June 2008, Auto Dealer Today - WebXclusive
Pay Them Accordingly
Just after the turn of the century, mighty Wal-Mart (yes, that Wal-Mart, the world’s largest retailer) entered the used car market. This amazing saga began as a joint venture between Wal-Mart and an established dealer group called Asbury. The venture cautiously started out as a test series of used car lots with no-haggle pricing in the state of Texas. The idea was to utilize the Wal-Mart name, no-haggle pricing and great customer service to sell used cars.
Although Wal-Mart was cautious to enter an industry that did not enjoy a good reputation, enter they did. They began by selling vehicles on existing Wal-Mart lots using prefabricated 1,500 square foot buildings. Each of these lots' infrastructures was bare bones. The idea was to stock around 80 cars and have a 35 to 40 day turn on inventory. No advertising was done as they had all the Wal-Mart foot traffic to prospect. On paper, this model couldn’t miss! Yet, as we can see, they are not in the market today, which begs the question: what happened?
First, let’s begin by analyzing Wal-Mart. These guys have excellent processes and procedures (maybe the best in the world), lots of money, name brand recognition and countless other items that help them to excel. One of those items is their ability to purchase on economies of scale. They buy in such large quantities and have such purchasing power that other retailers have a hard time competing with them.
However, as Wal-Mart entered their venture in the used car world with high hopes, they had absolutely no competitive edge with respect to this kind of purchasing. They were destined to acquire vehicles through the same channels as all other dealers do—at the auction, as trade-ins or from wholesalers. There is no economy of scale in the dealership world (unless you are a Suzuki dealer, but that’s another story) and especially no economy of scale in the used car world.
Thus, mighty Wal-Mart was treated as any other dealership trying to move the metal. I am sure they learned many lessons before they made their hasty retreat. However, one lesson I am dead sure they learned is that buildings, names and corporations don’t sell cars; people sell cars.
Do you find it ironic that in our day and age we still use salespeople to sell vehicles? We have the means to land a spaceship on Mars. Our government is in the process of protecting our country with a laser shield. Doctors can scan a human body and predict what illnesses and diseases a person will get 20 to 50 years from now. Yet we still sell cars in relatively the same way the industry has for over 50 years—with salespeople.
People are the most valuable asset at any dealership. You show me a dealership that is rocking and rolling, and I will show you a dealership that has good people. It’s as simple as that. This in turn leads us to another question: how do you get good people? This is truly a million-dollar question. Although there are several important aspects to recruiting and retaining good people, I am going to dwell on one very important aspect: compensation plans.
I often hear dealers brag about how cheap they were able to make a certain hire. They power-negotiated with a prospective employee and were able to land them below market value. Far too often this employee sticks around for a bit but eventually blows out and ends up working for the competition. The dealer then in turn offers more money to try and entice this person to come back.
Sound familiar? It should, as this scenario literally happens thousands of times a month across the nation. Here is a different idea: pay your people what they are worth in the first place. If your objective is to recruit excellent people, offer an excellent pay plan. Put pay plans in place that will allow personnel to earn top dollar. Notice I said allow. I am not talking of handing out free lunches. I am merely saying put the incentives on the pay plans to draw and keep top people.
Do not leave hiring practices to lower-level managers. A “10” will not work for a “6.” Have your best people do the hiring! Remember, our analogy on Wal-Mart? We can have the nicest buildings with world-class showrooms and still not sell cars. It’s not always about the price, either. I know of many high-volume dealerships that don’t have the lowest prices. I stand by what I said before. You show me a great high-volume dealership, and I will show you a dealership that has good people running it.
Excellent pay plans will vary depending on needs and wants, but I do offer some generic recommendations that have proven to work:
1. Offer a guaranteed monthly salary to new salespeople. I recommend around $2,500 (although this can change depending on what part of the country you are in). Think about it; the dealership is responsible to pay minimum wage anyway, so go ahead and guarantee a salary.
2. Finance managers should receive the majority of their checks from the back-end. I have seen every system imaginable, and I consistently see higher results with this type of a pay plan.
3. Sales managers and general sale managers should be paid a percentage of total store gross (front- and back-end).
4. General managers should be paid a salary plus a percentage of the net profits.
5. Lot techs should be paid an hourly wage.
6. Mechanics should be on a flat rate. You would be surprised how often I see them paid a straight hourly rate.
Every store is different and is on varying levels of success. You must do what works for you in your area. Think your compensations plan through, and analyze them from employer and employee perspectives. Don’t throw away good money trying to get good results from your people, but rather offer good money for good results from your people. As John Wooden once said, “Don’t mistake activity for achievement.” Recruit and hire the “10s” of the world, and allow them to earn what they are worth.
Always remember, people sell cars!
Special Finance Insider Vol. 2, Issue 3