3 Indicators To Make Market-Smart Used Vehicle Pricing Decisions

April 11, 2014

At a recent dealer group presentation, a used vehicle manager asked me an astute question:

“Dale, how can you tell when a used vehicle may need a price change?”

Alfa-Romeo-8C-WallpaperI liked the question because it suggested the manager was a thoughtful and proactive person—someone who doesn’t follow the more traditional set-it-and-forget-it practice for used vehicle pricing.

In answering the question, I shared the following three indicators that, when used together give dealers the best guidance to make used vehicle pricing decisions and retail every used vehicle for maximum profitability in the shortest amount of time:

1. Vehicle Details Page (VDP) performance: By now, most dealers and used vehicle managers can accurately define a VDP as the “look” a vehicle gets when a potential buyer clicks on an inventory listing to learn more about a specific car. Too few dealers, however, recognize the VDP as the “money metric”—the more VDPs a car gets, the better its chances to sell quickly and deliver the highest level of profitability.

If we assume a used vehicle is “right” for a dealer’s market, and it’s merchandised correctly and fully online, the vehicle’s daily VDP tally is an important indicator whether its price is resonating with potential buyers and the broader market. Some dealers carefully monitor a vehicle’s VDP counts and trendlines to help them determine if a price change is warranted. If the VDP views meet the minimum daily targets they expect to see, they may leave the price as-is; if the VDP exceed the targets, and they appear to be increasing, the dealers may adjust the price to reflect increased demand.

Both of these decisions, however, are contingent on a vehicle’s time in inventory.

2. Price To Market: This metric measures each vehicle’s price against identical, competing vehicles and their prices in a dealer’s market. Some dealers consider this their primary data point to craft their used vehicle pricing strategies and make subsequent pricing decisions on individual cars.

For example, it’s not uncommon for dealers to set Price to Market parameters for inventory age “buckets” (98 percent to 100 percent, 0-7 days; 94-97 percent, 7-15 days; 90-93 percent, 15-22 days; < 90 percent, 22-29 days). This approach recognizes two important fundamentals—fresh cars deliver the best gross profits, and time is often a used vehicle retailer’s worst enemy.

Dealers who use such Price to Market parameters fine-tune prices for individual cars within the individual “bucket” ranges. The key to success here, of course, is the degree of diligence a dealer or used vehicle manager applies to executing the Price To Market-guided strategy. Those who only price and re-price vehicles as they enter/leave an inventory age segment will inevitably leave gross profit on the table as vehicles don’t sell as quickly as they could. The most proficient dealers review used vehicle prices on a near-daily basis to keep pace with the current market.

3. Market Days Supply: This metric, which measures the sales rate and supply of identical used vehicles in a specific market, is most beneficial to dealers as they make the decision to acquire a vehicle. In an instant, the Market Days Supply tells them how much competition a specific used vehicle will face in their market.

The Market Days Supply also informs pricing decisions once dealers have acquired a vehicle. For example, vehicles with a high Market Days Supply (e.g., a greater level of competition) may see price adjustments that reflect the lower rungs of the inventory age “buckets” noted above. By definition, these vehicles aren’t as appealing and unique, hence the more aggressive pricing position.

Conversely, vehicles with a low Market Days Supply often deserve a higher Price to Market position. These are the in-demand cars that warrant more wishful asking prices.

I closed the pricing discussion by reiterating that these indicators work best when you’ve got the “right” cars for your market and they’re merchandised online correctly.

I also noted that when dealers have the “right” cars, and they diligently use these indicators to make used vehicle pricing decisions, good things start happening.

First, your used vehicles start to sell more quickly and, typically, generate better front-end gross profits. The market-based pricing strategy begins to fulfill its goals of retailing every used vehicle for maximum profitability in the least amount of time.

Second, you now have a market-based rationale to justify your asking prices with customers. In many cases, your “on the money” pricing means your sales team doesn’t have to justify anything—the buyer landed on your car because you priced it right.

And last, you’ve got a market-informed, scalable approach to pricing that can drive a “turn and earn” used vehicle inventory management strategy that drives improved performance and profitability in every dealership department.