Price swings – So how does a dealer price a used car?

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With the market recently becoming a somewhat more favourable place for used car buyers after almost constant rises throughout 2009 it may cause some consternation as to why there sometimes seems such a large swing in price across a similar age, mileage and model range. It may also then interest car buyers to know just how a dealer arrives at a selling price.

When a car first arrives at a dealer it can have come from a variety of different sources; an ex-demonstrator, a part exchange, purchased from auction, another dealers part exchange which they didn’t want to retail themselves, from a leasing or rental company, from a trade source or from a car owner who just wanted to sell it without buying another car, These are the main ways in which a car dealer, whether they are franchised or independent, would acquire a car for retail sale.

But before taking ownership of a car a dealer will obviously need to decide what “trade” price they will be
willing to pay and that decision is usually based on the following factors:

The market conditions they are currently operating in.

What the trade guides may tell them.

The results of researching what cars are selling on the internet for and working back

Experience – many trade buyers just know what their product is worth.

Who they are buying from and how low a price they can offer to successfully conclude the deal.

Stock profiling – looking at how much similar models have sold for recently.

How rare, highly specified and how sought after a model is.

The condition, specification and desirability of the car itself

Once they have considered these factors they can then decide on how they will put a retail margin across the car, and again this will depend on how many they already have (their stock levels) how many are for sale in their own network and more than likely a sense check against similar models on the internet within their radius.

Of course apart from the normal trade considerations about how much profit they are budgeted to make on each car and what they would need to spend on ensuring that car is prepared and presented properly, there are also things like regional variations and anomalies wherein diesels being inexplicably more popular in some places and automatics a safer bet in another.

If a car is so rare and unique and desirable a premium may be put on the price to reflect the fact that another nay not be found for quite some time. Ultimately the retail (or sticker price) will be dictated by the market (i.e. the customer) and when a price gets to the stage where a buyer is not only not prepared to buy but will not even consider looking at it, a dealer may decide that he needs to price it “to go” from day one.
When a customer starts his search for a used car and plugs in the buying criteria and this brings up a selection of cars within the distance selected, if there are plenty of the same cars listed and they are all similarly priced it may just be that’s the price to pay or it might be that, as there are so many others, there may be a deal to be had because a dealer can obviously easily replace it.

Searchers may find that as the market changes, like at present, similar age and mileage cars can wildly differ in their asking price and that is usually down to effects such as dealers being put under pressure by their management to control their working capital and when fewer customers are coming into the business and demand starts to weaken, the first way of attracting more buyers is by reducing the price.

This helps reduce ageing stock which is costing the dealer in depreciation. Also when prices drop cheaper cars come onto the market making older stock bought at premium prices suddenly appear expensive. Another important factor to consider when judging the price a car dealer may be retailing a car for is businesses wanting to reduce their inventories to generate cash and maintain their banking covenants*.

Of course the true value of a used car is down to the price someone (anyone) is prepared to pay for it and when it comes to private sellers there may be a whole host of different reasons as to why they chose to sell at a certain price.

As an example of price swings we took the example of a Ford Focus 1.6 Petrol Zetec 5 door and searched on Autotrader across the country. The prices ranged from £7,995 for an 09 plate with 7k miles to £12,995 an 09 plate with 3k miles and pretty much every price in between.

As you can see that’s quite a swing and right now the power has swung back to the buyer so used car dealers need to be made to work hard for their sale and sharpen their pencil when it comes down to price as all the factors we have mentioned will come into play.

*A condition that the borrower must comply with in order to adhere to the terms in the loan agreement. If the borrower does not act in accordance with the covenants, the loan can be considered in default and the lender has the right to demand payment (usually in full).
Banks usually add covenants in order to accomplish the following objectives:
Maintain loan quality
Keep adequate cash flow
Preserve equity
Keep an updated picture of the borrower’s financial performance and condition