What Does Certified Pre-Owned Mean for Dealer Profit Margins?

June 3, 2022

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What Does Certified Pre-Owned Mean for Dealer Profit Margins?

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The auto industry has had a rough few years. Between high prices, demand, and limited supply, more consumers are looking for options beyond new vehicles. While customers are open to used cars, they're clambering for certified pre-owned (CPO) vehicles.

CPOs are the best of both worlds. Used vehicle prices with new vehicle reliability.

CPO programs can help you meet your customers in the middle. A CPO car is a great option for buyers who want a new car, but either can’t afford the price tag or don’t want to wait for a new car to become available. The benefit of a warranty may also prove alluring to prospective buyers. If price and reliability are their major concerns, then you should show them CPO vehicles. 

There are many perks to selling certified used cars. CPO vehicles sell faster and have a higher profit margin for auto dealers than used cars. However, they’re also more complicated to sell than used cars. Let’s explore what exactly makes a vehicle CPO, the different CPO program types, and how selling CPO units can increase your profit margins.

What are Certified Pre-Owned Vehicles?

Certified pre-owned cars or CPOs are used vehicles that go through an inspection and extensive automotive reconditioning. This process makes them feel new. They also come with a warranty, to further assure and protect the car buyer. 

CPO vehicles are usually late model recent trade-ins or leased vehicles. They’re generally less than six years old. They also tend to feature low mileage on the odometer and are accident-free. The inspection and reconditioning process can either happen through manufacturers or dealerships (more on that later). 

While warranties differ from manufacturer to manufacturer, the idea is to give consumers peace of mind. Despite recent trends, many still hesitate to buy used vehicles because of the risk they carry. With CPOs, dealerships ease that risk with the inspection, reconditioning, and warranty. 

Manufacturer vs. Dealership CPO

Not all certified used vehicles are created equal. The quality and warranty depend on the certification process. Depending on your dealership type, you may only be able to sell certain types of CPO vehicles. 

Manufacturer CPO vehicles can only be sold from licensed new car dealers. So for example, a CPO 2019 Honda CRV could only be sold from a licensed Honda dealership. Meanwhile, any dealership that establishes a dealer CPO program can sell its own CPO vehicles. 

So, what are the differences between the two types of CPO programs? 

Manufacturer CPO Programs

Automakers all have qualifications to help determine if a vehicle qualifies for the CPO inspection. They’re generally based on model year, mileage, and if it’s been in an accident. If a vehicle qualifies, then it undergoes a multi-point inspection and reconditioning process. Each manufacturer's specific qualifications and inspection process are available on their websites. 

Once a car passes the reconditioning and inspection, it’s issued a manufacturer warranty. While each manufacturer’s warranty details vary, the vehicle is covered by all licensed dealers. 

Dealership CPO Programs

While dealership CPO programs have a similar process, they differ in their expectations. Vehicles are held to the dealership’s established standards. While you should be transparent about what those standards are, they likely won’t be as high as the manufacturer’s CPO standards. 

Since dealership programs are run out of a specific dealer, the CPO warranty ties the vehicle to that dealership. This is unlike manufacturer CPO programs, where a warranty is good at any of their licensed dealerships. If the dealership where a customer bought a CPO vehicle shuts down, a manufacturer warranty is still valid elsewhere. Meanwhile, a dealer warranty is now useless. 

If you’re not a licensed dealer but want to sell CPOs, establishing your own certification program is the only way. You can buy used cars at online car auctions and inspect them yourself. Then recondition, put a warranty on it, and voila! 

Why Dealers Should Consider Investing in CPO Vehicles

Reconditioning and inspecting a vehicle is a costly process that may cause dealers to pause. Instead of just stocking and selling used vehicles, you take them through an extensive process that takes time and resources.

Further, dealerships may not be privy to the same level of specs as manufacturers. This means you have to know the cars well and develop your own checklist and standards. 

However, the increased revenue that CPO vehicles bring is often worth it. CPO vehicles have an average profit margin of 5.9% vs. standard used cars, which have 4.7%.1

You can sell CPOs for more than any other used car because you’re selling a high-quality vehicle that’s undergone a rigorous inspection. It’s not just any used car, it’s a vehicle with a clean vehicle history report, low mileage, and a warranty to keep it in shape. 

Further, CPO cars also sell faster, usually five days earlier than non-CPO used vehicles.1 This reduces inventory costs and lets you stock and sell up to 20% more units in a year. The high turnover will help increase your profit margin even more. 

Start The CPO Process Now!

Are you a licensed dealer eligible to sell manufacturer CPO vehicles? Or are you considering establishing your own CPO program? Either way, CPOs are worth the investment. When you sell CPO vehicles, you’re not just selling someone their next vehicle. You’re selling them the reassurance that the vehicle is in excellent condition and that you’ll take care of it if it’s not. 

We look forward to helping your dealership stay competitive in this evolving automotive industry! Start by finding quality used vehicles to inspect, recondition, and certify by registering for ACV Auctions.  

Sources

  1. Linkedin. “5 Ways Your Dealership Makes Money by selling CPO vehicles” Retrieved May 2022 from https://www.linkedin.com/pulse/5-ways-your-dealership-makes-money-selling-cpo-vehicles-paul-brobson/