most stunning discovery we made in developing this system. Are you ready for this? Ready for this? More than half of the vehicles in your inventory on their first day of inventory life are brown and rotten bananas. But what would the calendar say? What would the calendar say to your pricing manager about every vehicle on day one? It would say that every vehicle is a green banana and you should go for all the gross. And in more than 50% of the cases it is exactly the wrong thing to do to optimize or to salvage whatever ROI opportunity there may be in that vehicle. But that's exactly what we would do. So let's think about it differently. Instead of selling used cars for profit, we sell bananas. And today you get a shipment of inventory and you open the box and to your surprise, they're not all green bananas. There are some green, some yellow, some brown, some rotten bananas. Now, if you're a prudent business person with an eye towards optimizing your return on that investment, those those investments, the very first thing you would do would be to grab those rotten bananas. And people do make banana bread. That's in fact a pretty big industry. Surprisingly big industry. You would take those rotten bananas, put them on the shelf immediately and price them super fast to go quick. And then you'd go back and then you'd get the brown bananas, put those on the shelf next and price them a little bit higher. And then third you'd go get those yellow bananas, put those on the shelf and price them even higher. And then finally you'd go get the green bananas, put those on the shelf and price them the highest. Right. It just happens to be exactly opposite of what we do in the car business. And then we wonder. Then we wonder why. In those years leading up to the pandemic, before we got the big reprieve. In those years leading up to the pandemic, when we did record volume, then we wondered why half of us had a net loss and the other half of us leading up to the pandemic made less than that profit every year. Well, no kidding. What is the problem? Problem was Velocity. Problem was Velocity. That one size fits all approach that eventually caught on to such a degree that everybody started doing it. The race to the bottom was on.
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What does the calendar tell you about the profit potential of a vehicle?

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True or false: Calendar time does NOT mean profit potential.

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Behavior Change: Software Alone Is Not the Answer

Learn how practicing Variable Management often runs contrary to “well-established” used inventory management norms, and why it requires a conscious effort to change behaviors beyond the purchase of software.