Pricing Primer Follow-Up: A Deeper Dive Into Competitive Sets
In my previous post, I shared how Provision ProfitTime helps dealers price used vehicles to match their investment values.
I also promised that I would take a deeper dive into competitive sets, and how dealers should consider them as they determine the optimal price position for a used vehicle.
Let’s start the deeper dive with a quick definition and context-setting: For those who don’t know, a “competitive set” represents current vehicles in a market that will compete, in the eyes of vehicle buyers, with the vehicle you, as a dealer or manager, have in your inventory.
Competitive sets for most cars run between eight and 20 units. vAuto’s Provision system automatically determines a vehicle’s competitive set based, generally speaking, on the degree to which other vehicles possess the same/similar characteristics (e.g., year, make, model, mileage, color and meaningful equipment), and show up together when online shoppers search in a specific market.
As you might expect, it’s important that your inventory management system continually assess and refine the variables that determine and drive competitive sets. This refinement process ensures competitive sets always account for and reflect any relevant change or nuance in the search manner/terms online buyers use to find a vehicle.
It’s also important for dealers to trust the competitive sets. In my discussions with dealers and managers about distressed or aged inventory, we’ll often go back to the competitive set for clues that might indicate why a vehicle hasn’t sold.
Many times, we’ll find that someone customized a vehicle’s competitive set because he/she felt the unit had a specific characteristic (such as a color or piece of equipment) that made the vehicle significantly different and more valuable than the other vehicles in the set.
When I see these competitive set adjustments, I’ll wave a yellow flag.
In fact, this exact scenario occurred just last week. I was meeting with a Midwestern dealer group. We were examining a vehicle that hadn’t sold. It was priced about $2,000 above the same/similar units available in the market.
A little investigation revealed that a manager had adjusted the competitive set to justify the higher asking price.
The reason? “Mine’s black,” the manager says. Yes, it is, I agreed. But I pointed to a silver version of the vehicle. It had essentially the same condition, equipment and mileage.
I then asked the manager: “Do you think the typical Internet shopper would pay $2,000 more to get the black car? Is it possible you like black cars more than your buyers?”
Upon a bit of reflection, the manager agreed to adjust the price to more closely reflect its true competitive set.
Here are three best practices I recommend dealers keep in mind as they use competitive sets to make market position and pricing decisions:
1. Revisit them daily. Today’s competitive set may not be the same tomorrow in the ever-changing retail market. Units come and go all the time. If I were a dealer, I’d staff my used vehicle team to ensure someone revisited each vehicle’s competitive set and market price position every day. Yes, it can be time-consuming.
But I can’t think of any other used vehicle administrative task that’s more rational and sales-focused than monitoring each vehicle’s competitive standing in the market. If you don’t have the resources to make this an everyday exercise, then it should happen at least every other day, and no less than every third day.
2. Put on your “Buyer’s Cap.” Ultimately, your competitive set functions as your primary reference point for where you should position and price your vehicle for retail sale. As we discussed in my last post, the optimal competitive position depends on the vehicle’s appeal in your inventory and market, and its overall value to you as an investment.
It’s also important to remember that your ultimate goal is to end up on a buyer’s short list, which typically consists of three to four vehicles.
More and more, I’m seeing dealers and managers use hourly employees (who generally get paid $12-$18/hour, depending on the market) to manage their competitive sets and pricing. The move makes sense when you consider the other tasks used vehicle directors/managers are expected to handle, and their propensity to view vehicles as “car guys,” a perspective that’s often different than typical buyers.
3. Minimize customization. This point’s worth repeating. To be sure, there are times when a vehicle may be more special and unique than others out there. There may also be instances where you simply must rule out the cars from a dealer you consider disreputable down the street.
But I’d suggest the following rule of thumb when you’re tempted to tweak a vehicle’s competitive set: If you’re doing it more than 10 percent to 15 percent of the time, you’re probably kidding yourself and trying to justify outcomes that won’t happen.
I’ll close this deeper dive with an observation: If you aren’t paying close attention to each vehicle’s competitive set, chances are pretty good buyers aren’t paying attention to your vehicles.