Demystifying Used Car Prices
How do you know if the price on a used car you’re looking at is a decent price? Perhaps the more interesting question is this: How in the world do dealers come up with their prices to begin with? It’s not something that gets talked about a lot, so let’s dive in and demystify used car prices.
Used cars as a product are a commodity, and that means they are subject to the laws of supply and demand just like any other commodity. In the used car industry, one of the basic building blocks of pricing is the auto auction. Most of the inventory at used car dealerships are purchased at dealer-only auctions. Some people have the misconception that these auto auctions are somehow bad. Not true! Like any source of used cars, auctions have a wide array of vehicles to sell, some of which are great and some of which are not. The best used car dealerships put a lot of time and energy into examining the offerings at these auctions and selecting only the very best vehicles to bring onto their lot for reconditioning and selling. So the prices at the auto auctions form one foundational piece of a used car’s price, and it’s one that can fluctuate wildly depending on what people want. When demand spikes for a particular kind of used car, then the prices of those cars at the auctions go up, as must the prices the dealership eventually charges customers for that car.
But there’s more that goes into a used car’s price than just what the dealer pays for it at an auction. The dealer also has to figure in a lot of other costs in taking on a vehicle – transporting it to the lot, making any needed repairs, and doing a thorough reconditioning of it are items related to the car itself. Then there’s a number of other factors that must be included – the costs of staffing and managing dealership, the advertising, and so on. Finally, the dealer then also has to make a profit on the car or risk going out of business! So the formula is essentially this: Auction price + overhead + profit = price. While the overhead and profit are often relatively fixed and don’t change much, it’s that price paid at the auction which can and does change constantly over time.
Now, when you go onto sites like Edmunds or Kelly Blue Book, they will give you different prices of what you can expect to pay for a used car based on information they accumulate from various sources, including what similar cars have sold for in your area. These are called “book values” and while they’re very useful as a guideline, they are only that – a guideline. In California, banks often turn to Kelly Blue Book retail values for guidance when they’re making car loans, so it’s a pretty common resource. How quickly those sites can reflect what’s happening at any given moment in the used car market is anyone’s guess, but they are looking at the auctions as well, which is why they do serve as decent starting points. But when demand for a particularly popular car spikes, it’s not uncommon for them to start selling above those book values.
In the final analysis, the used car market is very efficient and responsive to the laws of supply and demand. If you want to get a really great deal on a used car, you might look at models that aren’t the most popular but very similar to them.
Finally, we would like to shed some light on how we price our inventory at Auto City. We put a lot of effort into making sure that used cars that we sell are competitively priced and it all starts with market and competition research. Ask yourself this question: how would you search for a used car? You would probably start with online shopping websites, then search for a car or cars your are interested in, and finally, you’d probably sort search results by price. This is what most car shoppers do and most used car shopping happens online these days. So as a seller we want to make sure that we price our inventory competitively to get noticed. Things are quite simple here: if our vehicle ends up being displayed on the second page of your search results, chances are you will never find it. So we price our cars very competitively to make sure they get found online. We use software that aggregates data from thousands of websites and tracks millions of car listings in real time so we can stay competitive in real time.
There is another reason why we aim to be a price leader – inventory turn. At Auto City, we focus on volume of sales rather than high profits on individual deals. We want to sell cars quickly and the only way to do that is to be competitive. In addition to pricing our cars competitively, if a car does not sell within our benchmark time, we move to our specials category and lower its price and we keep lowering it systematically till it sells. You may think that there should be something wrong with these aged cars because they do not sell. Rest assured – that is not the case. All our cars are carefully selected, inspected, serviced and pass thorough quality control. It may be the color, or the market may suddenly become saturated with this model, etc. To see a list of deeply discounted cars, please see our specials page.