How to make sense of what determines used car prices

The thing that almost all customers ask me for is “my best price.” What is a good price? That’s a good question.

The auto industry is based upon negotiation. The seller asks for a price, the buyer offers a price, and usually both parties meet in the middle. If both parties are satisfied with that number, then I guess that is a good price.

I like to do things a little differently. There are two prices on every vehicle in Canada: a wholesale price and a retail price. If you buy your car from dealer “A” at a retail price, drive it around the corner and trade it in at dealer “B,” dealer “B” will give you wholesale price for the car. The difference between those two numbers is your retail markup. So I like to discuss price with my customers from a wholesale perspective.

Let’s look at this a little closer.

You come to me looking for a car, and for discussions sake, this car is a 2007 BMW 328i sedan with 50,000 kilometers on the odometer. At the auction a car like this would sell, with auction fees, for about $20,000. I can look at previous month’s sales results and see that this is the price to pay for a car like this. This is true wholesale value. When I bring this car back to my dealership to inspect, certify and detail, the car will stand me about $21,500. This is my book cost—how much I need for this car in order not to lose money, though still not make a profit.

Yes, profit. Like almost all businesses, we need to make a profit. If you were to choose to lease this 2007 BMW from me, I would lease you this car at $21,500, my book value, as my leases are based on wholesale value (Sounds good, huh? We’ll discuss leasing versus cash in a later article). If you choose to buy this car from me, you and I would discuss how much I can mark the vehicle up, or rather, how much money I can make. This number can vary from $1,500 to $5,000 depending on the cost, level of difficulty in finding it, or level of difficulty in getting the car here.

A quick look on AutoCatch would indicate to me that a retail price on this BMW would be somewhere from $27,000 to $32,000 depending on equipment, colour (yes, colour) and the store selling the car.

Now, if you know that the wholesale price on a car like this is around the low $20,000s, and you see a car on a dealer’s yard for $18,000, warning bells should go off. Why would a dealer, who needs to sell cars for a profit, sell a car at less than wholesale cost … at less than the market rate? Chances are this car had a significant accident in the past or something equally sordid, and therefore is worth less money. The price may look great, and it’s always tempting, but it won’t represent good value.

If we know what a car’s wholesale price is, it’s much easier to decide if the retail asking price is a “good price” or not. I’d rather be transparent and discuss a vehicle price starting at wholesale and working up, rather than from retail asking price, and negotiate down.

Who decides the wholesale price?

Well, you, the customer does! Once a car is on the used market, it is worth what someone will pay for it, much like a house. If we go back to our BMW, a white car will have a higher price than a green or red car, because most customers won’t want a green or red 328i … unless the price is low enough for you to take a color you don’t like. Dealers know this and will pay more at auctions for more desirable cars.

So what’s my “best price?” My best price is wholesale plus a profit margin that you think is fair for the work I do on your behalf.

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Posted by andrew on August 31st, 2010 :: Filed under Uncategorized
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