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February 12, 2007: How a $400 discount turns into a $400,000 loss

February 12, 2007
Filed under Columns

“What’s the big deal?” the salesperson asked his dealer principal. “It’s only a $400 discount.”
Is this the culture in your dealership?
Let’s take a look at two different stores that both sell about 1,000 units per year. They operate in similar market areas, carry the same product brands, have nice facilities and a strong customer satisfaction index. In the eyes of their OEMs, they are both great performers that are on the exact same level. So what’s the difference? The difference is that little $400 discount, which adds up to $400,000 in gross profit each year.
That’s amazing, isn’t it?
Front-end gross profit is the selling price of a unit minus the cost, and does not include earnings from the F&I department, parts department or service department. For example, if a dealership sells a unit for $7,400 that costs them $6,400, the front-end gross profit would be $1,000.
The benchmark for the average front-end gross profit is more than $1,300 per unit sold, according to a recent RPM Group composite report. And remember, that doesn’t include F&I. If you’re still looking for a good reason to join a 20 Group, just do the math.
The first step to increasing your front-end gross profit is to begin tracking it. Set up a report in your dealership management system that will give you the gross profit of all the units your dealership sold for any given date range, and then get in the habit of printing that report at least weekly. One unnecessary discount can lead to many others, and by viewing that report you will be able to keep your finger on the pulse.
Once you are tracking your front-end gross profit, here are some other tips to maximize your profitability:

  • Make sure your team understands that customers aren’t being overcharged when they don’t receive a discount. Many custom bikes with less quality and performance of the units you sell cost well more than $25,000.
  • Enforce a sales process that gives your sales team the direction they need to sell more units and increase customer satisfaction. The important thing about a sales process is that you have one, and that your sales department is following it.
  • Teach your sales staff that every customer is not looking for your best price. It’s absolutely amazing how a paradigm shift (change of attitude) in this area will increase your gross profit. If your sales staff is expecting to give a discount to almost every customer, then almost every customer will receive a discount.
  • Build value by using features and benefits. We’ve all heard about the radio station WIIFM (What’s In It For Me). Never mention a feature if you can’t explain the benefits. For example, if the feature is fuel injection, the benefits are improved fuel economy, crisper throttle response and better cold-starting.
  • Have a systemic way to educate your team on the sales training and product knowledge they need to be successful. Send your employees to seminars — or check out online options — and utilize OEM training. You will get a nice return on your investment.
  • Use a worksheet on every deal. I recommend a four-square worksheet that presents selling price, trade allowance, down payment and monthly payment. This type of worksheet allows your team to focus on down payment and monthly payment, which is what ultimately must fit into the customer’s budget. A worksheet allows your sales department to strategize an action plan for every customer, and helps your team to stay off price on the showroom floor.
  • Your dealership pays for freight and set up. Consider how much a stamp costs for a letter that weighs just a few ounces. Now, multiply those ounces by 400 pounds, and $399 for freight is a value. Often times, technicians are some of the highest paid people in a dealership, meaning it costs you to set up and service each unit. Also keep in mind that the additional dollars you generate from freight and set up can offset hardball customers that demand a discount.
    As you can see, a few small tweaks will make a big difference in your gross profit. Discounting should be the exception, and not the norm. And the next time your salesperson asks, “What’s the big deal, it’s only $400?” you’ll remember that $400 today turns in to $400,000 tomorrow.

    Tory Hornsby, general manager of Dealership University, was drawn to the powersports industry more than 10 years ago when he turned his passion for motorcycles into a career. Hornsby worked in nearly every position in the dealership before becoming a general manager. He welcomes your e-mail: thornsby@dealershipuniversity.com.

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