Feb. 9, 2004 – Observations on profitability

EDITOR’S NOTE: The following article by Steve Jones is a series of observations and suggestions on increasing the profitability of your business. These come from more 30 years of experience working in dealerships and from working with hundreds of dealers across the country as a manufacturer’s representative.

This is NOT another F&I article. There are already lots of good books and articles on using F&I to increase your profits. Rather, these are ideas you can use to directly improve the net profit on the units you sell before you ever get to the F&I office.

Deeply discounted prices destroy the value of the product you are selling. What are you telling your customers? The product is not worth the asking price! In addition, you are killing trade-in and resale values and insulting your previous buyers. Deep discounting destroys the marketability of the product. Ultimately, declining profits destroy the dealership.

HOW DO I INCREASE PROFITABILITY?
The survival and the future growth of your business depend on your ability to make money. Making money means Net Profit. Do not confuse this with gross dollar volume. I can provide numerous examples of dealers with huge gross dollar volumes who have failed because there was no profit in their sales.

There are two main methods of increasing profitability on a given volume of business: decrease overhead, or increase margins. My goal here is to provide you with ideas you can use to increase your margins on units. Decreasing your overhead is a case study that is best handled on a one-on-one basis.

HOW DO I GET INCREASED MARGINS?
Easy…raise your prices. But, you say, your competitors are selling their units for less and you will lose sales to them. So what. Isn’t the whole idea to make money on what you sell? You will still be in business after they are gone.

I realize that this is simplistic, but it really is the basic idea.

Let’s analyze the problem in a little more depth. The “Discount Syndrome” begins when one dealer drops his advertised price.

Step two occurs when one or more additional dealers react by lowering their prices in response. What would happen if no one reacted? There would be no “Discount Syndrome.” If any dealers lost sales to the discounter, it would be minimized by the fact that the majority did not respond!

TWO IMPORTANT SUGGESTIONS
First, don’t let other dealers run your business. Don’t react to what others do. Follow your business plan.

Second, don’t quote discounted prices on the phone. If you do this, you are letting the customer control the sale. They’re sitting at home “smiling and dialing” and playing all of you against each other. To be a profitable customer for you, they must come to your store. Then you can use your selling skills to obtain a fair profit margin. The phone quote game is one of the primary breeding grounds for the “Discount Syndrome”.

There are many methods that can be used to handle the phone shopper. For example, the first dealership I worked in was a highly successful Yamaha dealership. If any of our sales staff quoted any price other than MSRP over the phone, they were subject to instant termination!

The answer to a phone price inquiry went something like this; “I can only quote you retail over the phone. Our prices are so low that the boss doesn’t want the competition to know what we are selling our units for…”

Another approach was; “We are competitive with all the dealers in this area, come on in and we’ll work out the best deal for you…” You can be very creative with your answers, but remember, if they aren’t willing to come to your store, they aren’t your customers. Create a written store policy that clearly spells out your preferences to all of your personnel.

WHO IS A “GOOD CUSTOMER”?
You all know that the customers will play you against another dealer to get the best deal. It’s their job to do this. There some things to consider about this customer shopping game that can heavily influence your profitability. It is important that you develop a policy and communicate it to your employees regarding your definition of a “good customer.” For example:
– Who gets “deals?” What happens when a customer from another town calls and asks for a discount? Do you go after this business?

Why would you want to give a better deal to a customer you’ll never see again than to your repeat buyer? Many dealers do, however. Is this wise? This customer buys no parts or service from you, he gives you no opportunity to make up any profit you lost on the unit. He is not your “good customer”.
– If the customer is in your store wanting you to match another dealer’s price, call the other dealer and verify the deal! If you don’t do this, you’ll never know how much is being left on the table. If the other dealer is really discounting the unit, at least they’ll know that you know.

Either way, it keeps the communication link open. Dealers who talk to each other are less likely to work against each other.

THE CUSTOMERS IN YOUR SALES AREA
If a customer won’t come to your store to negotiate a sale, they aren’t your customer. Why do I say that? With few exceptions, the manufacturers spend a lot of time and money analyzing a given market to determine if it will support a dealership. This is simple economics since it costs the manufacturer money when a dealer fails.

There are very few dealerships who don’t have enough customers to support their business. You should have enough customers to sell to without going far and wide to make a sale.

Concentrate on the customers who make you the most money, the repeat buyers and the parts and service customers, and you will increase your profits.
You need to recognize that these are primarily the customers who have easy access to your location. You need to be aware of the specific demographic that they represent in your area. This is the information you use to build your marketing plan — the plan that determines how and where your advertising dollars are spent, as well as the specifics of how you market your dealership.

DOES DISCOUNTING INCREASE SALES?
In the short term, of course it does. In the long term, however, a given market area retails the same number of units, regardless of the price.

Discounts can be used to boost sales on individual models for short periods. Since I already pointed out that you each have a good supporting customer base, long-term discounting doesn’t make much sense.

OVERCOMING THE COMPETITION
Many times I’ve heard dealers say, “Our only competition is another (insert brand name) dealer…”. If you accept this, you are missing out on the fact that you need to be selling against other brands.

Each brand and product has unique features and benefits, and it is much easier (and more profitable) to sell against other brands. It’s the old “apples and oranges” thing. Think about it. You can more easily overcome the price objection by selling the unique features and benefits of your product, than if you are comparing identical brand models. The biggest influencing factor here is how effective you are at marketing to your competitors’ customers.

If you must compete with like brand dealers, you will be much more profitable if you differentiate your products by modifying and accessorizing them. “Packaging” your units with accessories targeted to your market makes it harder for the customer to compare prices with the other dealers.

One of my more successful ATV dealers stocked multiple colors of plastic for their units and created models in colors that were only available at their dealership. This resulted in their being able to charge significantly higher prices in a highly competitive market. Unique sells. In another case, a dealer had some slow selling snowmobile models that they modified with pipes, longer tracks, and special decals.

They not only sold them out at a good profit, they had customers calling from other states to purchased these “special build units”! I have seen several cases where motorcycle dealers have increased sales and profits by changing decals and/or painting units to make them unique and more saleable in their markets.

HOW ABOUT OVERSTOCK SITUATIONS?
It happens to every dealer at some time or another. The mill closes. Your hot sales manager orders extra product and then moves to Cambodia. You ordered the green one that was hot last year and the customers all want the red one. The end result is that you have units coming off of free flooring and you want to move them. What can you do to maximize profits while decreasing this inventory?

Avoid going into panic mode whenever something comes off of free flooring. Recognize that some flooring costs are normal in this business. You need to incorporate these costs into your projections. It is much easier to absorb some flooring costs when you are making a good profit on your units.

If you really have a heavy inventory situation, the first stop is your DSM. See if there is anything that can be done to move these units to other dealers. Next, contact the surrounding dealers and let them know that you need help to move these units. If you have good relationships, they will try to help you. Remind them that it will help them in the long run, because you won’t be “dumping” the units in their market area.

If you have no other option, you must develop a promotion that will put the units out the door. You are always better off to offer an option that shows more dollar value than a price discount. If the price needs to come down $300, offer an accessory package with a retail value of $500, but a cost to you of $300. It is important that you go big enough the first time. You seldom get a second chance at this game.

Check with a travel agent for airline tickets or travel packages that you could offer that have high retail values, but minimal costs. One of my dealers was very successful at moving old inventory by offering a Hawaii vacation valued at $1100. His cost was only $250. The idea is to avoid directly discounting the unit price, if at all possible. Be creative, do something unique that will attract the customer. Do something different that preserves the value of the product.

USING MANUFACTURER PROGRAMS
If there is a widespread overstock situation or a significant competitive product or program threat, the manufacturers will develop programs to boost sales. You need to “think outside the box” and look at all the possibilities these programs offer.

If the manufacturer is offering a dealer rebate, think about how you can better utilize this money by developing your own promotion funded by the rebate money (see above examples). This will allow you to differentiate yourself and help justify higher margins even when sales are slow or there are increased pressures from your competition.