Stories from the Sales Frontlines

explorerx4

great post, and kdh's after that.
when i bought my first new ,new car back in 1983, the closer said that since they had met their expenses for the month, they would give me a great deal on the car i wanted to buy. in the cigar smoke filled room, he even said he was giving me the same deal he would give his own son. i escaped and drove to another dealer about 20 miles up the road and got a better deal by about a grand. i always have remembered the expenses part.

plekto

Oh, I can fully see their reaction. There are a couple of places, for instance, that sell Minis at below MSRP - closer to wholesale, and make it up with accessory sales(since you just saved $2K compared to everyplace else...) and BMW sales(5 series has silly profit in it, for instance)

And the local competitors are beside themselves. Heh.

pch101

I know about inventory control and costing. But to take profit from one deal and apply it to anothe unit usually isn;t done.

As I explained to you on the Buying Tips forum, accountants don't do this, but business people do.

The dealership business is run with relatively high fixed costs and a lot of leverage (in particular, inventory financing), which creates a push for inventory turn for virtually any car that isn't "hot", which is most of them. Every extra car sold at a profit -- any profit -- contributes to hurdling that fixed-cost threshhold and pushing the business toward profit.

Sitting on old inventory, while allowing rival dealerships to capture more market share and the ancillary profits that goes with that business, such as the service, is ultimately more costly for your average dealer than selling quickly in higher volumes. That may not apply to your local Ferrari store or a dealer in the middle of Podunk, Alaska, but for your average marque in your typical metro/suburban market, this is more than likely the case. The bigger the lot, the more likely it is.

And kudos to kdhspyder and carhag for explaining this. Thanks very much, very educational.

snakeweasel

As I explained to you on the Buying Tips forum, accountants don't do this, but business people do.

Sorry business people don't do it either. Fact is it just isn't done. They may cover a loss with profits from other areas, but whats being talked about here is very rarely done.

Every extra car sold at a profit -- any profit -- contributes to hurdling that fixed-cost threshhold and pushing the business toward profit.

True but what is being described here is taking X amount of profit and using that to reduce the cost of another piece of inventory in an attempt to sell that piece of inventory at a greatly reduced price and still make a profit (or at least call it a profit). Thats just not done in any business.

Sitting on old inventory, while allowing rival dealerships to capture more market share and the ancillary profits that goes with that business, such as the service, is ultimately more costly for your average dealer than selling quickly in higher volumes.

I agree thats why sometimes you sell old inventory at a loss to move it and cut your losses. Its just that business's don't play these little numbers games to pretend they make a profit on it.

carhag2000

I agree thats why sometimes you sell old inventory at a loss to move it and cut your losses. Its just that business's don't play these little numbers games to pretend they make a profit on it.

My general manager is an accountatnt and I respectfully disagree with you. Our business DOES ( notice the caps?) do this and you are welcome to come spend a month in my shoes to witness it first hand.

dino001

I agree thats why sometimes you sell old inventory at a loss to move it and cut your losses. Its just that business's don't play these little numbers games to pretend they make a profit on it.

All agreed here, but you're missing the point entirely. This program is not really about "making profit", it's about providing financial incentive to the sales staff to move old piece of inventory. It's as good, as declaring a loss on a car (by selling below acquisition cost) and still granting a sales person a bonus for moving it. Probably same cost and same result. But there is one extra benefit: the staff (both managers and sales) still can call it a profit, which can be huge for the spirit and morale.

snakeweasel

My general manager is an accountatnt and I respectfully disagree with you.

You can disagree with me all you want. It is against GAAP (Generally Accepted Accounting Principles) and will get you in trouble with several governing agencies.

kdhspyder

Sorry business people don't do it either. Fact is it just isn't done. They may cover a loss with profits from other areas, but whats being talked about here is very rarely done.

That's just not accurate. I gave you two examples from two different industries where and when it is used - constantly. It may not be structured in exactly the same way but it's the same thing so the structure is rare but the concept is used every day.

I agree thats why sometimes you sell old inventory at a loss to move it and cut your losses. Its just that business's don't play these little numbers games to pretend they make a profit on it.

You are looking at it in theory. In actual day to day operations the Management has to play these games ( make decisions to take loser deals ) every single week. You can argue that it's all the same, and we all agree that it is.

Just don't say that it's not done. It is done, obviously in the specified case and in other cases as well. The loser sale reduces the profit of the preceding profitable sales. That's the bottom line.

kdhspyder

What the Sales force thinks has nothing to do with what the Controller and Accountants actually do. In this case it is an artificial oonstruct to incentivize the Sales force. Nothing more.

In an accounting context it's selling an old piece of inventory at a loss and giving the sales staff a 'spiff' to do it - at the expense of other sales efforts.

You're just arguing to argue.

snakeweasel

You're just arguing to argue.

No it seems to me that the one that started this is trying to make it sound like they can sell that old inventory at a profit even though its sold for hundreds or even thousand under invoice. The poster also implied that they can do this repeatedly.

british_rover

In an accounting context it's selling an old piece of inventory at a loss and giving the sales staff a 'spiff' to do it - at the expense of other sales efforts.

Yup we will sometimes do something similar withi old used cars or retired service loaners that we need to move. For example last month towards the end of the month every used car carried an extra 100 dollars added to the commission as long as you delivered it before the end of the month.

All service loaners carried an extra 200 dollars added onto the comission if you did the same.

carhag2000

No it seems to me that the one that started this is trying to make it sound like they can sell that old inventory at a profit even though its sold for hundreds or even thousand under invoice. The poster also implied that they can do this repeatedly

That's not what I was trying to illustrate. I was trying to show how sometimes people can really sell a car for that cheap. Management has made the decision that enough profit has been made in other areas, ( other deals) that they will take a loss on an old piece.

mark156

Carhag.. I understood what you said from the start about putting money towards old slow moving inventory for the salespeople. And, I understood every post there after, I don't know why snake doesn't get it? It would be great if every piece of inventory was FIFO (First in First out) but it doesn't happen that way in the real world.

Snake, it's basically to help the sales force, the accountants in the back can juggle the balls any way they want afterwards, that's all. :P

Mark

pch101

Snakeweasel, I think it's pretty obvious that this happens, you've received several explanations of this phenomenon.

The world doesn't revolve around GAAP. Your typical high leverage/ high fixed cost business revolves around generating more marginal revenue, because the cost of every extra sale is minimal, while holding inventory is expensive.

The fact that the inventory is leveraged at 100% or more should make it clear why this is a driver for the dealership -- the whole business is a war against interest expense, which racks up on every item as it sits there unsold, while most of the costs of operating the business are already built in and need to be hurdled.

I would suggest that you read a book by Eliyahu Goldratt called The Goal. It's a "business novel" that is a bit hoaky to read, and it deals with manufacturing rather than car sales, but it does a nice job of illustrating how managers who are slavish to accounting principals end up running businesses into the ground because they focus on ratios and faux-efficiency measures, instead of bringing dollars into the door with an eye toward profitabilty. A great way to lose money in any business with costly inventory is to hang on to that inventory for too long.

robr2

I would suggest that you read a book by Eliyahu Goldratt called The Goal.

I haven't read The Goal in years. It's a great little business novel that opened the eyes of many traditional business folks.

As others have noted, this system is merely an incentive plan for sales. It happens all the time in many industries and it's a morale booster. Nothing entices sales people more than a bonus or spiff - well maybe free food. In the end, accounting is going to aggregate all the numbers anyway.

mark156

I had to write two papers on that book in college! Oh the memories!

Snake, read the book! :mad:

Mark

snakeweasel

The world doesn't revolve around GAAP.

Actually the financial world does. Try getting an audit when you are not in compliance and see what happens.

The fact that the inventory is leveraged at 100% or more should make it clear why this is a driver for the dealership

You don't have to tell me anything about inventory control and costs. My contention is the implication that what was described reduces costs, it simply doesn't.

snakeweasel

I have read it, what i said still stands.

robr2

Although the financial world revolves around GAPP, is accounting really going to present the numbers on each individual deal or are they going the present aggregate numbers?

Don't take it personally that sales is moving numbers around to motivate sales people. You're not going to report those numbers anyway. All accounting should be concerned about is presenting those numbers in the correct manner to maintain compliance at the end of the period.

mac24

You guys are ignoring two important lessons that should have been learned from recent protracted exchanges.

1: Snake is never wrong.

2: Snake will always have the last word. :P

As to the present situation, I don't see any problem with presenting figures in any way necessary the incentivize the sales force. It doesn't mean that they have to be presented the same way for final accounting.

151ranch

IIRC, you are an independent CPA. So, I doubt you have ever seen the books of a franchised car dealer. Let me explain.

Dealers have some of the most obnoxious software systems you have ever seen - especially if they are a dealer group with more than one manufacturer's franchises. They usually keep at least four different types of books.

1. Accounting system mandated by the mfg. may or may not be GAAP - usually isn't.

2. Tax

3. If they are a public group, or are in a big market and want to be attractive to a group, they may maintain an auditable GAAP set of books

4. "Payroll" books - this is what they use to determine bonuses, etc. The gross is pretty close to accurate, but the expenses bear no relationship to GAAP at all (or even a relationship to reality at some stores).

5. Many stores are partnerships - that's another set of books.

I am sure no salesperson, GSM or GM on Edmunds has ever seen GAAP books for their dealership. They just aren't relevant in the car business, or to most salespeople anywhere. I work in the insurance industry - we don't have to report GAAP for taxes or state filings - so we don't prepare them until year end.

riposte

You said: "True but what is being described here is taking X amount of profit and using that to reduce the cost of another piece of inventory in an attempt to sell that piece of inventory at a greatly reduced price and still make a profit (or at least call it a profit). Thats just not done in any business."

I can give you a very specific, if non-auto related example:
Microsoft uses the ample profits it generates in the sale of the operating system and products like "Office 2003", to uderwrite the cost of their XBox video game.

There a thousands of examples where this is done in business.

Here's an auto-related one which suddenly comes to mind: It's been generally accepted that Toyota uses profits from it other models to reduce the price of the Prius to one that's less than it costs them to make. The thinking is that they're doing it to build mind and market share.

Hope these examples help.

snakeweasel

Actually I have audited dealerships. Other than that I am letting this drop as its not on topic.

british_rover

Translation...

"I Still got the last word..."

GRRRRRRRRRRR now one car short of our bonus man how hard is for five people, three sales guides and two managers, to sell one new car in two days. :sick:

robr2

GRRRRRRRRRRR now one car short of our bonus man how hard is for five people, three sales guides and two managers, to sell one new car in two days.

Start working those phones. Go hang out at the Benz dealership and tail anyone looking at a G class. Drive to a Rover dealership in MA and kidnap a customer.

BTW, I get a 10% cut of the bonue if any of those work.

british_rover

Bah the benz dealer is 45 minutes away from us so that won't work.

The closest rover dealer is over an hour away that won't work either.

I am thinking of throwing the least senior tech out into the road and using it to attract some business.

He is pretty tall should take up at least three lanes of traffic with his arms stretched out above his head.

tidester

... have "Stories from the Sales Frontlines?"

tidester, host

robr2

Well start combing the phone book for Simons, Ians, and Nigels. Drive down to Stamford and kipnap a CEO.

C'mon work with me here!!

bigdveedubgirl

today is the last day of the month. (I am not counting tommorow because if it freezes I am not getting on the road with those yayhoos) And I have a 2pounder in the finance office waiting to sign up, I have a flakey customer. And I only have 3 cars on the books this pay period.

Okay another story. Why do people see these Special lease program and think if they do not read the fine print the fine print does not exist?

kyfdx

Not sure why you would blame the consumer, when the advertiser is the one trying to hide the details..

Leases are designed to be hard to understand, and to appear cheaper than they really are..

You are reaping what the marketer sows..

carhag2000

You are reaping what the marketer sows

I absolutely HATE marketing. Try to explain to someone why their payment will be 95 dollars more per month then that nice man on TV told them it would be. 9 times out of 10 YOU are the liar.

div2

Maybe I'll buy one...
What's your best deal on an LR3?

bigdveedubgirl

this is not exactly fine print!

Read this http://www.audiusa.com/audi/us/en2/special_offers/Special_lease_offer_on_2007_A4- _2_0T_quattro_with_Tiptronic_transmission.html

I mean really. I can understand the fine print of a screamer ad, but i think this is pretty concise.

snakeweasel

I don't know about you but something just doesn't look right about that.

kyfdx

You are correct... pretty clear..

So, why is your price so much different?

murphydog

Snake,

Question, if a "lot anchor" can be sold today because the dealer applies some cash from others sales instead of sitting on the lot for maybe 6 more months - won't that save money overall? I mean there is a time cost of keeping a dog on the lot, right? I don't sell cars, and can't put any figures out there, but if you are financing your lot inventory at some point it needs to move. The tricky point I suppose if finding the balance between time for a lot anchor and how much $$ to knock off the price.

Others - sorry, not trying to beat a dead horse, Just trying to understant the concept. As an outsider this makes some sense, assuming you can't improve the mix of incoming vehicles.

:shades:

bigdveedubgirl

We actually honor that ad, when ever anyone comes in. The only catch, really is not a catch, is that metallic pain cars cost 450 more. Because there is a metallic paint charge.

What does not sound right to you?

mac24

Seems clear enough, so what are the variables causing the problem? Is it "...leases offered to qualified customers...", or perhaps "....Required dealer contribution could affect final negotiated transaction...."

I'd guess the latter.

bigdveedubgirl

Because AFS and Audi are not the same and totally separate, The dealers do not HAVE to honor this lease. IF they are smart and want to move units they will. Everyone in town here is honoring the program.

kyfdx

You were the one saying the customers don't read the fine print... just wondered what the problem was...

Actually, the metallic paint thing jumped out at me... $10/mo. for anything other than black, white or red... I'm guessing that comes up a lot?

kyfdx

I'm kind of surprised at how well equipped the A4 is at $33,500....

The lease deal is just a little above average at that MSRP, but a pretty good value overall, I think..

One plus... 15K mi./yr... and no cap cost reduction.. Most advertised leases are for 10K/yr with $2500 down..

snakeweasel

What does not sound right to you?

Well first its a rate based on $33,510.00 MSRP. The sum of the payments and the purchase option price at lease end is close to the MSRP. So if you go by MSRP you practically have zero percent interest. But I guess the difference between MSRP and actual sales price would come into play too.

It just raises a flag for me.

kyfdx

Once you factor in the finance charge portion of the lease, it is a decent discount..

The Audi A4 only has about a $2K spread between MSRP and invoice.. I'd guess the CAP cost for this program is around $1K under MSRP.

corvette

Two things that would raise the OTD price and cause people to get huffy--sales tax and the purchase of extra miles. It is a nice deal, by my yardstick, though.

snakeweasel

Yeah I was sort of figuring that, just that it still raises a flag with me. I guess thats good because then I wouldn't be calling the sales lady (in this case bigdveedubgirl) a liar when it becomes a higher payment.

british_rover

They money factor is probably .00001 or something silly like that so yes I bet the interest is about 0%.

graphicguy

madmanmoo...used to be good for some sales stories. He hasn't been around in awhile. I'll assume he left the business?

tsgeisel

"I am thinking of throwing the least senior tech out into the road and using it to attract some business."

I've tried that sort of thing before. Non-customers will just roll right over him, without even slowing down.

Time to start calling everyone *and* their mothers.

Good luck.

210delray

Another one-hit wonder per chance?

pch101

Question, if a "lot anchor" can be sold today because the dealer applies some cash from others sales instead of sitting on the lot for maybe 6 more months - won't that save money overall?

Of course, you are correct, and those in dealership management understand the importance of managing inventories. Here's a decent synopsis of an article from Ward's --

Out-of-balance and over-aged vehicle inventory will cost your dealership excess interest, promotion and variable sales expense, a loss of unit volume and of gross profit dollars. An out-of-balance inventory occurs when levels of inventory are too high or too low for your current selling rate. This may be corrected or eliminated by proper ordering procedures, weekly prioritizing of orders and a better knowledge of your inventory.

Acceptable gross profit is a 'state of mind' which is difficult to maintain when selling from an inventory that is out-of-balance and over-aged. With a proper inventory you should experience a substantial increase in gross profit, unit volume and lower expenses.