Do you ever wonder why car dealers are always trying to buy your car? I noticed the other day that Carvana (yeah, the car vending machine company) is running ads about how they’ll buy your car from you. Do you wonder why? It has something to do with how much dealers markup used cars. Let me tell you, for dealers, there is a lot of money to be made in used cars.
In my career, I’ve seen many different ideas about what the markup should be for a used car. There are many factors to consider. Let’s breakdown how dealers determine their price for used cars, and how much markup they build into them.
How dealers set used car prices
Where to start? With a quick history lesson.
In the old days (you have to remember, I spent 42 years in the car business), before computers, before the internet, before digital marketing, car dealers relied on the classified section of their local newspaper to advertise a used car. Back then we would look at a car, add up all our costs associated with it, and determine how much we wanted to make on it ($1,500, $2,000 maybe even $3,000). We’d then add the desired profit amount to our cost, and that became our selling price.
Pricing in the good old days was simple, easy, and best of all, it worked.
When a customer would walk in we knew how much profit was in the list price. We’d negotiate, and end up selling the customer their used car with a profit of $1,000 or $2,000. The best part was, the customer felt like a winner because they negotiated us off of our original price, and we made money. Win-win.
Today it’s completely different. Customers have access to more information before they walk in.
Dealers today have software that helps them determine how much a car is worth. One of the most popular in the industry is vAuto.
These software programs are complex. They tell dealers what they should price each used car at in relation to similar cars in the market so that they’ll sell. They can even take into account geographic and seasonal differences between dealerships. For example, a truck might be worth a lot more during the winter in Colorado than during the summer in California. The software is able to factor that into the price it suggests the dealer should list the car at. Sophisticated, eh?
Pricing for profit isn’t the primary concern for most car dealers. Even more important than profit nowadays is how quickly a dealership can turn its inventory. Turn is the term used to describe the amount of time a car sits on a dealers lot before it’s purchased by someone.
Aging policies affect used car markup
For many dealers (especially the big ones), the idea is to sell or turn your inventory within 60 days of acquiring it.
Many stores have strict aging policies for their used cars. If a used car doesn’t sell within 60 days (or at the max 90), off to the auction it goes. The dealer will sell a used car at auction and replace it with a different car that they think will sell within the 60 to 90 day timeframe. For most dealers, it’s important to turn your inventory as fast as possible. As a car sits on the lot, its actual value is declining. From the dealer perspective, what was worth $10,000 when you traded it is now worth $9,000 90 days later.
The longer a car sits on the lot, the lower the selling price becomes.
Most dealerships work on a strict 60 to 90 day policy for their used cars. This means they’re adjusting a used cars price downward every 10 days to try and sell the car.
There is even software that tracks how much interest a used car gets and changes the list price in realtime. Dynamic pricing decisions occur on an almost daily basis.
If a car is not drawing any interest it’s because it’s priced higher than similar cars in the market. With this software in place, dealers lower the price of their inventory to try and make it more competitive.
During my career, I worked for dealerships that lived by the 60 day policy: a used car was either sold to a retail customer or it was wholesaled to another dealer within 60 days, no ifs and or buts. I’ve also worked for dealerships where the best way to describe how we handled our aging inventory was the fine wine method: we believed, much like a fine wine, that our cars were getting better with age. They weren’t but we chose to believe it anyway.
So how much do dealers mark up their used cars?
As much as the market will bear for that model. With that advent of sophisticated software platforms and “big data,” we’re seeing more and more dealers allowing algorithms to set prices, rather than human beings.
That being said, the average used car markup today is probably about $2,500. Hard to find specialty cars (Ferrari, Lamborghini, McClaren and others), or models in short supply could (and should) be much higher. But, for your run of the mill used car, expect the dealer to have a $2,500 markup in the price. Remember, to get the best deal, you’ll want to find one of the older cars on the lot!
One of our readers, Nick Gray documented his negotiation process and how much he saved here: https://nickgray.net/car-buying/