Many businesses face the classic dilemma of whether to focus on profit per sale or volume of sales, but it’s an especially important question to answer for any car dealer buying cars from private owners. Is it better to buy more cars at lesser profit or buy fewer cars at more profit? The answer you arrive at for this question is critical because it will drive how your dealership will be buying cars from private owners. Another way of asking it: Should go for fewer but higher-price transactions with bigger profits or a higher volume of lower-price transactions with smaller profits? Here’s our take on what to do based on years of experience buying cars from private owners.
How Dealers Make Money When Buying Cars from Private Owners?
The most obvious way dealers make profits when buying cars from private owners is on the front end with the difference between the cost of buying a vehicle and what they can get by marking it up and selling it. But the other main way dealers make money is on the back end through the F&I or financing and insurance department.
When there is a lot of competition and an abundant supply of used cars, focusing on fewer transactions with higher prices and profits is not the best way to achieve your dealership’s business goals because the competition will undercut your efforts. Focusing more on volume makes more sense, especially if more of the profits will be coming from the F&I back-end part of the transaction rather than on the front-end part of the deal.
What if the market changes and there is high demand for used cars? What if part of what’s driving high demand for used cars is because of a lack of new car supply thanks to a global shortage of essential components such as microchip processors? This kind of scenario can drive used car prices up to record levels. Does this mean a dealer should shift away from volume and focus on profit? Our answer is no. Used cars fetching higher selling prices is a great thing, but to stay competitive, you’ll also have to pay more to get those cars. You’re still going to be better off in the long run by focusing on volume with competitive buying and selling prices and back-end F&I profits.
Additional Factors Important to Buying Cars from Private Owners
Dealers that make decisions on the volume-profit mix in a vacuum, without considering a variety of other factors, do so at their own risk. Below are additional important aspects to consider:
Competition: There is real pressure from an ever-increasing number of competitors selling and buying cars from private owners, especially the big nation-wide brands you see advertised everywhere. But there are ways for local dealerships to take them on and win. What’s needed to win is an expert strategy and consistent process of knowing how to do it right, along with the using the right tools and technologies to make it happen. What you can’t afford to do when buying cars from private owners is bid low. When demand for used cars is high, you won’t find much success in winning the volume game by low-balling your quotes. Sellers won’t give you the time of day. Your quotes must be high enough to catch the attention of sellers and draw them in.
Inventory: Availability of cars is always a factor, and you never know when something like a global pandemic is going to come along and result in scarcity of new vehicles, thereby putting significantly increased pressure on the used car market. The wholesale auctions have always been a reliable source of used cars up until the pandemic shut them down and then forced them to go virtual. The auctions also always came with their own drawbacks in terms of not giving you the opportunity to thoroughly inspect what you were buying, which was made even worse when many of them went online. In our experience, buying cars from private owners has been the key to relying less on the auctions. We not only get better cars, we also always know exactly what we’re getting. It’s been a game-changer for us, and it can be a game-changer for your dealership as well.
Customer Experience: This one is arguably the most important factor of all when it comes to winning the volume game when buying cars from private owners. The process from start to finish must be fast, convenient, transparent, competitive, and customer focused. If you do right by customers, they become brand ambassadors and spread the word about the great deal they got from you to their family, friends, and social networks. In other words, you must go all-in on providing better customer experience than your competitors. When you do this, the positive impact can be huge. It’s worth noting that it is this piece of the puzzle where the big national companies tend to fall short. Just read real customer reviews (not the testimonials on their website) from third-party review sites and you’ll see for yourself how not to do it.
Volume Wins the Race in the Long Run
The temptation is always present to try to earn bigger profits on every transaction on the front end by buying low and selling high. In our experience, this is not an effective long-term strategy when buying cars from private owners. Volume is the way to win. Even if the profit on each sale is relatively small, you’ll make up for it two different ways: First by increasing volume because people love their experience with you, and secondly on the back end through F&I. But to really win big, your dealership must have a superior process designed specifically for buying cars from private owners and doing it right. That’s what you get with Driveo. Learn more about how Driveo can transform your dealership on the Driveo for Dealers page our website.