Recent headwinds facing the globalized economy have afforded car dealerships some of the most profitable years in decades. The average new car sales price reached $46,000 as of February and new and used car prices increased 12.2% and 40.4% year over year, respectively. It’s an awful time to buy a car, and a great time to sell one.
Dealers are raking in increased profits as hungry buyers compete for thin inventory pushing sale prices to never seen before highs, at or above MSRP. Accordingly, dealerships are able to command unprecedented per unit profits on historically low margined used car sales. Kerrigan Advisors’ average dealership Blue Sky value (the intangible dollar amount paid for a dealership’s future profits) increased 20.3 percent from 2019 to 2020. Simply put, dealership values are at all-time highs.
But what happens when vehicle supply returns to normal? How do dealerships uphold business value after the feeding frenzy subsides?
The answer: Focus on increasing value for the customer and start doing it right now.
What to do: Don’t charge premium pricing simply because the current environment allows.
- Foregoing short-term profits to increase recurring revenue reaps benefits in the long run.
A skilled salesman knows every buying opportunity is a chance to make a customer for life. In the nearly perfectly competitive car dealership industry, price and the reason for its fluctuation are the best way to communicate value to the customer.
Quist’s most successful dealership clients attribute their business prosperity to reputation and high volume of recurring customers. Some dealership clients attribute nearly 60.0 percent of annual sales to repeat customers.
Why It Matters: Prospective business buyers are willing to pay more for a customer base that has a history of coming back.
- The highly competitive, thinly margined nature of the car dealership industry benefits greatly from a loyal customer base with regards to service, future sales, and business reputation.
- Recurring revenue from long-term customers reduces overall business risk.
Why Now: Disruptions in how Americans have traditionally purchased cars and the lack of available inventory present a once in a lifetime opportunity to increase customer value with far less risk to the dealership than before. Many of Quist’s clients currently hold significantly higher cash balances than in prior years.
- The customers’ desires for value much like prices are at all-time highs. Short-term focus may cost in the long run when the overall industry climate is far less forgiving for the dealership.
- Offering fair, non-premium pricing illustrates to the customer the dealership is willing to offer value in ways others are not. It makes the business stand out.
The current environment for dealerships is more fruitful than it has ever been, and it is expected to remain that way through 2022. Despite this, the nature of the automotive industry will eventually lead to normalization of prices. Dealerships are in the middle of a unique opportunity to establish and strengthen long-term customer relationships by increasing customer value through fair, non-premium pricing. To build sustainable value, dealerships should focus on what brings customers back time after time.
Kerrigan Advisors “The Blue Sky Report”, Full Year 2020.