One question that I am consistently asked about used cars is when there is a comparison between similar cars at different dealerships, why one is priced differently than another. Most customers think that it’s all a question of markup, that one dealership wants to make more money than the other, so they start off the asking price higher. There are actually a good number of reasons why one car can be priced higher than the other, and most of them have nothing to do with profit.
Let’s start with the example of a 2014 Volvo XC60 T6 that I have available at Bridgewater Volvo:
This XC60 features leather seats, a laminated panoramic moonroof, and heated front seats. It has only one previous owner, who purchased this car from our dealership, and no accidents reported through Carfax. It has only 22,069 miles, with a warranty through March of 2018 or 50,000 total miles, and it has an asking price of $29,995. At that price, it is priced at 95% of market value. That means that based on the miles, the condition of the car, the equipment, and how fast similar cars have sold, it is priced at a 5% discount to what the car could fetch on the market.
Now, let’s take a look at a similar 2014 Volvo XC60 T6 at another dealership:
This XC60 is the same year and model, a desirable color, and has similar mileage. It also a one owner car, has a clean Carfax vehicle history report. The only difference in equipment is that it has the BLIS package instead of the heated front seats, which can be a point of contention for people who live here in the north where it gets cold. And it has a shorter warranty, which runs out in December of 2017. Yet this car is priced $3,000 higher.
Why is that?
Here are the two main reasons why similar cars can have different prices, beyond profit:
The dealerships own their cars for different amounts
Not every dealership gets all of their used cars from customers who either trade their cars in for another vehicle or from those who sell their cars outright to the dealership. A good number of dealerships will go to auctions to purchase cars. Cars that go to auction aren’t bad cars. On the contrary, most cars that go to auction are in excellent condition.
Sometimes a dealership acquires a car from a trade-in that doesn’t sell well in their market, so they would rather sell it at auction to move it immediately, rather than have it sit in their inventory and take up valuable space and money while it depreciates. Sometimes a dealership sends a desirable car to auction, to offset the losses they will attain on some of the less desirable cars they have to send off.
Those kinds of cars will typically carry a premium for the dealership to purchase. And if they purchase it from the auction for above market value, they will usually set an asking price higher than that just so that they do not lose money on the car when they do sell it.
But what about vehicles that were traded-in to the dealership? Yes, dealers overpay for trade-ins all the time. When manufacturers put pressure on dealership to deliver ever increasing volumes of new cars, dealerships can overpay for the cars that are traded in, just to make a sale on a new car. That puts them in the same situation that I stated above.
There is also a question of reconditioning. Not every car that a dealership acquires has fresh brakes, fresh tires, a recent oil change, and no cosmetic issues. If a dealership does any work on a car prior to making it available for sale, that gets added to the cost of the car, and from there the sale price.
Most dealerships don’t like to lose money when selling a used car. They would rather keep it priced high and hope that someone comes along to buy the car at that price, than sell the car quickly, take their small profit or loss, and move on to the next car.
The market the dealership is in is different
The market for a car may change by thousands of dollars after only a 20 minute drive. A pickup truck may do better in an urban area, or an area that is experiencing a growth in development. But it may not do so well in an affluent area. So a dealership in an affluent area that has a pickup truck may end up pricing it thousands below the market value, just to get people to come to their dealership and see it.
A luxury SUV may be less expensive in northern New Jersey, where you have one of the biggest concentrations of luxury car dealerships in the country. But you move one or two states to the south, and suddenly the price jumps because it is harder for those dealerships to source the same type of SUV. Used cars, like all commodities, are governed by the laws of supply and demand. And where the supply is low, the prices go up to compensate.
It happens more than you think. The most extreme example I can give was back in 2014, I was working at a dealership where we purchased a 2011 Honda Pilot EX-L with the rear seat entertainment system. After about a month, I received a call from a customer out near Seattle who was interested in the car. Apparently in his area, finding a EX-L model with the rear seat entertainment system was very difficult, and the ones he could find within a reasonable 4 hour driving distance of his house were significantly higher. It ended up being completely worthwhile for him to fly himself, his wife, and their daughter out to New Jersey, buy the car, and take a road trip back home than to buy this kind of Pilot local to him. I’ve had customer fly in from places like Detroit, Montana, Texas, Kentucky and Florida to purchase vehicles and drive them home, because it made a lot more sense financially.
In the end, it’s your choice which car to buy, and who to buy it from. Hopefully now you have a better understanding of how used car pricing works, and why the dealer with a more expensive car may not be able to discount it to the price point of a cheaper car you find somewhere else.