4 Misunderstandings About Price In Today’s Auto Retail Market

August 17, 2017

Old beliefs and habits definitely die hard.

Take the way many dealers still think about their new and used vehicle prices:

Dealers control vehicle prices. I’m not talking about the obvious point that dealers do, in fact, largely set the asking prices for their vehicles. My point relates to the ever-more powerful influence the market has on a dealer’s latitude to price vehicles the way they really want to. Some dealers have let this one go entirely. They’ll price their vehicles based on what the market data tells them—no more, no less. They recognize they can’t control or make the market for a vehicle. They understand the market dictates if the car’s a winner or loser, or lies somewhere in between, and they should price accordingly.

A higher price is a better price. Some dealers still believe that higher prices lead to higher front-end gross profits. This belief used to be true, before the Internet and pricing transparency gave the market more influence on vehicle prices. Back then, dealers could set their retail asking price as high as they wanted, and negotiate to keep every last bit of gross profit from a customer. Unfortunately, it doesn’t work that way as much or as well today. Vehicle buyers hunt hard for a fair price, and don’t respond well to dealers with new and used vehicles priced 10 percent to 20 percent higher (or more) than the same/similar cars in their markets for no apparent reason.

Price and age aren’t related. This thinking isn’t as prevalent as it used to be in used vehicles. Generally, dealers recognize that the longer a used vehicle sits in inventory, the less money it makes, due to depreciation, competing units and opportunity costs. As a result, many dealers make the effort to adjust prices as vehicles age to facilitate a timely retail exit. But these same dealers often do not apply the time-is-money principle in new vehicles. The prices these dealers place on new vehicles on Day 1 often don’t change for months. Other dealers, however, have recognized that age- and market-related adjustments result in faster retail sales, which affords them the right to earn additional inventory from their factory partners.

When you re-price, you lower your price. Dealers affirm that the vast majority of re-pricing decisions result in a lower price. But the most market-astute dealers know this isn’t always true. That’s why they assess each vehicle’s online performance. They ask these and other questions: Is the vehicle’s online listing getting a sufficient number of Vehicle Details Page (VDP) views? Is the online activity increasing or on the wane? Are there more or fewer competing cars in the current market? How do the prices and Market Days Supply metrics on these cars compare with mine? Most of the time, the answers lead to price reductions. But there are times, in both new and used vehicles, where dealers are well-justified to raise a vehicle price, or hold off on a price reduction, because their vehicle stands taller in the market than others.

I’m sharing these misunderstandings because I’ve seen, time and time again, how they impede a dealer’s ability to fully maximize new and used vehicle sales velocity and profitability.

In today’s market, margins are too thin, and time is too precious, to allow these common misunderstandings about new and used vehicle prices to get in the way of tomorrow’s retail sales.