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Solving the Mystery of Margin Compression

by Dealertrack
on August 22, 2018

Margin compression is a known problem in the auto sales industry. It has been for years. And yet, there’s a mystery surrounding the problem that most dealerships can’t crack. Too often the knee-jerk reaction is to work harder and sell more cars. But as sales go up, profits go down. And the mystery deepens. So, what can be done to reverse the trend? Here are 7 solutions to solving the mystery of margin compression.

 

  1. Fixed Ops

If more customers are walking through your dealership’s doors to buy a new or used car, leverage those relationships to provide service lane work for years to come. Parts and services generate an estimated 13.6% of revenue. That’s better than both new and used vehicle sales.

 

  1. F&I

Your dealership isn’t just about selling cars, it’s also about selling maintenance plans and service agreements. If F&I has become an afterthought at your dealership, remember that for every dollar made through F&I, dealerships keep an estimated 70 to 80 cents.

 

  1. Process Improvements

When margins are slim, it makes sense to slim down in other areas as well. By cutting costs and improving efficiency, you can turn the tides of margin compression and make more money per sale.

 

  1. Holding Costs

The longer a car remains on your lot, the bigger the financial drain on your dealership. And if a car sits there long enough, those profits disappear altogether. By improving the reconditioning process and getting cars to the frontline more quickly, you can sell more cars faster and more efficiently, directly benefiting your margins.

 

  1. Employee Training

Employees have a lot of influence over profit, for better and for worse. With more frequent, more focused employee training, you can instruct your employees in ways that improve the sales process and maximize margins.

 

  1. Digital Retailing

Moving toward digital retail, at least in part, has become a necessity for most dealerships. By moving sales and purchasing activities online, you can align your sales processes with the preferences of modern customers, improve efficiency, and increase profits.

 

  1. New Technology

A modern dealer management system (DMS) reduces waste and streamlines operations. If your dealership is still fumbling with old technology, embrace the move to a more up-to-date system. Implemented correctly, technology can improve everything about a dealership, including its bottom line.

 

By working smarter, not harder, you can solve the mystery of margin compression at your own dealership. To learn more about how to combat margin compression, check out our infographic, 7 Solutions to Margin Compression.

 

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