Is Front Gross $PVR Still a Relevant Metric?
One of our “poster” clients—with super market penetration, great customer retention, strong gross profit production, and excellent net-to-gross retention—doesn’t believe in focusing on front $PVR, at least in his new vehicle department. In fact, his business model is based on $-0- new vehicle “total front gross profit.” But please also understand the following:
The New Vehicle Net F&I Income (back gross) is approaching $1,400 PNVR
This is a GM dealer, and therefore eligible to receive quarterly EBE and SFE incentives (reported in Net Additions to Income)
This dealer is privileged to do business in a state that permits a reasonable Doc. Fee (approximately $400.00 PVR reported in Net Additions to Income)
The dealer believes that the best source for pre-owned inventory is through trades on new vehicles…and the trade ratio on new vehicles exceeds 65%
This dealer is passionately focused on service retention; once the dealership acquires a new owner, there is a very high expectation of retained service business, repeat vehicle business, and referral business
Is this dealer’s new vehicle business model flawed? Obviously not, because the store is extremely profitable and is highly regarded within its franchise group.
Last week I was in the Northeast working with a long term dealer-client who owns and operates a lot of dealership locations. Somehow one of our discussions became focused on used vehicle front $PVR. Allow me to recreate the conversation to illustrate a point.
In reviewing the financials for one of his stores, it appeared his front $PVR was too high, so I said, “I don’t believe you’re maximizing your retail volume, your overall department gross, your inventory turn rate, or your departmental ROI.” He looked at me cross-eyed! “Let’s take a look at your used vehicle pricing, compared to other dealers within the market,” I continued. “Let’s see what that tells us!” So, using his inventory optimization (and market pricing) technology, we sampled the pricing on more than 50% of that store’s retail used vehicle inventory. Guess what? The average retail price on those vehicles examined was 105% - 110% above the market average. I then asked him, “If you reduced your pricing to 100% (or slightly below) of market average, don’t you think the phone would ring (and the door would swing) more frequently and you’d sell more used vehicles?”
“Sure, but then my front $PVR would suffer, probably by as much as $500,” he answered.
“Maybe, and maybe not,” I offered. “But think about the BIG picture! You’re currently selling 70 used units per month, at an All-In Gross (front, back, and Doc. Fee) of $3,000 per unit, for a total department gross of $210,000. Wouldn’t you be better off selling 100 retail used units per month (and achieving nearly a 1-to-1 used-to-new ratio) at $2,500 All-In Gross? And as a further eye-opener, just envision what those additional 30 retail units per month would do for your service department, both in reconditioning gross and future customer-paid gross!”
“But also think about this,” I followed up. “If you adopt a value selling strategy and then manage and measure your Price-to-Sale Gap, your front $PVR should not suffer significantly. However, this will require a culture shift within your vehicle sales department.”
I then explained value selling and Price-to-Sale Gap (which will be the subject of an upcoming Up to Speed article).
So for the last time I ask, should Front Gross $PVR continue to be regarded as a relevant metric, or should we be more focused on total department gross, or maybe more importantly, total dealership gross?
NCMi offers numerous management training opportunities that focus on alternative strategies for maximizing dealership gross profit and return on investment.