Here’s everything you need to know about dealership inventory turn rate — and how to find your turn rate sweet spot.
Your dealership probably monitors its inventory closely — and rightfully so. Yet, many dealerships inadvertently miss out on opportunities to maximize the value of that inventory because they misunderstand the dynamics of inventory turn rate. A thorough understanding of vital automotive KPI is crucial to dealership success.
Let’s look at inventory turn rate in detail and answer some of the key questions that should determine your benchmarks.
What is inventory turnover rate, and why is it important?
Inventory turnover rate is a ratio that defines how many times your dealership has sold a car over a set period. With this rate, you can gain valuable insights to help determine how to price your cars based on supply and demand. You can also use these insights to find ways to speed up the selling cycle.
If you understand inventory turn rate, you’ll be well-equipped to maximize your profits and maintain a steady sales flow throughout the year. For instance, collecting inventory turn rate data over the course of a week, month, quarter, or year can provide insights into sales ebbs and flows over set time frames. You can even use this information to generate reports to identify how to price your cars to maximize consumer interest.
How do you calculate inventory turn rate?
To determine inventory turn rate, you’ll need to use the following formula:
Cost of goods sold / Average inventory value = Inventory turn rate
The cost of goods sold refers to the total value of your inventory during a set time frame. For instance, to calculate the cost of goods sold over a month, your dealership should add all the costs of cars sold during this period.
Comparatively, the average inventory value refers to the sum of inventory values over a set period. For example, to determine the average inventory value for a year, you can calculate the inventory values for each month, then divide this total by 12. Or, if you want to calculate the average inventory value for the current month, add the inventory value at the beginning of the month and the inventory value for the end of the month, and divide this figure by 2.
What is considered a “good” inventory turn rate?
There is no such thing as a “good” inventory turn rate for all dealerships, since dealerships vary in terms of the quantity and types of cars they sell. In many instances, a specialty car dealer will have a lower inventory turn rate because it sells fewer vehicles at higher prices compared to other dealerships. On the other hand, a high-volume dealership may have a high turnover rate, since this dealer may offer a large selection of affordable vehicles.
Oftentimes, it helps to determine your dealership’s inventory turn rate and evaluate it over several weeks and months. This allows you to establish a baseline for your inventory turn rate. Next, you can take steps to continuously monitor this rate and optimize it for your business model.
How can you optimize your inventory turn rate?
Much as there is no “good” inventory turnover rate for all dealerships, there is no surefire formula that you can use to optimize inventory rate. However, there are several tried-and-true best practices you can use to improve your inventory turn rate, such as:
1. Leverage inventory management tools
You can use digital tools to streamline inventory management. These tools can provide insights into your inventory, including sales and pricing age for every car on your lot. They can help you find out which cars are popular and which ones miss the mark with consumers. Plus, inventory management tools can help you find new ways to get the most value out of the cars on your lot.
2. Take advantage of market-based pricing
Real-time market data can make a world of difference, particularly when it comes to pricing your cars. This information lets you see the top-selling cars in your area, average weekly sales, and other pertinent information. So, you should capture and analyze market data and use it to identify opportunities to optimize your pricing and inventory turn rate.
3. Simplify your reconditioning process
How quickly you recondition cars can play a major role in your total inventory turn rate. Utilizing recon software backed by a proven process can help boost gross profits, lower your expenses, and sell more used cars faster than ever before. It can also help you bolster your inventory turn rate now and in the future.
Want to find the sweet spot in your inventory turn rate? Partner with ReconVelocity
Finding the sweet spot in your inventory turn rate can be challenging. With help from ReconVelocity, you can move one step closer to optimizing this KPI.
We offer an end-to-end recon management platform that provides dealerships with complete transparency into all aspects of the recon process. Our platform also helps dealerships jumpstart the sales process, identify potential buyers, score leads, and more. To learn more about our platform, click here to request a demo, or call us today at (850) 616-6294 to talk to a recon expert.