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Total cost of ownership - how to use it as a car sales tool

By Philip Nothard

It has become a cliché that consumers are ever more tightly focused on running costs. Recently, we published findings from interviews with 500 motorists that listed the priorities they have in mind when they buy their next car. It revealed that economy is now king, with even the cost of a tax disc coming ahead of driving qualities.

     
 
 

Philip Nothard joined CAP in 2010 as its retail and consumer price editor, analysing pricing data and interpreting strategic market trends. In his role, he is able to apply two decades of experience gained in franchised motor retailers, which culminated in running dealerships for the likes of European Motor Holdings, Lythgoe Motor Group and Arnold Clark.

 
 

The same research also revealed that motoring costs featured three times in a list of 10 ways consumers identified to save money in austerity Britain.

Dealers may be aware of the powerful sales messages contained in CO2 figures, fuel consumption and service costs, but the challenge is that all of this information is available to the prospect long before they set foot in the showroom. Conveying the concept of an overall running cost advantage, therefore, remains extremely difficult without access to comparative data that shows the bigger picture.

Nonetheless, running costs provide a compelling argument in today’s market. A comparison of the top selling car derivatives three years ago and today shows how the need to drive down total cost of ownership has changed the shape of the market in a relatively short period.

The question posed by the success of the Fiat 500 and Suzuki Alto – two cars with very low costs of ownership – in overtaking the incumbents is whether or not this represents a change of taste in style or something more significant.

However, dealers could certainly advance a persuasive argument for the advantages of choosing one car over another in the new or used market by highlighting these monthly ownership costs. Because, while consumers are said to be well educated on the options available to them, the reality is that their understanding still remains relatively superficial.

The used market is the biggest determiner of running costs, because depreciation is effectively dictated by the used car buyer. A used car is worth what a used car buyer will pay for it and the manufacturer’s control of that – at least in the open market – is largely limited to including features that will shine in the secondhand arena. The rest is down to perceptions in the trade and retail markets.

The used market is also much more sensitive to running costs overall than the new market, because much of the new car sector is dominated by company car user-choosers. They are, of course, conscious of P11D, but their awareness of things such as service and maintenance is inevitably lower. When responsibility for every aspect of a vehicle’s cost lies with the owner – as it does across the used car market – there is clearly an advantage to be gained by focusing on more than just mpg or VED bands.

Another enormous advantage dealers have is in spelling out the running cost benefits of buying used. Instead of focusing on the sticker price – and all the painful margin-shaving that undercutting online competitors involves – they can deploy some unarguable numbers to illustrate that not all running costs are the same.

Take the incredibly popular Fiat 500. CAP’s Total Cost of Motoring tool predicts an overall spend of £11,546 for running the 1.2 Lounge variant over three years, at 12,000 miles per year. Contrast that with a Skoda Citigo 1.0 MPI SE costing £9,769 over the same period and you have a serious money-saving proposition for the customer. Translate those figures into average monthly outlays of £320 and £271 respectively and it’s even more apparent.

 
   

But take those cars with 12 months and 12,000 miles behind them – the Skoda has depreciated by £960 and the Fiat by £2,310. Conventional wisdom would have it that the lowest depreciator must be a ‘better’ car to own because it ‘holds its value’. But while the monthly total cost of ownership for the buyer of a 12-month old Fiat 500 is £10 less than the new one, the monthly total for the Skoda is £16 more. In this case, the low depreciation is a penalty for the used car buyer, who will face higher service and maintenance costs for an older vehicle while paying little less than for a new one. In other words, the customer is better off financially buying a new Citigo, but will save money every time they drive a used Fiat 500 compared with a new one.

All of this goes to show that the running cost equation is sometimes not as obvious as it may seem. Dealers who understand the subtleties of varying ownership costs and are skilled at explaining them to customers have everything to play for.

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