Vehicle Inventory or Market’s Day Supply … Where Do You Stand?

May 19, 2008

For the first 100+ years of the used car business, we’ve always adjusted our prices based on how long we’ve owned the vehicle. But I say its time to stop doing this. OK, maybe I don’t really mean that completely, but listen to what I’m about to say.

What if you had to choose: you could either pay attention to the age of the vehicle in inventory or its day’s supply in the market, but not both? My professional opinion is that you’d be way better off knowing the vehicle’s day’s supply in the market rather than how long you’ve had it in your inventory. Think about it. If you knew from the first day that you had a vehicle in stock that it had a market day’s supply of over 100 days, how long would you be proud of it? Answer this question: how long would you be willing to advertise a new vehicle for over market money if there was 100 day’s supply of identically equipped vehicles in your market? I think the answer is that you probably wouldn’t do it at all. So why are you doing it in your used car operations today? I can show any dealer that they have vehicles with 100+ market day’s supply being advertised for over market money.

The reason that our industry is willing to do this with used vehicles is that they don’t understand what it means to do business in an efficient market. An efficient market is one where buyers and sellers have relatively equal knowledge about their choices and alternatives. Given this definition, was the used car market efficient before the internet? No. We often got buyers to take cars home for more money than they would have if they’d only known where other similar ones could be found around town for less money. There were always such vehicles; it was just that they were not easily found. Today, is the used car market efficient and getting more so every day? Yes. The internet gives shoppers access to the information they need to be aware of all of the available choices and alternatives for every vehicle.

Now, think about this. Any market that’s efficient is governed by the same forces and principles. It doesn’t matter whether it is the oil, grain, cattle or automobile markets. If they’re efficient, they’re governed by the forces of supply, demand and price sensitivity.

In other words, now that the used car business has become an efficient market, dealers are either sailing on the seas with the wind at their back or in their face, on a unit-by-unit basis, depending on the vehicle’s supply and demand. When I say the vehicle’s supply and demand, I mean its current availability (exact year, make, model and specific equipment) divided by its average daily retail sales rate over the last 45 days.

Simply stated, if you have a vehicle whose demand outpaces its supply, shoppers will beat your door down, even if you price the car over the market and call it “ugly.” Conversely, the market will punish you if you take a vehicle whose supply outstrips its demand and price it over the market. The simple time-tested principles of supply and demand never mattered when the market was inefficient and customers didn’t know where other similar vehicles and better deals were to be found. Now that the market is efficient, I say that the vehicle’s day’s supply is actually a much better determiner of how proud your asking price should be rather than the calendar that marks the age of your vehicle in inventory.

I would appreciate your comments on this view (pro or con).