EXPERT ARTICLE
Are inventory holding costs
draining your profits?
Brian Kramer
GM
AccuTrade
What if I gave your dealership an extra $2,263 a day to improve your business? What would you do with it? Would you invest more in your digital advertising budget? Upgrade your dealership’s technology infrastructure? Offer better sales incentives to your team? They are all worthy initiatives, and I think you’d agree that each would have a significant impact on your dealership’s performance.
But why $2,263? Well, for a dealer with a 100-unit inventory valued at $3,000,000, that’s the amount silently draining away each day in holding costs. Now, imagine if you had double or even triple that inventory — the losses multiply, further eating into your profits and limiting your ability to reinvest in growth.
Understanding what holding costs are, how to calculate them, and how they affect your bottom line is crucial for running a profitable, efficient dealership. In this article, I’ll break down the components of holding costs and, more importantly, show you how you can minimize these losses and improve your profitability.
What are holding costs?
“Holding costs,” also known as “carrying costs,” are the expenses incurred by your dealership for maintaining unsold inventory over a period of time. These costs can include everything from depreciation, insurance, storage, and floorplan interest to opportunity costs and vehicle maintenance. Left unchecked, they can have a significant impact on a dealership’s bottom line.
Calculate your holding costs
| Monthly Holding Cost for the Entire Inventory: | |
| Monthly Holding Cost Per Vehicle: | |
| Daily Holding Cost for the Entire Inventory: | |
| Holding Cost Per Vehicle / Day: | |
Calculations are based on typical dealership expenses to provide a basic estimate only. Your true holding costs may vary.
While your dealership or automotive group might not include all of these in your holding cost calculations, here’s a breakdown of the primary components that most dealerships I work with typically factor in:
1 Depreciation
Every day a vehicle remains unsold, it loses value. Depreciation is one of the most significant components of holding costs, and when supply outpaces consumer demand, it can become even more unpredictable. Factors like sudden changes to manufacturer MSRPs and fluctuations in electric vehicle (EV) prices can also complicate pricing, quickly eating into your front-end margin.
2 Insurance and Security
Dealerships need to insure their inventory to protect against theft, damage, and other risks. Insurance premiums, combined with costs for outsourced security services, contribute to holding costs. These costs scale with the size of your inventory, meaning the larger your inventory, the more significant this expense becomes.
3 Storage and Rent
Rent or storage costs are also part of holding costs. Vehicles that sit in the lot without selling not only take up valuable space but may also require off-site storage if the inventory outgrows the dealership’s lot. Less desirable inventory, in particular, becomes a burden, occupying spaces that could otherwise hold faster-moving units.
4 Floorplan Costs
Most dealerships use loans or lines of credit to purchase inventory, and the interest on these loans (referred to as floorplan interest) contributes to holding costs. These costs increase the longer vehicles sit unsold, eating into potential profits.
5 Opportunity Costs
Opportunity cost refers to the loss of potential gain when capital is tied up in inventory. By holding onto vehicles that aren’t selling, dealerships miss out on reinvesting that capital into more desirable acquisitions. Every day that capital remains tied up, there’s a missed opportunity to maximize profitability.
6 Maintenance Costs
Vehicles in inventory require regular maintenance to stay “front-line ready.” This includes additional detailing, fuel, battery replacements, and unexpected repairs from sitting idle too long. These maintenance expenses are often overlooked but can accumulate quickly, further adding to the financial strain.
Combatting holding costs
As a former dealer myself, I’ve felt the pain of managing holding costs firsthand. If you’ve experienced it too, you know it feels like death by a thousand paper cuts. Each day that vehicles remain unsold, the cost of doing business quietly rises. When I first started using AccuTrade at my dealership, I realized the real game-changer wasn’t just how quickly we could appraise a vehicle, but how accurately we could price it. AccuTrade helped us put the right price on each vehicle, ensuring they were positioned to sell quickly — whether retail or wholesale.
By setting the right price from the start, we saw a noticeable reduction in the number of days vehicles spent in inventory, which minimized holding costs and protected our bottom line. Here’s how:
- Real-Time Market Data: AccuTrade uses real-time market data to provide accurate and transparent appraisals, so you can acquire vehicles at competitive prices. This allows you to price your inventory to market, reducing the risk of acquiring vehicles that will take too long to sell.
- OBD Diagnostic Scanner: AccuTrade’s OBD scanner helps dealers uncover unforeseen diagnostic issues that could lead to costly reconditioning. On average, it saves $756 in reconditioning costs per issue found, and the diagnostic results are automatically factored into the appraisal. This ensures you don’t overpay for vehicles with hidden problems, which can inadvertently lead to a prolonged stay on the lot due to pricing challenges.
- Guaranteed Offers: By leveraging diagnostic scans and real-time data, AccuTrade offers guaranteed offers, ensuring you can move inventory at the right price, whether it’s sold on the retail floor or through wholesale channels. This reduces the likelihood of vehicles overstaying their welcome on the lot.
In addition to setting the right price on the right vehicle, having a strategic marketing plan to connect with the right buyers is key. That’s where VIN Performance Media comes in. This machine learning AI-powered tech matches your inventory with local shoppers actively researching similar models on Cars.com, and then promotes your VINs to them across search, social, and display channels until they buy.
You can also prioritize segments of your inventory — like aged units that have been on your lot for over 30 days — and the AI will focus on promoting those units to drive the demand you need to move them, all while automatically adjusting your budget across channels to generate more leads at the lowest possible cost.
In fact, one of our first pilot dealers put that strategy into effect and saw a 39% decrease in the average age of their used inventory. Imagine what that accelerated turn rate would do for your holding costs? You don’t have to imagine — here’s a calculator.
Turn rate savings simulation
Calculate potential savings by comparing your actual holding costs at your current turn rate with those at your desired turn rate.
| Cost Savings Per Vehicle: | |
| Potential Savings for the Entire Inventory: | |
Why speed matters
The longer a vehicle stays on your lot, the more it costs in holding expenses that quietly erode profits. AccuTrade helps you price vehicles accurately from day one — while providing intelligent insights on the best timing and strategies to maximize profitability — and then our marketplace and media solutions promote your VINs to the right in-market shoppers to increase turn. Drop us a line, and let’s discuss how we can move your inventory faster.
Let’s move some metal
1AccuTrade Dealer Engagement Reporting, 2023
