To alleviate the pain of relatively new market realities, Pollak's cure calls in part for a rolling, 30-day total retail sales count to dictate how much inventory should be bought; rather than dealers stocking up on cars to sell, they should sell to stock up.
Many dealers instead have a 2:1 stock-to-sell ratio as part of a widely used best practice.
Pollak said he's now found that just more than half of the vehicles dealers acquire hold little, if any, margin potential on day one.
He began to realize there was a problem a few years back when dealers increasingly came to him and said the velocity method was not resulting in the profits they had come to expect — even as they were selling more used cars and trucks.
Pollak and colleagues began to dig into the issue. They came across some alarming data from the National Automobile Dealers Association: Dealers' average retail net profit per used vehicle had dropped from $203 in 2011 to $65 in 2016. Then, in 2017, the figure fell to -$2. Also around that time, he found that most vehicles lost their profit potential in only about 30 days, instead of 60.
Pollak said a solution to all of this is to forget about calendar time when selling vehicles. He has helped create Provision ProfitTime, Cox Automotive software that launched in 2018 that rates vehicles based on their potential profitability.
The software uses an algorithm that weighs three factors — and not necessarily equally:
1. The cost the dealer acquired the vehicle for.
2. The vehicle's demand vs. supply.
3. Its availability in the retail market.
The software then assigns a platinum, gold, silver or bronze rating to the vehicles.
Dealers should be pricing platinum vehicles higher, relative to their average selling price, and discounting bronze ones to get rid of them as quickly as possible. But most of the dealers Pollak has been meeting with have been doing the opposite, he said.
Pollak said about 700 dealers signed up for ProfitTime last year, including some Penske Automotive Group stores. "I don't think there's more than 200 dealers that have un-inverted that pricing profile," he said. "That's the bad news. The good news is the ones that have and balanced the [inventory] equation are experiencing hard-to-believe outcomes."