When a car dealer sells a used car, how do they go about setting its price?
To find out, we've taken two screen shots of Edmunds.com's basic True Market Value report for a 2008 Toyota Camry in Georgetown, Kentucky on 12 April 2011, which we've presented below. On the left, we show what Edmunds reports for the CE version of the car, featuring a 2.4L 4-cylinder engine and a 5-speed manual transmission. On the right, we show what Edmunds reports for the LE version of the car, featuring a 3.5L V6 engine and a 6-speed automatic transmission.
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| 2008 Toyota Camry CE 4-Cylinder, Manual Transmission | 2008 Toyota Camry LE V6, Automatic Transmission |
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Everything else about these two used cars is identical. Right off the bat, we see that there's a remarkable difference in the relative value of the two Camrys we selected. For instance, we see that the difference between all prices for each vehicle is pretty substantial, as the LE version with the V6 engine is valued at significantly higher prices for all listed transaction types (trade-in, private party and dealer retail). Generally speaking, we see that the value of the LE V6 version of the 2008 Toyota Camry is consistently 23.3%-23.5% higher than the value of the CE 4-cylinder version, regardless of the type of transaction:
| Comparison of Used Car Values for the 2008 Toyota Camry | |||
|---|---|---|---|
| Transaction Type | CE 2.4L 4-cyl 5-speed Manual | LE 3.5L V6 6-speed Automatic | Difference in Value Between Models |
| Trade-in | $9,910 | $12,216 | $2,306 |
| Private Party | $11,358 | $14,017 | $2,659 |
| Dealer Retail | $12,642 | $15,614 | $2,972 |
Now, let's see what happens when we calculate the difference between the dealer's retail price and the trade-in price for each model type, which represents the dealer's markup for each:
| Dealer's Markup for Selected 2008 Toyota Camrys | ||
|---|---|---|
| Transaction Type | CE 2.4L 4-cyl 5-speed Manual | LE 3.5L V6 6-speed Automatic |
| Dealer Retail | $12,642 | $15,614 |
| Trade-in | $9,910 | $12,216 |
| Difference Between Dealer Retail and Trade-In Prices | $2,732 | $3,398 |
| Dealer's Markup as a Percentage of Trade-in Value | 27.6% | 27.8% |
What this result demonstrates is that dealers use a consistent value-based method for determining how much they will mark up the price of a vehicle they take as a trade-in - otherwise we would not obtain such a consistent result in percentage terms for such differently-valued vehicles. For Toyota Camrys in Georgetown, Kentucky, it appears that selling the vehicles for 27.6 to 27.8% above the vehicles' trade-in values is sufficient to cover the dealer's inventory holding and transaction costs and also provide a profit.
In any case, being able to work out these kinds of percentages for your local car market may help you work out how fair a dealer's price for a car or offer for a trade-in allowance might be, should you be out doing some serious car shopping.
Labels: business, personal finance
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Closing values for previous trading day.
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