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7 Ways to Fight Back Against Margin Compression

by Dealertrack
on September 9, 2020

When the going gets tough, the tough get going! That’s always been the mentality of auto dealers during difficult times. When a new challenge comes along (a pandemic, for instance), tough-minded dealers buckle down, work harder, and fight through the difficulty. It’s an admirable quality and one of the main reasons the auto sales industry is so resilient. But in the last few months, economic and societal factors have combined to throw a curveball at dealers—the resurgence of margin compression—which means working harder to sell more cars doesn’t necessarily mean more profit.

Tough times call for smart measures

The amount of gross profit (the amount of profit over and above the cost a dealer pays for a vehicle), has always been relatively slim for new car dealers. But sudden economic slowdown and the threat of long-term recession have reduced margins even further.

In fact, according to Forbes, economic recession is the main factor that causes margins to shrink—the more severe the slowdown, the slimmer the profits. And while the true impact on the economy as a result of recent global events is yet to be determined, there are ways dealers can combat margin compression right now to stay profitable.

  1. Fixed Operations – By placing a strong emphasis on customer service and retention, and an awareness of your fixed ops offerings, your dealership can create a steady stream of customers when other sources of profits start to slim.
  2. F&I Sales – Even as profits on car sales slim, your dealership retains more profit per dollar generated on the sale of maintenance plans and other services. Plus, a focus on F&I sales promotes retention and ensures future business.
  3. Process Improvements – By focusing on selling cars more efficiently (cost and expense control, more efficient technology, and finding hidden areas of improvement), you can recoup profits lost to margin compression.
  4. Holding Cost Expenses – Speaking of efficiency, reducing the amount of time that a car stays on your lot (by improving the vehicle reconditioning process, for example), reduces waste and improves profit margins.
  5. Employee Training – Employees are key to driving long-term profits. By hiring the right people and implementing the right technologies to manage human resources and emphasize ongoing training, efficiency and profits increase.
  6. Digital Retailing – Now, more than ever before, digital retailing is a must. According to the 2020 Cox Automotive Report, The Rise of the Digital Experience in the COVID-19 Era, consumer interest in finalizing a deal online has risen by more than 73%.
  7. New Technology – Implementing a modern DMS can streamline operations and reduce waste. If your dealership has all its data in a single, interconnected DMS, you have a real advantage in times of economic slowdown and margin compression.

Dealers have always been tough. But tough times like these call for smart, efficient measures to fight back against margin compression. If you’d like to learn more about staying profitable, even in times of margin compression, check out our free guide, 7 Solutions to Margin Compression, Strategies for Preserving Dealership Profit Margin.

Tags: DMS, Margin Compression

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