Two dealers have traded in well-worn trade-in practices for a new model. The new one is based on appraisal-to-delivery ratios that sell more cars and creates more downstream F&I and service revenues.
They call this strategy appraisal effectiveness.
“I want to appraise every car, whether a trade, a private sale, cars in the service lane — or phone ups and internet leads — because I want to ensure consumers do business with us. When we buy a car, a lot happens downstream, and because we now rely less on auctions, our cost per sale is going down,” said David Simches, group used-car director for Crown Automotive Group, St. Petersburg, Fla.
The premise is increasing look-to-book percentages do not translate into more car sales — or downstream revenues.
“Look-to-book gives you a false sense of what is good,” said Ed French, a member of the board of directors with TruWorth Auto, with locations in Indianapolis and Kokomo, Ind. “A dealer appraising 10 vehicles and trading for five has a 50-percent look-to-book ratio, which gives the used-car manager pause to say, ‘We’re doing pretty good.’ But, if you appraise 20 cars and trade for five, is that good? No, no it is not.”
As a management tool, look-to-book lacks accuracy, French noted. It relies on humans and their misjudgments. It focuses on trade margin over downstream revenue potential. Forgetting or neglecting to account for every appraisal opportunity, whether phone ups or online leads, creates false look-to-book metrics.
An appraisal-to-delivery ratio is a more accurate and meaningful metric: appraisal effectiveness, they say.
Simches said an appraisal effectiveness trade strategy focuses on a small win that protects the gross each trade does present. “In today’s transparent market, why not give the customer what the car is worth — who knows, the guy might buy a car from us,” he said.
French, who also advises independent and franchise dealerships as president of AutoProfit Automotive Consulting, encourages dealers to measure their look-to-book ratios and sales to determine how practicing appraisal effectiveness would close that sales gap. He worked with Simches to put this new metric in place at Crown.
Simches minimum appraisal effectiveness is 150 appraisals to 100 deliveries. “A dealer actively sourcing or trading should achieve a best-in-class appraisal-to-delivery ratio of 2 to 1. When I increase appraisals, I sell more units,” he said, which he said is “up significantly year over year” since using this metric as Crown’s trade practice.
“I want trades to wholesale and retail sales. This is a move from making more gross on a deal to protecting the gross that is already there. If our industry thinks digital retailing is going to work with under-allowing on trades, we’ve got it wrong,” Simches said.
This appraisal-to-delivery model applies to trades the store doesn’t want to retail
“If I can give someone only $500 on trade and turn around and wholesale the car for $800, why wouldn’t I want that trade? That kind of deal has a ton of value to me. Everyone wants to make trade-in home runs, but success comes with a lot of little bites of the apple,” Simches said.
The topic of appraisals surfaced during a vAuto used car workshop in Chicago in October. Moderator Jim Tritz, director of performance management at vAuto, asked attending dealers:
- Why do we miss appraisals?
- Does the cost we put into the trade make sense by the metrics?
- Why did the particular trade die?
He said dealers who make careful notes of each trade, including valuation(s) offered, the source of appraisal, and reconditioning estimate have the information needed to learn why a trade blew up.
Tritz suggested dealers should treat phone up and internet evaluation requests as bona fide appraisal opportunities. Doing so, he said, would improve the dealer’s average look-to-book percentage from these sources to 30 percent to 35 percent from an average of 10 percent to 15 percent. He said overall look-to-book should be at least 54 percent.
To identify look-to-book, pull up your appraisal records in the CRM. Pull closed deals from whatever inventory management tool you use. Divide that number by completed transactions.
French cautioned dealers to watch the hazards that plague look-to-book. “Look-to-book is easily manipulated because you have to pull every appraisal into the inventory management tool being used, and those deals have to be closed deals. And I can take a vehicle I don’t want in trade and not appraise it to make my look-to-book numbers appear better than they are.
“The truth has to be based on a nonmanipulative number, and the total number of units delivered as we used for measuring appraisal effectiveness is not a manipulative number,” French said.