Loading

How Profitable is Incremental Growth?

This article was written by Robin Cunningham and originally published on the NCM Institute Up to Speed blog.

Composite Review

I think it is safe to say that every business operator is planning, forecasting, or at least hoping to increase their sales and profits in whatever business he or she is involved in.

In the retail automobile business, that growth can come in many forms, such as:

  • Selling more new or used vehicles
  • Increasing the gross profits of the vehicles you already sell
  • Increasing finance & insurance income per vehicle retail
  • Reducing the aging of your used vehicle inventory
  • Reducing your reconditioning cycle time in order to get the vehicle front-line ready sooner
  • Increasing the repair order count in the service department
  • Increasing the gross profit margin in the service department
  • Increasing the number of parts on the shelf that the service department needs each day

There are many more forms growth can take, of course, but these are pretty representative of the opportunities available to most dealerships we work with.

The reason I say that incremental growth, resulting from actions like those mentioned above are far more profitable than one might think, is because, for the most part, the personnel, semi-fixed, and fixed expenses are going to be nearly the same in our operating departments, whether or not we drive increased sales and gross.

If we can keep the selling expenses in the range of 30-35% of total all-in gross, when we incrementally add more gross, we can retain 65-70% of that increased income as net profit on the bottom line. If a dealership is doing really well, its total expenses will typically run 70% of gross profit, leaving a net profit metric of 30% net-to-gross. So growing our business, while being able to maintain our expenses at best practice levels, can drive more than double the incremental net-to-gross metric than would typically be the case.

There are several places we see this demonstrated during our classes. Students are encouraged to develop and document at least two Guarantee of Action Plans (GOAs) each evening after class and then present them to the class the following morning. These GOAs describe and quantify their ideas. The GOA could be something like selling 10 more used vehicles per month by pricing them more competitively to the market. The quantification might look like this: 10 incremental used vehicles at $2,976 all-in gross, which would be $29,760 additional gross per month, or $357,120 annually.

The primary selling expenses (commissions to salespeople, F&I producers, and sales managers, advertising, floor plan interest, policy and delivery expense) will be maintained at no more than 35%, and assuming that no additional incremental expense is required, the department would retain 65% of the $357,120 or $232,128 in additional net profit. The equation I used looks like this: (10 x $2,976 x 12 x 65%)  If these 10 extra vehicles were not sold, the same 65% in expenses would still be incurred; but not any extra gross profit nor subsequent net profit.

When working with variable department managers, another action we suggest to begin focusing on every day is to reduce the price-to-sale gap. That is the difference between the advertised Internet price of a specific vehicle and the actual retail transaction price at the time of sale. In the beginning, this can be a huge number, so we suggest starting at a target reduction of $200 per car.  As an example, for a dealership retailing 80 used cars per month, reducing its average price-to-sale gap by $200 per vehicle, and keeping its variable selling expenses at no more than 35%, would increase its net profit by $124,800. The equation I used looks like this:  (80 x $200 x 12 x 65%).

We work with a lot of variable managers, and, before we begin teaching them this best practice, they tell us that they believe their true average price-sale-gap is currently at least $700 per vehicle retailed… off Internet pricing!!! (Don’t get me started!) So the $200 per vehicle target reduction that we’re suggesting is extremely conservative.

As I said at the beginning, there are numerous opportunities for increasing sales, gross and reducing expenses in our dealerships these days. I hope my brief message validates for you the powerful effect that incremental growth, combined with a controlled expense structure, will have on your bottom line!

Views: 137

Tags: Cunningham, Robin, associates, general, institute, management, ncm, ncmi, sales

Comment

You need to be a member of DealerELITE.net to add comments!

Join DealerELITE.net

Comment by steven chessin on July 31, 2014 at 3:36pm

I shortened my commute and hot-rodded my computer. Incremental steps worth at least an hour a day.

Comment by DealerELITE on July 31, 2014 at 2:16pm

Robin thank you for sharing

Blog Posts

Be Your Own Life Coach, Continued-Part 2

Posted by Joseph Little on September 1, 2015 at 3:36pm 0 Comments

What are the ways I sabotage myself? [Getting honest]

Here’s some honest for you. I avoided…

Continue

Have you hit a creative roadblock?

Posted by Paul Potratz on September 1, 2015 at 2:30pm 0 Comments

When was the last time you wowed someone with your creative? Many dealers fall into a cycle of bland commercials, templated websites, and average marketing. This week on Think Tank …

Continue

NFL & CARS SURVEY SHOWS MOST CAR ENTHUSIASTS THINK NEW ENGLAND WILL WIN THIS YEAR’S SUPERBOWL

Posted by John Sternal on September 1, 2015 at 1:29pm 0 Comments

Swapalease.com, the nation’s largest car lease marketplace, today released results of its NFL & Cars survey, where football fans revealed their favorite cars and also discussed which NFL teams remind them most of popular cars in automotive…

Continue

Wide Variation In Results Across Segments

Posted by Black Book on September 1, 2015 at 1:21pm 0 Comments

Welcome to this week's edition of Black Book Market Insights, with in-depth analysis of used car and truck valuation trends and insights straight from the auction lanes. Click here to download the full…

Continue

Is The Way to Loyalty Through Your Customer’s Stomach?

Posted by Mike Gorun on September 1, 2015 at 8:51am 0 Comments

Companies increasingly invent new and creative ways to…

Continue

Mobile Marketing Mysteries Solved

Posted by Joseph Little on August 31, 2015 at 5:30pm 0 Comments

Defining and Attracting Your Mobile Consumer

More people in the world …

Continue

weekly newsletters

dE Sponsor

© 2015   Created by DealerELITE.

Badges  |  Report an Issue  |  Terms of Service