A franchise dealership has a fairly simple model for how they price used cars. They simply choose a percentage of the car’s estimated value on the wholesale market. That wholesale market value is determined by the age of the car, the make and model of the car, as well as the options, mileage, and general condition of the car.
A dealer determines how much markup to use on a used car based on these factors. The first thing they take into account is the price they paid to get the car. They may have taken the car as a trade-in for a new car, meaning they paid no cash for it, or they bought the car from a private seller, auction, or wholesaler. The second thing to consider is the cost they have paid for the necessary repairs and reconditioning of the car. Then eventually they have to add more to the price in order to make money. This is a business they are running after all.
The profit margin applied by a distributor will be influenced by all these factors. As you can see, it’s clearly more than one thing that affects how much people have to pay for a used car. If you want to be an educated used car buyer, your goal should be to find out the wholesale price of the cars and then how much the dealer has invested in the car to get it ready. This will tell you how to plan your trades, as a dealer will hardly ever go below those two things.
When buying used cars, everyone knows that haggling is necessary. It is for this reason that most dealerships include a “dealing board” in what they use as markup. Many people who come to used car lots will not buy a car unless they feel like they are making a deal. If dealers marked cars with the prices they actually wanted to sell them for, people would walk in and try to haggle below that level. If they put it at, say, 1000 above, they can easily let people haggle over that 1000 and still get a price that they think is fair. If people don’t bother to haggle, then they’ll have made an extra 1,000. That’s why it’s important to know how much the dealer has invested in the car. Once you know that, you know how much you can test and trade and what is the absolute minimum they will go to.
