Monday, December 15, 2008

How Car Dealerships Price their Used Cars

A franchise dealer has a pretty simple model for the way they price used cars. They just pick a percentage over what the car has been estimated to be worth on the wholesale market. That wholesale market value is determined by the cars age, the cars make and model as well as options, the mileage and overall condition of the car.

A dealer determines how much markup they will use on used car based on these factors. The first thing they take into consideration is the price they paid to get the car. They might have taken the car as a trade against buying a new car, which means they did not pay any cash for it, or they bought the car from a private seller, an auction or wholesaler. The second thing they must take into consideration is the cost that they have paid for repairs and reconditioning the car needed. They then finally have to tack on more to the price so that they can make money. This is a business they are running after all.

The markup that a dealer puts on will be influenced by all these factors. As you can see it is clearly more than just one thing that affects how much people have to pay for a used car. If you want to be an educated buyer of used cars your objective should be to find out the cars wholesale price and then how much the dealer has put into the car to get it ready. This will tell you how to plan your negotiations since a dealer is almost never going to go lower than those two things.

When shopping for used cars, everyone knows that you need to bargain. It is for this reason that most dealerships include a "negotiation pad" in what they use as their markups. Many people who come to the used car lots will not buy a car unless they feel they are getting a deal. If dealerships marked cars with the prices they actually wanted to sell them for then people would come in and try and haggle below that level. If they put it at say 1000 above, they can easily let people bargain them down that 1000 and still get a price they feel is fair. If people don't bother to bargain them down then they have made an extra 1000. This is why it is important to know how much the dealership has put into the car. Once you know that, you know how much you can try and bargain off and what is the absolute minimum they will go to.

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