A jam-packed room of dealers and dozens more online listened intently to Dale Pollak, Founder of vAuto, as he offered his insight on a new approach to pricing and selling used vehicle inventory at a private dealer event in Toronto, Ont., hosted by software provider AutoSync.
Pollak is a celebrity in the auto retail world, as the founder of vAuto, and author of several books aimed at maximizing a dealer’s profitability using data science and vehicle market metrics. Pollak credits his unique approach to relying on science and analytics to price and sell vehicles due to his unique circumstances of not being able to physically observe used vehicle inventory when he was a Cadillac dealer in Chicago — because he was blind.
His observations and methods helped spark the creation of vAuto in 2005, and has now been widely adopted by thousands of dealerships across North America.
In his Toronto keynote address, Pollak said he had done a lot of soul searching and thinking during the pandemic. He said his previous approach to focusing on maximizing vehicle turns at the expense of gross profit for each vehicle was a sound strategy that worked for many dealerships. It was called the Velocity Method of Management.
But he said the market disruption fueled by the pandemic and the supply chain shortages made that approach less effective. He also said he started to see the process as fueling a “race to the bottom” that wouldn’t be sustainable. “In retrospect, I was wrong. There was a race to the bottom,” said Pollak.
He said that while forces outside of his influence, such as the transparency in vehicle pricing powered by the Internet, was the key factor driving lowered pricing, he nonetheless contributed to it with his teachings and publishing.
“I’m here to share a very important new strategy in used vehicle operations,” said Pollak during a 90-minute keynote he delivered at an upscale golf clubhouse location in Toronto. “Velocity passed its prime before the pandemic… Now is the time to move beyond velocity management — to a method called variable management.”
Pollak argued that velocity management was a “blanket one-size-fits-all” approach, while variable management is much more precise. Just as a parent wouldn’t treat all their kids the same, dealers need to treat each vehicle differently based on its expected ability to deliver its maximum potential.
As he was developing the variable management approach, Pollak looked outside of the auto industry and deduced that auto retail was one of the only industries that didn’t have a proper recognition of the return on investment (ROI) involved in acquiring, refurbishing, and managing used vehicle inventory. “Why was that? Was there something missing in our industry?” he wondered.
For a host of reasons, car dealers don’t manage their used vehicle investments with an eye to optimizing their returns. Pollak came up with a new theory and tested it using data from millions of used vehicle sales from over a decade of business with dealers. His hunch, fueled by the data science crunching from his analyst team, found a distinct pattern and statistically relevant correlation between vehicles that delivered the best ROI performance.
He said three factors stood out:
- Cost to market
- Market days supply
- Local market retail volume
Based on those key factors, he developed a new classification system for used vehicles: Bronze, Silver, Gold and Platinum. The bronze and silver vehicles were destined to deliver lower ROI, while the gold and platinum vehicles had the highest opportunity for ROI based on how they fit into those three key factors.
But what Pollak found in looking at how dealerships were actually pricing their vehicles, is that they had it inverted. They were quickly selling the gold and platinum vehicles that had a good chance of fetching a higher price and return, and were holding on to the “duds” that were going to generate little to no ROI on the investment.
This finding was also consistent across all 12,000 dealerships he analyzed. None had implemented what he called a “rational pricing policy” that recognized when a vehicle’s value was like a rotting black banana and needed to be priced quickly to sell. Yet dealers were only too eager to part with the platinum vehicles that could have generated more margin for them.
During his talk, Pollak repeated that: “Eventually this finding will change the way every single dealer manages used vehicle inventory.”
But he said it won’t be easy, because the used vehicle market buying and selling are rooted in habits and are influenced by human behaviours and things like pride. “Some of the issues are human nature,” he said. “People don’t want to admit on day one that a vehicle they purchased is a black banana,” he said, but the smart idea would be to aggressively price it and move it.
He said if dealers follow his classification system, most will find a lot of their inventory is in the silver/bronze category, because the markets are efficient and pricing information is so widely available. But that’s not a problem if dealers recognize bad bananas for what they are: high risk vehicles. “Make it go away quickly,” said Pollak, advising that dealers need to treat those vehicles as something that needs to be sold quickly for a reasonable price.
Pollak said only using a calendar to determine the time needed to sell a vehicle was also partly to blame, because some vehicles maintain their value even as they age in inventory. “The calendar tells us nothing about the profitability of a car. Calendar time does not equal profit potential.”
At the end of his keynote, Pollak then fielded questions from dealers in the room and others online who were viewing the event via livestream.
Watch the full recording and download resources at: https://bit.ly/3RofoHy