I'm excited about this one, because it's a topic that doesn't get talked about enough: holding cost. Doing 20 groups all over the country and working with dealers for over a decade, I can tell you holding cost is one of the most misunderstood numbers in this business. So I wanted to make a special episode on it, especially for the independents, though it's just as relevant for the franchise stores. What is it, how does it get defined differently across the industry, and more importantly, what's the practical application for your dealership?
There's No Standard Definition
Holding cost, sometimes called carrying cost, is a strange animal. If I asked ten industry experts how they calculate it, I'd probably get several different answers. There's no standardized, industry-accepted formula. NADA doesn't publish one publicly anywhere I've been able to find, which I find interesting in itself.
So what is it? Holding cost evaluates the cost of holding inventory, but not based on the cost of the car itself. We're not using ACV or whatever value you've entered for the vehicle. It's not about what you own the car for. Holding cost uses your fixed and overhead expenses, plus floor plan, divided down by your inventory, to figure out your overhead erosion. What does it cost to carry a car based on your operating expenses?
This concept was originally popularized by NCM and Associates, with some variations from Cox Automotive/vAuto and commentary from Dale Pollak, who's spoken at ARC 20 Groups in the past. In this piece, I want to unpack the differences between NCM, NADA, vAuto, and what we do in our 20 groups at ARC, and why I believe holding cost matters so much to running a profitable operation, and honestly, to not going bankrupt. It has a lot to do with gross margin, but also with frozen capital and your return on investment. Let's start with my baseline model, then look at the variances.
What's NOT Included
It's easier to explain holding cost by what's excluded. Everything on your P&L in the expense section that you have to pay whether you sell a car or not belongs in the formula. But there are four expenses that only get triggered when a car actually sells, and those don't belong:
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Sales commission. You don't pay it until a car sells.
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F&I commission. Same story, no sale, no commission.
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A portion of delivery expense, specifically things like delivery prep detail, which isn't incurred until the vehicle actually sells. This one's usually negligible, but it belongs in the excluded category.
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Policy, or goodwill. A customer comes back weeks or a month later with an issue, and rather than risk a bad review, you fix it at no cost or reduced cost. That's a sales-department expense, but it can only happen after the car is sold.
Honorable mention: sales manager or desk manager commission on the front end could arguably belong in this excluded category too, since it's also triggered by a sale. I could be persuaded on that one, but pay plans are so inconsistent across the industry that it's tough to build a standardized formula around it. The four above, though, are consistent enough industry-wide that I feel confident excluding them.
What IS Included
Everything else. Pull up your QuickBooks or your accounting software and look at last month's P&L expense page: rent, utilities, telephone, printers, office supplies, most of your payroll, workman's comp, benefits. You pay your title clerk and your controller whether you sell a car or not. Advertising belongs here too, and I'll get into why that's actually a point of disagreement across the industry in a minute.
Most dealerships break expenses into four categories: variable/direct, semi-operational, fixed, and personnel. Nearly everything in those categories, minus the four exclusions above, gets totaled for the month. That total is your holding cost numerator.
How the Industry Compares
NADA lands very close to my baseline, no major variance there. NCM and Associates, who I believe popularized holding cost originally, use the same baseline with one twist: they calculate floor plan interest and fees separately on a 365-day basis instead of folding it into the standard 30-day math. The result is close to mine, just a slightly different number.
Cox Automotive/vAuto is where it gets interesting. They remove advertising from the formula entirely, and they use average selling days (24 to 26 a month) instead of a full 30-day average. I don't agree with either adjustment. Your operation being closed on a Sunday doesn't pause your interest, your payroll, or your fees, so I don't think the day count should skip those days either. And you have to spend money on advertising to sell cars, not after they're sold, so I think it belongs in the formula. Worth noting: NADA's benchmark daily holding cost runs around $40, vAuto's closer to $85. I get into the full math behind each of these models, and my theory on why that gap exists, in the video.
Real Gross Profit vs. Blind Gross Profit
Here's where it gets practical. Once you know your holding cost per day, you need your average front-end gross, which I define as sale price minus what you own the car for (including recon), plus admin fee, plus aftermarket sales average, plus preloads, excluding soft packs and hard packs.
Let's say your average front-end gross with all those adds is $1,500. Feels good, right? Now you need one more number: your average days to sell. Let's say that's 45 days, and your average holding cost is $37 a day. Multiply it out, and let's say your holding cost over those 45 days comes to roughly $1,350.
Take your $1,500 gross, subtract $1,350 in holding cost, and you're left with $150. A lot of dealers I've worked with see that number and think it can't be real. And they're right, sort of, because it's actually worse than that: you still haven't paid sales commission, delivery prep, or policy. F&I gets a pass because it should be clearing its own path. So that $150 difference figure isn't your final number, it's the number you have left before those remaining expenses come out. This is the difference between blind gross (what you think you made) and real gross (what you actually made after holding cost has quietly eaten into it).
Market Erosion vs. Overhead Erosion
There are two kinds of depreciation dealers deal with, and it's worth separating them clearly. Market erosion is the value of the car dropping over time on your lot, sometimes fast. Overhead erosion is holding cost, the topic of this whole piece. Most dealers understand market erosion intuitively. Book a car out today, book it again in seven days, and it's dropped in value. Overhead erosion is less understood, but it's every bit as real.
I don't include market erosion in the holding cost formula, because I believe it's already reflected in your gross profit. As you price a car to market and reduce the price to keep it competitive, you're taking the depreciation hit right there, which shows up as lower gross. If you can sell 60 to 70% of your inventory in the first 30 days, like NADA and NCM both recommend as best practice, your gross profit is going to be meaningfully higher than a dealer whose average selling day is 90, because that dealer has had to cut the price over and over to finally move it.
A great exercise here, and something we do in 20 groups: track your front-end gross by age bucket. Look at 0 to 15 days, 16 to 30, 31 to 45, 60, 75, 90 plus. I'd be shocked if you don't see a clear decline in gross as the age bucket increases. That's your proof that market erosion is already showing up in gross, without needing to double-count it in the holding cost formula.
Soft Pack vs. Hard Pack
Quick pack conversation, because I pull both out of the holding cost calculation, but for different reasons. A soft pack doesn't actually increase the cost of the vehicle in accounting, it's tied to commission, which we've already excluded, so it's simply irrelevant here.
A hard pack is different: it's when you literally charge an expense to the car, raising its cost on paper. Dealers handle these in wildly inconsistent ways, some reconcile it against actual cost and can end up with a gain or loss that affects real gross profit, which is exactly why I don't build it into the standard holding cost formula. I walk through the full mechanics of how a hard pack works and how it can add real money back to your bottom line in the video.
There's a quote from dealer Dan Oaks, reported by CBT News, that sums up why this all matters: "Because dealers don't actually write a check out of the business account for holding cost, they don't see what recon delays can cost them." You do write that check, just to the phone company and the printer company instead. If you had to write one lump-sum check for your holding cost the way you write one for a car deal, you'd think about this very differently. Holding cost is invisible on a check register, but very real on a profit and loss statement. Once accumulated holding cost exceeds your gross profit, it's flipped from an asset to a liability. You're not making money anymore.
"I Own My Inventory Outright" Doesn't Change the Math
This is a debate I've had more times than I can count in 20 groups. A dealer will tell me, "I own my inventory outright, no floor plan, so I've got room to hold cars longer, holding cost doesn't concern me as much." Here's the problem: nothing we've covered has anything to do with a loan, outside of the one line item for floor plan interest and fees that's already part of the formula. Outside of that, you're not making an argument, you're making an excuse. You're not turning those units, they're still depreciating, and you're still eating the rest of the holding cost. Owning your inventory reduces your holding cost by exactly one variable, your interest expense, and that's it.
Why a Price Cut Today Usually Beats Waiting
Here's a note I want you to sit with: a price cut today is usually cheaper than a wait. If dropping the price by $300 sells the car 10 days sooner, and 10 days of holding cost is $500, the discount is the profitable move. The sticker price gap is an illusion once holding cost is netted in. This isn't an argument for gutting prices recklessly, I'm not a velocity model guy. But there's a point where holding onto a car another 8, 10, or 15 days costs you more than just cutting the price and moving it.
The Auction-Dumping Mistake
One honorable mention here. A lot of dealers feel like they've got water on the lot, and their instinct is to load up 10 aged units and haul them to auction to free up cash. In my experience, dealers who do this usually haven't had a disciplined price-cutting system in place, and they're still sitting on front-end gross they haven't captured. I've seen dealers ready to wholesale a car priced $4,000 over MMR, when cutting the price toward MMR would let them capture an admin fee, a pack, and give F&I a real shot at the deal. Auction gets you none of that. Let the price glide down toward MMR first, and you'll recover meaningfully more than dumping it early. This alone can save a store tens of thousands, sometimes hundreds of thousands, of dollars a year.
A Real Case Study: Two Dealers, Very Different Outcomes
To close, I break down a real ARC 20 Group composite in the video comparing two dealers selling almost identical volume, 88 units a month versus 90, with similar operating expenses. But one is carrying a lot more inventory than the other, and once you follow the holding cost math all the way through, one dealer is actually losing money per car while the other is comfortably profitable. Same volume, same expense structure, completely different real outcome. Worth watching that breakdown in full, it's the clearest illustration of everything in this piece.
The Bottom Line
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There's no industry-standard holding cost formula, but the core idea is universal: your fixed and overhead expenses, divided by inventory, tell you what it really costs to sit on a car.
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Exclude sales commission, F&I commission, delivery prep, and policy from the formula, they only trigger when a car sells. Include everything else, including advertising.
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Keep market erosion out of the formula; it's already reflected in your front-end gross as you cut prices to move aged units. Track gross by age bucket to prove it to yourself.
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A price cut today is very often cheaper than holding a car another 10 or 15 days. Do the math before you assume patience is free.
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Owning your inventory outright reduces exactly one variable in this formula, interest expense, nothing else. It's not a reason to ignore holding cost.
Run this math on your own store. Know your holding cost per day, know your average front-end gross, know your average days to sell, and find your real gross profit, not your blind one.
- Justin Osburn
