10 Car Dealership KPIs to Track [+ Formulas]

Some 17,000 new car dealerships set up shop in the United States annually. Despite its size, the car dealership industry is challenging as it involves large investments yet small profit margins. That’s where KPIs come in: they allow car dealership owners to monitor their business performance to ensure they’re profitable.

From used-to-new car sale ratio, inventory turn ratio, cost to market, etc. here are the 10 most important KPIs you should track for your car dealership. Let’s dive in!

1. Used-to-new car sale ratio

Car dealerships often juggle between the tight margins of new car sales and the more comfortable returns generated by the used car sales department. New cars offer tighter profit margins because pricing strategies employed by factories impede dealers. On the other hand, dealerships can generate decent returns on used vehicles because they have more control over pricing.

The used-to-new car sale ratio indicates how well the dealership balances the new and used car markets.

For example, a car dealership that sales 250 used cars in a given month and 300 new retail units in the same period has the ratio of:

2. Inventory turn ratio

This metric is widely tracked among car dealerships, although some refer to it by different names, such as inventory turnover rate.

The inventory turn ratio or inventory turnover rate KPI measures the rate at which the dealership clears its lot. The best performing businesses turn their inventory in shorter periods. Vehicles that take too long to sell often lead to inventory pile up and a poor inventory turn ratio, adversely affecting the gross return on investment.

The KPI is calculated as follows:

Suppose a car dealership sells 600 units in a given year. During this period, there were 50 cars on average in stock. The inventory turn ratio would be:

In other words, the car dealership clears its inventory 12 times per year, or every 30 days. That’s the number what every car dealership should strive to meet.

3. Average gross profit per unit

The gross profit (or loss) per unit sold is one of the most important KPIs a car dealership should monitor. The metric evaluates the gross profit each vehicle sold generates.

Dealers get more informative insights when evaluating this metric based on categories like used cars, certified pre-owned cars, new cars, etc. The insights obtained help identify poor-performing categories enabling better stocking strategies.

The metric is determined as follows:

If, for instance, a dealer’s used car category gross profit in a given year was $1,000,000, and 800 units were sold in this category over the given period, the Average Gross Profit Per Unit would be:

4. Days to break even

Break-even analysis is critical for car dealerships, especially those intending to be in business for long. It evaluates the business’s revenue position against costs (fixed and variable). The goal is to ensure the business operates with a healthy margin of safety.

Car dealerships acquire a fresh stock of vehicles frequently, often monthly, and they need to break even in the period to sustain the business. Thus, tracking the number of days it takes to break even after a new stock acquisition is critical.

The longer it takes to break even, the less efficient the business is. This metric also ties into the inventory turnover rate and the absorption rate of the units. Good inventory turnover and absorption rates lead to shorter days to the break-even point.

For example, assuming a car dealership earns $100,000 in revenue in a month and spends $86,000 in expenses, days to break even is:

So in this case, it takes 26 days for the car dealership to break even and turn a profit.

5. Cost to Market

A typical car dealership vehicle goes through a 4-step business cycle:

• Acquisition: the car dealership acquires the vehicle from the factory, auction, or certified owner
• Reconditioning (for used and certified pre-owned cars): the dealership often reconditions the unit to ensure it is faultless
• Transportation: the cost to ship the vehicles and any other parts that may be required for maintenance
• Maintenance: once in inventory or showroom, a car dealership may perform regular maintenance jobs on the vehicle

The cost-to-market metric evaluates the total cost dealers should incur throughout these 3 phases until the vehicle finds a new owner. This KPI is critical because it enables the dealership to determine the profit margin on each unit.

Cost to market is the sum of all the expenses on a unit until it is sold, i.e.:

For example, a unit that costs $18,000 to acquire, $3,000 for reconditioning, $850 for transport, and $600 for maintenance has a cost to market of:

6. Average Unit Value

The average unit value provides an estimate of the value of each vehicle in the lot based on current demand. This metric is more helpful when compared to the spending behavior of the business’s target demographic.

This KPI is more useful if calculated for each business category, i.e., for used cars, certified pre-owned, and new cars. The formula is as follows:

Suppose a dealership’s total inventory value is $1,300,000 with 100 vehicles in stock. The average unit value would be:

7. Average Reconditioning Time

Most car dealerships sell pre-owned and other vehicles in various used conditions. As such, they must spend some time and money touching up on the areas that need reconditioning to fetch a good price in the market.

The reconditioning time differs depending on the nature of work required to be done – some units require light touch-ups, and others may need a comprehensive repair. The goal is to minimize delays during the reconditioning process and get the cars in front of buyers as soon as possible.

Tracking the reconditioning time involves recording the cumulative time (often in hours) spent reconditioning the units and the total number of reconditioned units. Thus, the average reconditioning time is calculated as follows:

If, for example, your car dealership reconditioned 200 vehicles for 5,000 hours, the average reconditioning time would be:

8. Sales Per Employee

This is a straightforward metric for car dealership, yet a very important one. Sales per employee is a KPI that allows to track sales people performance. By employees, we indeed only refer to the team in this case.

Tracking sales per employee allows business owners to monitor employees’ productivity, assess areas of improvement and pay variable compensation.

This metric should be calculated at the car dealership level, at a company level (if you have multiple shops) as well as at the employee-level.

For example, assuming you sold 50 vehicles in a month and employs 8 sales representatives:

9. Conversion rate

Conversion rate is a common metric for a variety of retail businesses, including car dealerships. For car dealerships, conversion rate is calculated as the percentage of leads that end up in a sale (a conversion).

A lead is a potential customer, so anyone coming into your shop for example, or anyone browsing your website even. On average, a car dealership website has a conversion rate of about 2%.

Whilst conversion rate is straightforward for a website, it may be challenging to calculate for a shop. Indeed, it’s not easy to assess how many customers are coming into a store. Instead, you may be able to track conversion rate for your shop and website separately.

The conversion rate for your shop would be anyone who would speak to one of your sales representative for example. As such, you may have less leads, yet a higher conversion rate (as supposedly someone who speaks to a sales representative is more likely to buy a vehicle).

10. Gross return on investment

How can you make sure the price you sell a vehicle at is the correct price? You must be able to recoup your original investment, right? That’s where gross return on investment comes in.

This is one of the few profitability KPIs a car dealership should track to make sure the value of the vehicles sold is sufficient to turn a profit.

The metric is calculated at the vehicle level by dividing the gross profit per unit by the cost to market.

For example, assuming the cost to market for a vehicle is $10,000 yet you sold it at $12,500, then gross return on investment is: