Does the Internet Mean the End of Solid Gross Profits?

Does the Internet mean the end of solid gross profits?

This is a question every retailer faces, but retailers in other industries understand their higher and lower margin products.

In the auto industry, dealers traditionally haven’t thought about having high and low margin products in their pre-owned cars.

Therefore, the first step towards earning high gross profits in the Internet age is to identify your high and low margin products and manage your inventory accordingly.

So what makes a high margin product?

For dealers, a high margin product is typically a popular, high demand vehicle with more limited supply, which sets up stronger gross profits. Essentially, consumers want it, and the demand is greater than the supply.

Toyota’s Cash for Clunkers success is a great example.

2009 was a slow year for dealers, but at the end of Cash for Clunkers there was still a high demand for new cars. Toyota dealers had only 15 days of supply of many new cars, and those cars were selling at or around sticker price (a price they had not been getting all year long). As soon as demand increased and supply increased, vehicles turned quickly at strong pricing and profits.

Another retailer with enviable profits? CarMax. CarMax turns inventory quickly, yet its average gross profit is historically higher than NADA (National Automobile Dealers Association) dealers’ average gross profit.

Again, the key is knowing your high margin products. CarMax understands which vehicles are high margin and which are low margin. When they have a popular car with short supply, especially if the car has low mileage per year, they earn high gross profits.

If the car is a former rental vehicle with a lot of supply and not as much demand, CarMax recognizes it and prices accordingly, so the car will still turn quickly (albeit with a lower margin).

If anyone tries to convince you that you can’t earn a profit because of the Internet, they don’t understand the Internet. By applying principles like identifying your high and low profit margin vehicles, you can earn a strong profit, whether consumers find you online or by driving down the road.

This is the newest post on Pat Ryan Jr.’s blog, "Get Relevant of Die." Ryan is the chief executive officer and founder of several tech companies focused on transforming automotive retail in consumer centric ways, including FirstLook Market Smart Inventory Management Systems and MAX Intelligent Online Advertising Systems. If interested in reading more posts, see getrelevantordie.com/.