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The Magic Number

One of the hardest battles for a sales manager to wage is to achieve that crucial balance -- the fight between getting all the money and giving the bike away.

What should I be holding in terms of gross margins? How do I accommodate the discount shopper and not build my business model around him? How do I serve the customer who is willing to pay a premium for the high level of service that he desires? Is it reasonable to hope that I can be known as the discounter and the high-end service dealership? Can I be Wal-Mart, offering low prices and no service, and at the same time be Nordstrom’s, personal service at premium prices?

One of the hardest battles for a sales manager to wage is to achieve that crucial balance — the fight between getting all the money and giving the bike away. I’ve never seen a dealership where that question isn’t asked in some form or another. So what is the magic number? How do we set the policy to accomplish that end?

Recently our director of dealer development and former dealer principal, Tom Orlando, had a fairly lengthy discussion with one of our dealer clients (we’ll call him Joe) both on the phone and in e-mail form on that very subject. What follows comes from the conversations and from a journal Tom wrote after one of those conversations.

Joe: Tom, what do I do about the discounters in my area? It seems that if I don’t adjust my pricing policy, I can’t compete with them.

Tom: Joe, I told my sales manager that if he wasn’t "giving away" a certain percentage of my bikes to keep a customer from buying elsewhere, he wasn’t doing his job right. Likewise, if he was giving them all away, he wasn’t doing his job right either.

Joe: I’m sure that locked his head up a bit.

Tom: You have to find the right balance and put it in process along with policy. If you just have a discount pricing policy, you’ll force yourself into being the discount dealer; you’ll never get the opportunity to get retail.

Joe: Yeah, but what is the right balance between giving them away and getting retail?

Tom: It’s more about the mix between policy and process. When we started tracking different factors in order to find the right mix, we measured three things starting with local market share. If we were getting a higher penetration of the local market, we knew that we were rendering it "not worthwhile" for our local customers to drive just to beat our deal. That, of course, turned into more access to any after-sale service and/or P&A sales those local customers would make. If you are asking for retail every time and working every deal for every dollar, you should be able to maintain front end gross while being number one or two in your local market share. The prerequisite for that is that once you get all the money, you have to roll the unit. The test is as follows: Can I replace the bike or can I replace the customer? Have I gotten every dollar available from this customer? If not, go back and get more. If so, can I make a phone call and replace the unit today? If I can replace the unit, make the call and roll it. If not, then and only then, you may have to pass on the deal. Just remember that every deal you don’t take results in X number of tires you don’t sell, X dollars of F&I profit you don’t get and X number of service and P&A sales you don’t get.

Next we look at gross profit numbers. You should be able to maintain a front-end gross that is at or slightly above the national norm for the top overall performers — not the guys with just the highest front-end gross. Those guys are often under-performing in the other areas because overly focusing on front-end gross costs money in those other areas. When volume falls behind it nearly always means less total front-end gross profit, even if the gross profit percentages are up. Also, the total back-end profit goes down, even if the percentages are up. Total parts sold with major units goes down, too. Total service volume goes down. And so on and so on … basically, you’ve gotta count all the money before you say no to a deal.

At the end of each month, (not during the month) we figured that if we were deeply discounting between 10% and 15% of the new units, we were at about the right level. If it goes higher than that, you’re probably not asking for all the money all the time. Now, when I say asking for all the money, that doesn’t necessarily mean I have to get all the money. I’m not unrealistic; I’m not trying to convince you that if you always ask retail, you’ll always get retail. I’m just saying that if you never ask for retail, you’ll never get it. The other side of that coin is that every unit you’re able to sell at full price makes it more acceptable to take a skinny deal once in a while. We’ve all bounced back and forth between "work every deal for every dollar" and "whatever it takes." In the end, it isn’t one or the other, but a combination of both. Get all the money you can get, but at the end of the day, when you’ve gotten all the money you can, sell the bike!

So here’s how it all worked out. After about a month, Joe’s local market share is on the rise, his gross profit-per-unit sold is pretty stable and his delivery ratio has been steadily creeping up. Joe is much more comfortable engaging in negotiations as a result of knowing that he’s keeping the value of his bikes as high as he can while accommodating everyone he can. Tom got an e-mail from Joe about a week ago saying, "What I’ve really learned is that every single unit I have in stock has one thing in common — I don’t want it!"

So there really is no magic number, but I believe that there’s a combination of factors that can actually render the magic a bit more scientific. Admittedly, it might not be rocket science, but it’s science nonetheless.

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