By Richard Yarrow
The old adage is that with the exception of a house, a new car is the most expensive thing anyone ever buys.
One other factor links home and transport; within reason and certain parameters, the price isn’t fixed.
Each is only worth what someone is willing to pay for it.
That’s even more relevant in the used car market.
The retailer can stick a price board in the windscreen, but how quickly the vehicle sells will depend on whether a potential buyer feels it represents good value.
So how should franchised dealers make sure their price is right in the first place, and how important is it to constantly review – and if necessary, revise – that figure?
Perhaps most crucially, how should it be done while still protecting the profit margin?
Basic economics tells us that consumer demand will govern the process.
Put bluntly, if a car isn’t selling it’s probably too expensive.
But the real key lies in having a pricing strategy from the moment you’re considering a second-hand vehicle for stock.
Clever dealers will make use of the available tools; as well as having a retail focus and an understanding of consumer behaviour in this digital age, the most successful used car operations are those which use market data and valuation software to constantly review sourcing and pricing strategies.
Alex Lowe is sales and marketing director at Deltapoint, an automotive data analytics company. It recently introduced i-Control, a programme which recommends what stock to buy, where to find it, how much to pay and what the likely mark-up should be.
Lowe explained: “The available market data will include metrics that track consumer demand in the local area, measure stock turn and identify the potential gross profit margin.”
But he warned that the optimum selling price will only last for a time – alas, never the same length of time – because the used car market is not static.
“It’s dynamic and constantly evolving so dealers need to study local retail demand, review their prices regularly and adjust them accordingly,” he added.
Vik Barodia, director of product management and marketing at EurotaxGlass’s, says it is core to a dealer’s day-to-day business. He reckons the trick is knowing how often to do it.
“It’s difficult because different dealers operate different policies,” he said.
“If they have a 90-day stocking policy, some will say ‘for the first 30 days I want to be a certain percentage above market; for the next 30 I want to be market and for the last 30 to be below market to get rid of it’.
Some will go substantial periods without changing the price, but I think reviewing should be at least a weekly exercise, focusing first on the problem cars.”
Barodia said smarter dealers will think about the bigger picture before they make stocking decisions, and will be proactive, not reactive.
For example, if they take a car seeking a £2,000 margin, they will accept it might take 60 days to sell.
But if they will settle for a £1,500 margin, knowing they’re likely to get rid of it in 30 days, in two months they can make £1,000 more profit.
“They will think about the right margins – so what price they should set – right from the beginning, rather than waiting until a car starts to become a problem,” he added.
Even then, that’s not the whole story.
Some dealers will track market trends, try to have an insight into the wider industry and keep on top of broader economic issues and measurements of consumer confidence.
Andrew Ballard, principle consultant at Experian Automotive, said: “Good communication with fellow dealers will offer a good indication of the direction of market changes and price fluctuations.
"This could involve attending events aimed specifically at the used car market, such as those organised by industry magazines like AM or industry bodies including the FLA or the SMMT.
"That’s where experts gather and discuss key issues to be mindful of.”
When setting the price, Ballard said it is important to consider the initial purchase amount and desirable margin, plus costs for refurbishment, warranty, MoT and service. Investigating similar vehicles on used car websites and with other local dealers can help retailers get a true feel for the market.
He added: “Margins are tight, a wealth of offers are available and consumers are aware they can shop around.
"However, people still value good service and can be swayed if they can see the benefit through enhanced deals or an improved package.
"Look at your key competition, including franchised, non-franchised, approved used car schemes, used car supermarkets and online providers.”
The internet has made the marketplace nationwide but regional trends are still important when it comes to used car pricing and protecting the margin.
Experian figures for 2012 reveal that those living in the North of England and Scotland prefer Vauxhalls, but Ford is the brand of choice in the South East, South West, East Anglia, West Midlands and Wales.
“The only region to buck the trend was Greater London, opting for the BMW 3-Series,” said Ballard.
“This shows that regional variations and insights are valuable and shouldn’t be overlooked.”
Glass’s recently reported on the case of two Fiat 500s, one in Cardiff, the other in Edinburgh.
They were identical in every way except for the 12.5% difference in price.
By monitoring regional preferences dealers can ensure they hold a suitable and profitable mix of stock based on a true reflection of the needs of their customers.
Dealers should also keep a close eye on how similar vehicles are selling in the area, how they are being priced and how quickly they sell.
Finally, while data shows people will research their preferences online first, they still like to visit a dealership to view a car and test drive it.
This offers an opportunity for sales staff to demonstrate their product knowledge, engage with the customer, discuss offers and promote aftersales/accessories – all of which can add profit to the business.