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The Better Way: A Focus on ROI

See how a $2,500 front-end gross might be a good outcome for one vehicle and a bad outcome for another. And, why it’s critical to tell the difference.

I had a hunch, and it was just a hunch, back in 2017 that possibly if there was a better way forward, it might be because maybe as an industry we were too focused on the wrong thing. Maybe not focused on the right thing. What we were focused on still to this day, very focused on is gross profit, whether it be total gross profit or average gross profit. But I happened to have met a lot of dealers along the way who did a lot of volume and were losing money. I met dealers who generate a lot of total gross profit in those years, and they still lost money. But one of the things that I understood generally about business is that if you have a positive return on your investment or your assets, you're profitable. And the larger that ROI is, the more profitable you are. So I began to wonder if maybe what we should be focused on in the industry with respect to our used vehicle inventory is their return on investment, their ROI. So I began to socialize this hunch that I had with some friends and dealers and colleagues. And one of the things that I came to understand very quickly when I would speak to dealers about, you know, managing their inventory with an eye towards optimizing their return, you know, dealers would often say to me, well, we do that, we do that. That's what we already do. And as I thought about it dwelled on it a little bit, it occurred to me that that is not what you really do. You might think it is, but it's not what you do. And in fact, what I really ultimately discovered is not only do we not focus on maximizing the return on these vehicle investments, but as I'm going to demonstrate to you, we actually do the opposite. And just to begin to illustrate proof of that point, let me give you this example. Suppose I told you that you sold a used vehicle and you made a $2,500 front end gross. Now, if I said that to you, probably everybody in the room would say, well, a $2,500 front end gross on the sale of a used vehicle is a pretty good outcome. And it might be a pretty good outcome, but it might not or it might not be nearly as good of an outcome as you think it is. So let me explain a little bit further. Suppose I told you that that $2,500 front end gross came from a sale of a $50,000 unit that took you 60 days to do it. Here is my question to you. Is that the same outcome for the bottom line of your used vehicle business as if you sold a $15,000 unit in 20 days and made it $2,500 gross? They're the same two gross profits, but are they the same two outcomes for your business? And when I put it to you that way, I think you can all see that they are not. They are different. They are two completely different ROIs. But you see as an industry, we don't recognize that today. And I thought that might just be a problem and some proof of the fact that we don't recognize it that way is I would say that if you looked at your sales log today and you saw two sales, both of which grossed $2,500, I don't think any one of you would ask the question, wait a minute, how much did we have to invest in that vehicle? How long did we have to hold it to make that $2,500? And therein lies proof that if you think you do manage vehicle investments with an eye towards optimizing their ROI, you don't. Because if you did, you would ask those questions every time, but you never do.
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Historically, what have been the primary goals of most used vehicle departments?

Check all that apply.

What should be a higher operational priority for used vehicle departments today?

Which option represents the best ROI?

True or false: Most dealers believe they are managing their ROI, but in reality, they are not.

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How Data Science Cracked the Code of ROI

Understand the statistical correlations that have delivered a whole new way of grading each investment you make in your used vehicle inventory.