NCM Institute wants to know: Is Front Gross $PVR Still a Relevant Metric?

Is Front Gross $PVR Still a Relevant Metric?

One of our “poster” clients—with super market penetration, great customer retention, strong gross profit production, and excellent net-to-gross retention—doesn’t believe in focusing on front $PVR, at least in his new vehicle department. In fact, his business model is based on $-0- new vehicle “total front gross profit.” But please also understand the following:

The New Vehicle Net F&I Income (back gross) is approaching $1,400 PNVR
This is a GM dealer, and therefore eligible to receive quarterly EBE and SFE incentives (reported in Net Additions to Income)
This dealer is privileged to do business in a state that permits a reasonable Doc. Fee (approximately $400.00 PVR reported in Net Additions to Income)
The dealer believes that the best source for pre-owned inventory is through trades on new vehicles…and the trade ratio on new vehicles exceeds 65%
This dealer is passionately focused on service retention; once the dealership acquires a new owner, there is a very high expectation of retained service business, repeat vehicle business, and referral business

Is this dealer’s new vehicle business model flawed? Obviously not, because the store is extremely profitable and is highly regarded within its franchise group.

Last week I was in the Northeast working with a long term dealer-client who owns and operates a lot of dealership locations. Somehow one of our discussions became focused on used vehicle front $PVR. Allow me to recreate the conversation to illustrate a point.

In reviewing the financials for one of his stores, it appeared his front $PVR was too high, so I said, “I don’t believe you’re maximizing your retail volume, your overall department gross, your inventory turn rate, or your departmental ROI.” He looked at me cross-eyed! “Let’s take a look at your used vehicle pricing, compared to other dealers within the market,” I continued. “Let’s see what that tells us!” So, using his inventory optimization (and market pricing) technology, we sampled the pricing on more than 50% of that store’s retail used vehicle inventory. Guess what? The average retail price on those vehicles examined was 105% - 110% above the market average. I then asked him, “If you reduced your pricing to 100% (or slightly below) of market average, don’t you think the phone would ring (and the door would swing) more frequently and you’d sell more used vehicles?”

“Sure, but then my front $PVR would suffer, probably by as much as $500,” he answered.

“Maybe, and maybe not,” I offered. “But think about the BIG picture! You’re currently selling 70 used units per month, at an All-In Gross (front, back, and Doc. Fee) of $3,000 per unit, for a total department gross of $210,000. Wouldn’t you be better off selling 100 retail used units per month (and achieving nearly a 1-to-1 used-to-new ratio) at $2,500 All-In Gross? And as a further eye-opener, just envision what those additional 30 retail units per month would do for your service department, both in reconditioning gross and future customer-paid gross!”

“But also think about this,” I followed up. “If you adopt a value selling strategy and then manage and measure your Price-to-Sale Gap, your front $PVR should not suffer significantly. However, this will require a culture shift within your vehicle sales department.”

I then explained value selling and Price-to-Sale Gap (which will be the subject of an upcoming Up to Speed article).

So for the last time I ask, should Front Gross $PVR continue to be regarded as a relevant metric, or should we be more focused on total department gross, or maybe more importantly, total dealership gross?

NCMi offers numerous management training opportunities that focus on alternative strategies for maximizing dealership gross profit and return on investment.

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Comment by Garry House on December 11, 2012 at 4:15pm

Hi, Courtney!

Yes I know that you're an NCM client, and we thank you for your business!
I don't disagree with anything you said; I just wanted to provoke a discussion.
Yes, this client is at 30% Net-to-Gross.
I appreciate your taking the time to comment on this article.

Comment by Bill Gasson on December 11, 2012 at 9:36am: Garry,

I'm surprised here front end gross ,never goes away ,no chargeback's, rite to the bottom line . Should you not ask for it each and every time. That would be a costly error .

Comment by Courtney Cole on December 10, 2012 at 8:13pm: Sell the car and take care of the customer does NOT mean lose $$ on the front end?? It takes a high and a low to make an average. WHY don't you work the deal the correct way from the start and then sell the car? I am AMAZED at how many stores continue to SACRIFICE front end gross?????? IT seems to be the "new accounting". I understand selling cars (volume as we do well over 300 per month), but we also have BOTH a very PROFITABLE NEW AND USED vehicle dept.

Contrary to POPULAR belief, you can sell a lot of cars, make a lot of net, and have tremendously happy customers. We currently have 95% CSI in the front end, averaging over $3k per unit (for both new and used), we are the market LEADER IN OUR STATE FOR ALL OF GM.

Is the guy at 30% net to gross? He should be well over it with SFE and EBE! There's too many unanswered questions... I want to know if this guy is +30% net to gross. TRUST ME -- YOU CAN have a very profitable NEW AND USED car dept! And yes, we are an NCM CLIENT...

Comment by Christian Hanna III on December 5, 2012 at 9:05am: Online visibility equals traffic... traffic equals sales... how you own the asset dictates gross and since this asset is a depreciating asset the faster you turn it back to cash the greater your profit opportunity and the lower your risk. I have not heard many stories of dealerships selling too many cars and going out of business!

Comment by Big Tom LaPointe on November 21, 2012 at 10:24pm: interesting paradigm shift. takes a bold owner to implement that kind of higher cognitive planning. but i think there is still value / gross available to a higher line gm brand like cadillac or buick or even gmc, whereas that would be understandable with chevrolet.

Comment by Tim Doherty on November 21, 2012 at 1:15pm: Interesting article. If volume dealers concentrate on a negative or zero PVR on new cars, then what is the target Finance PVR? And, what is the penciling practice to achieve those results? We have a lot of pencil practice discussions at our store to achieve our gross goals.

I like Robb's take below: sell the car and take care of the customer. It doesn't get much simpler than that. Get the volume and the gross will come...

Comment by Duane Sanders on November 21, 2012 at 11:36am: This is an ongoing discussion in our 20 Group. With almost all luxury makes in metro areas there is little or no front end / above the line gross. We are all living on the below the line money and F&I income.

We are talking to our NCM moderator about modifyng the composie accordingly.

Comment by Robb McCalmon on November 21, 2012 at 11:35am: Gary,

Great article. I started in the buisiness with a dealer that looked at two main things. Sell the car take care of the customer. It is funny how everything else fell into place. We had great customer retention, great overall store gross and very rarely even talked about our gross averages. The vision was always 10 cars per day and take care of the customer. I now work for a dealer that almost everything focuses on the gross average, and while we make money, I still cannot win the agrument of let's look at total gross generated and not focus so much on the front gross average. Again great article.