Buying a used car is an important decision. The way that prices on used cars have risen, it’s especially imperative to do your research and negotiate the price you want so you can get the car you truly desire.
Unlike new cars, the prices of used cars are not fixed, and the final selling price is not always what the dealer paid for it.
Many factors go into determining the price of a used car. Today we will explore how dealers set used car prices.
Knowing this can help you get your best deal going — so keep reading as we cover this important subject.
Table of contents
The Good Old Days of Used Car Pricing
Back in the old days of often high pressure car sales, dealers advertised their used cars in local newspapers and had the cars parked on their lots with prices clearly marked on the windshield.
They’d determine the selling price of a car by adding their cost and along with the desired profit margin. For example, if they purchased a car for $2000 and then spent $650 to recondition it — they’d sell it for $4199, thereby making a profit of $1500.
Today’s New World of Used Car Pricing
Nowadays dealerships use digital marketing platforms to advertise their used car inventory. The internet has changed the retail world, and dealerships have to be more competitive to attract customers.
To do so, they use software to determine the value of their used cars. This software analyzes the sales history of similar cars and calculates the current market value of the car.
Based on this information, the software suggests a recommended price range that the dealer should sell the car for.
Velocity Pricing
One popular software used by dealerships is called velocity pricing. The software looks at market trends and prices and computes a number to determine how quickly the car should sell and assigns it a velocity factor. This software then suggests that the dealer should sell their car for between 95% and 98% of the market value — hence the velocity price.
The goal is to sell the car as quickly as possible, and this pricing model allows dealerships to price their cars more competitively than other dealerships.
Dealerships using this pricing model do so to turn inventory quickly — the longer a car sits on the lot, the more it costs the dealership in terms of financing, insurance and storage.
Current Markups
In today’s world of rising prices, the average gross profit on a pre-owned car is typically around $2500. This includes the profit from selling the car and does not include financing or warranty sales.
This figure varies depending on the brand, model, and shortages of the car. However, for an average car that most people buy, the markup is around $2500.
You might find this number to come in handy when doing negotiating for your favorite car.
Luxury Cars
When it comes to luxury cars like Ferraris, Lamborghinis, and McLarens, the markup can be much higher than the average car as you can imagine.
This is because there is a limited supply of these cars, and there is much more demand for them. Dealerships can make a profit of $10,000, $20,000, or even $30,000 on these cars.
The difference is that these cars are not sold as quickly as other cars. It takes a specialized high end buyer who is ready to pull the trigger. This results in 90 to 120 days to move these unique cars.
Factors that Affect Used Car Prices
Aside from the pricing strategies used by dealerships, other factors also affect the price of a used car. These factors include the car’s age, mileage, condition, location, and demand.
Cars that are newer, have lower mileage, and are in good condition will command a higher price than older cars with higher mileage and poor condition. The location of the car also plays a role in determining the price, as cars in high-demand areas will be more expensive.
Another factor that dealers consider when setting used car prices is the condition of the vehicle. Cars that are in good condition and have low mileage will generally command a higher price than those with high mileage or that have been in accidents.
This is because buyers are willing to pay more for a car that they believe will be reliable and will last them for years to come.
Dealers will often inspect a car thoroughly before determining its price. They will look at the car’s body, engine, interior, and any other components that might affect its value.
They will also consider the car’s history, including any accidents or repairs that it has undergone. All of these factors will help the dealer determine the condition of the car and what it is worth.
Used Car Supply and Demand
Another factor that plays a significant role in used car pricing is the supply and demand of a particular make and model. This is similar to velocity model pricing: if there is high demand for a certain type of car, dealers can charge more for it.
Conversely, if there is a glut of a particular make and model, dealers will have to lower their prices to move inventory.
For example, if a new model of car is released and it becomes popular, the demand for the previous year’s model will decrease, and dealers will have to lower their prices to sell those cars.
Conversely, if a car has a reputation for reliability and has a cult following, dealers may be able to charge a premium for it, even if it is older or has higher mileage.
Current Overhead Costs
Dealers also consider their overhead costs when setting prices. These costs include rent, salaries, advertising, and other expenses associated with running a dealership. Dealers will need to make enough money on each car they sell to cover these costs and turn a profit.
This is why they will often add additional fees and charges to the selling price, such as documentation fees or dealer preparation fees.
Your Best Negotiation Face
The negotiation process surprisingly plays a significant role in the final used car price.
Buyers can often negotiate a lower price on a used car, especially if it has been on the lot for a while or if there are similar cars available for less elsewhere.
Dealers are often willing to negotiate because they want to move inventory, make a sale and in the end, turn a profit.
It’s important for buyers to do their research and understand what a fair price is for a particular make and model before entering into negotiations.
By understanding these factors, buyers can make informed decisions when purchasing a used car and negotiate a fair price.
As you can see from my message above, it’s always a good idea to do your research, shop around, and understand the value of the car you are interested in before making a purchase.
Be confident, negotiate strongly, and compromise fairly — you’ll come out with a situation where everyone can win!
