Used- Car Pricing

A franchise dealer with a used-car operation usually prices his cars at some percentage over what the car is deemed to be worth on the wholesale market. The wholesale value of a car is usually determined by such things as the demand for the car coupled with the age, make. model, options, mileage, and general condition.The dealer's markup on a used car, van, or pickup is frequently determined by any or all of several factors:

• First, there's the price he paid to acquire the car. He might have taken it in trade against, a new car-which means that he accepted the car in lieu of cash or he might have purchased it from a private seller, a wholesaler, or bought it at auction.
• Second, he will add what it has cost him to repair and recondition the car.
• Finally, he'll add a markup to cover his profit objectives and to pay for his overhead.

The markup will also reflect such things as the condition of the car, the mileage, the make, model, options and, most important, the market demand. The point, simply, is that used-car markups vary greatly for any number of factors. As an educated used-car buyer, your objective is to discover the fair wholesale price and what the dealer "has in the car." In other words, what has it cost him to buy and recondition the car and put it on his lot. That will give you the basis for plan¬ning your negotiation. More on this later.

Asking More Than They Plan to Get
Many dealers also include a "negotiation pad" in their markups. They recognize that most people won't buy a car-new or used-unless they feel they're buying it for less than the advertised price. So a dealer will build in a large enough cushion to give the buyer a discount and still end up with whatever he considers to be a reasonable, or maybe even a more than reasonable, profit.

Here's Some Insider Information on Pricing
The key to a dealer's survival and profitability in the used-car business is to buy used cars at or below what the industry calls the wholesale price and then to sell them at a retail price that, in the final analysis, is whatever a buyer will pay. Here are some actual examples:

A dealer told us that if he pays a customer $1,000 for the trade-in on a new car, he'll clean up the car and put it on his lot for $3,999. That's a 400 percent markup! He can then let the potential buyer "beat up the salesman" and believe he or she has driven away with a great deal for $3,000. The dealer and salesman laugh all the way to the bank. Recently we saw a GM car that we discovered had been purchased by the dealer for $9,500. After spending $400 for repairs and reconditioning he put it on the lot at $13,800. That's a markup over his purchase cost of just over 45 percent. The used-car sales manager confided that he had built in room for negotiation. A buyer finally appeared and, after a negotiated agreement, bought the car for $12,450. The customer felt he'd gotten a deal, and the seller said nothing to disabuse him of that notion.

The Dealer as a "Predatory Buyer"
In a rare moment of candor a used-car manager told us that if a car is worth $25,000 on the wholesale market, he'll try to convince the seller to part with it for three to four thousand less. He called this "predatory buying," which is another way of saying that he'll say anything or do anything to screw the seller. If he's successful, he'll turn around and put it on the market for $29,995. This could represent a markup of anywhere from 30 to 40 percent. He admitted, however, that if he senses the seller is smart enough to offer the car to more than one dealer, he will be forced to offer a figure closer to the true wholesale price. He also admitted that if the car is a "cream puff," if he knows there's a lot of profit in the car and that he's bidding against another dealer, he will often go above the wholesale price.

Most successful used-car operations hold a car on their lot for somewhere between 60 and 90 days. If it hasn't sold during that time the dealer will offer it to a wholesaler or take it to auction to recover some or all of his costs. The point to keep in mind is this: Dealers seldom spend more on a car, including purchase and reconditioning. than they feel they can get were it to become necessary to sell the car to a wholesaler or to put it on the auction block. For that reason a dealer is unlikely to accept an offer that is below what he knows he can get on the wholesale market. However, any offer above the wholesale value will usually be considered, especially if the car is not in high demand, has been sitting on his lot for a number of weeks, and if the offer is made at the end of the month.