As a Twenty Group Moderator, I have a chance to meet at least three times per year with groups of dealers in the Special Finance business. It is always amazing to see the range of numbers for various dealers in the area of average gross profit per retail unit. This range is usually a low of around $1,100 per retail unit to a high of $3,150 per unit with a median of approximately $2,350. For the dealers who consistently average $2,750 plus on 100 or more units per month, there is obviously a common denominator. The secret of this highly profitable level of performance almost always points to the same area. The secret is not a lender advancing 180% of book value or even a consultant advertising "I'll get your average gross to $4,000." The secret is consistentINVENTORY ACQUISITION!
I have often heard these highly successful dealers asked, "How do you maintain such a high gross profit average?" Many times they explain their formula, but the audience is not always listening. Let's take a look at what contributes to average gross profit.
There are primarily three areas which determine the profitability of a deal. They are:
Maximum advance allowed by Lender - Each lender has a formula which is used to calculate the maximum allowable advance to a dealer. The majority of nationally recognized lenders usually advance between 110-120% of NADA trade value.
Customer down payment - The amount of down payment a customer has can impact the gross profit equation, however as an average, the average down payment nationwide is $914.
Inventory Cost of the vehicle - This is virtually the only area that dealers actually control. By targeting vehicles which can be acquired for less than NADA trade value, additional profit is created based on the lenders advance criteria.
Of these three areas, the one sighted by dealers with higher average gross profits is virtually always the inventory cost of the vehicle. By knowing your market and which makes and models are obtainable for less than trade value, a dealer may create additional gross by effecting the deal equation. A good friend of mine who consistently averages over 300 units at $3,100 of gross targets the inventory acquisition process to maximize dollars. It takes a very disciplined process to acquire and offer the right car, structure the deal properly and place the paper with a reputable lender with a competitive program. It is, however, something any dealer may accomplish with work and commitment.
The follow-up to the proper acquisition of inventory,though, is the ability to structure a deal based on maximum gross profit. While working with a major sub-prime lender, I learned that their average contract financed is consistently under-advanced by $800 to $900. So once we obtain the unit for a favorable inventory cost it is important we recognize "what the metal is worth" to the dealership with respect to lender advance. Now we have the equation for maximized gross profit. Until next time, Good Luck!