Dealers Should Look at Odds

It's interesting to think of the number of times the average vehicle is sold — and by whom — before it ends up being scrapped I would guess a selling cycle of three to four times.

The number means a lot to franchised dealers.

While working on his degree, my youngest son took a class on the mathematical theory of probability.

It's a subject which holds a great deal of interest for me and which created an opportunity for my son and I to have many conversations about applications of probabilities in our daily and professional lives.

Historically, the mathematical theory of probability has its roots in attempts to analyze games of chance by Gerolamo Cardano in the 16th century and by Pierre de Fermat and Blaise Pascal in the 17th century.

Although an individual coin toss or the roll of a die is a random event, if repeated many times the sequence of random events will exhibit certain statistical patterns, which can be studied and predicted.

So, what does this have to do with selling and servicing cars and trucks, creating gross profit, etc.? A lot!

In the past five years, total new- and used-vehicle sales volumes annually have ranged from a low of 59 million units to a high of 61 million units.

During this same period, used-vehicle sales have, on average, represented 72% of the total transactions or 43.2 million units per year.

Let's take a look at the following chart compiled from vehicle sales-volume information supplied by CNW Marketing Research:

Now, back to probabilities. With a degree of certainty, we know the used-vehicle volume during 2007 will be an estimated 43 million units.

The question is how much of that market are we, the new-vehicle dealers, going to get?

When we look at the trend, we see a fairly significant decline in the new-vehicle dealer share of this used-vehicle market.

The interesting part is that our lost market share is going to the casual market.

I contacted several people who follow the used-vehicle industry to ask them about this shift in market share. Without exception, they credit the gain in the casual market to person-to-person Internet sales.

When we consider the total impact of losing two to three percent of a 43 million unit market, it equates to an average loss for us of just under 1.1 million retail sales at an average gross of approximately $1,800 per unit vehicle retail.

To that, add a finance penetration of say 50% at $600 PUVR and you will quickly see we are speaking of a potential loss of 2.3 billion dollars of gross profit. What I'm unable to estimate is the impact this loss might have on our fixed operations. But it, too, is sizable.

So, having pointed out this used-vehicle opportunity for the new-vehicle industry based on probability, what can we do to protect our turf or actually gain market share?

That is another day's subject, but look at your average transaction price of used vehicles, look at your inventory to ensure there is a selection of not only makes and models, but an age and lower price option for your potential customers.

One last tidbit: more than 80% of the retail used vehicles sold are five years old or older, according to CNW.

Take a look at this information and then get busy on a game plan that will allow you to turn your possibilities into probabilities.

Good selling!

Tony Noland is the president and CEO of NCM Associates, Inc. He's at [email protected].