With 40 million used light vehicles sold in the US every year, you would think that there would be enough pricing data to know exactly what you buy or sell a car for. An interesting aspect of the industry, though, is that there are so many variables involved that even that many data points leaves accuracy woefully below what you might hope.
This phenomenon becomes increasingly relevant as you move from the regular commuter car to the higher end options like luxury and exotic vehicles. The result is that for buyers and especially sellers, going the dealership route can be unknowingly expensive. Today we're diving into some of the economics and data analysis that goes into the high end market and why I think it's time for something new.
I threw a lot of jargon at you in those first 2 paragraphs so let me loop back and clarify some things first. For those of you not in the math or science fields, your ability to predict future events of some tracked variable is often correlated to the number of past data points you have for that variable.
For instance, if I said that last year there were 1 million (just an example) new Toyota Camrys sold in the Houston area at an average price of $15,000 and a variance of $1,500 - or 10% - you could be pretty confident that you could get the exact Camry you wanted for a very specific price. Whereas if you only had data from 10 Camrys being sold it would be much more difficult to know exactly where you should land in the $13,500-$16,500 range.
This seems pretty reasonable given that Camrys don't have tons of options and these were all new cars. Let's consider a more expensive option like a BMW M3 which starts at $69,900 new but can have tons of expensive options. We also consider M3's are much rarer than Camrys and drop the dataset to 100k cars (over-estimate). Here we would expect maybe a $75,000 avg. price with a $5,000 variance. You're still pretty sure you can get in somewhere between $60k and $70k but it's getting less clear where you land even in best case scenario.
Without boring you all to death, let's take one last look at what happens once you move to used vehicles. Not only do you add model year as a variable, but you have mileage, condition, paint color, accident history, options, maintenance history, etc. If you assume that you add 5 variables each with 10 options (eg. brackets of mileage 0-10,000, 10,001-20,000, etc), you end up with a formula that looks like gives the number of combinations of those variables looks like:
# of Combinations = 10 * 10 * 10 * 10 * 10 = 10,000
Where you used to have 100k data points across just price and vehicle options, you now have those same data but across an additional 10,000 possible combinations. You're left with just 10 data points per actual combination
Ok, I'm done with most of the math here now.
But here's the fun part. Let me now tell you that BMW doesn't make nearly 100k M3's a year. They actually sell about 10k per year in the US. Which means if you're selling a specific year M3 and want a price to base on, you're now down to just 1 data point to reference.
Read More: Finding the right M3 while Supply Quickly Dwindling
For the data scientists out there, yes you can correlate data from previous years and extrapolate a lot of additional information from that. Regardless, the ultimate point here is that 40 million cars sales still leaves a lot a wiggle room in terms of pricing for cars in general and much more so for the higher end luxury vehicles.
With fewer examples to base data off and larger initial price variances in terms of options and configurations, luxury and high end vehicles become significantly more difficult to price and forecast than your average commuter.
Now that we all fully understand the problem the market faces, lets look at some of the solutions the market has created to handle them!
Traditional Dealers - Build in the Risk
Traditional dealers have become more and more price conscious with the internet making pricing data available to pretty much everyone, but their process is still far from efficient. They use pretty sophisticated models to analyze all the data we discussed above to try their best to come up with a price that makes sense for a vehicle and then work down from there.
The last thing they want to do is end up with a car they can't sell or that they have to sell for less than what they paid for. So they build in the risk to their purchase price. Every dealer is different, but they all pad each every purchase with profit margin and then a risk factor. They may not actually call it that, but essentially it's a sliding curve that requires a lower margin for a Camry that they know they can sell tomorrow vs. an M3 that might take weeks to sell.
We already found that it was harder to value the M3's as a car in general, and now the dealerships are adding in their own risk factors based on how long they think it might take the car to sell.
Online Dealers - Ignore the Market
We've seen how the traditional dealers handle the high end market, but how do the new players like Carvana and Vroom respond to it? Depending on the vehicle, they may just ignore it.
This is no criticism on them. In fact I somewhat appreciate that they recognize that the high end just isn't for them. The bread and butter of the AI-based models is where all the data is - the commuter cars. The circa ~$20,000 sedan or crossover that is less than 3 years old is where they live.
As an example, two cars recently placed on Topmarq for sale were an Audi R8 and a Lexus LC 500 . Both of these were not able to get offers from Carvana or Vroom. You may think it's just because these were expensive cars at the time, but it's not just price based. Even the cheaper used options for other luxury brands were not given offers because it's outside their models.
Let the Peer-to-Peer Market Set Prices
An option that has been tried in certain areas and failed multiple times is the peer-to-peer market. Beepi in 2015 went out with a splash after burning $300 million in funding. Carlypso started peer-to-peer and was later acquired by Carvana. Shift began in the market but then 'shifted' - pun intended - into the generic online seller space to compete with Vroom and Carvana.
The reason all these started in the private market is from a theoretical standpoint, it's the most efficient. Buyers set the market with what they are willing to pay, and the sellers work directly with those buyers. The dealership model adds in the middle step which alters prices such that sellers don't see what buyers are actually paying and vice versa.
This has a much larger effect when you are dealing with low volume, high cost cars because it's riskier for the dealers to take them on.
One of the biggest positives of a dealership is often the ability to rid your household of your vehicle right away. However, many owners of high end vehicles aren't in immediate need of cash or a garage space and would prefer to get market value for their vehicles. Without the total focus on sales time, sellers have the option to use a platform like Topmarq to list their vehicles privately.
We discuss how Topmarq is different from your average listing site in last week's article. The brief is that other private marketplaces only fix pieces of the buyer and seller experience, leaving at least one party disappointed or at risk somewhere along the line. Between low-rate listing quality, unverified parties, and zero transaction support, the status quo leaves a lot to be desired.
With the confidence that Topmarq gives both buyers and sellers in interacting with members of the site, many of the typical private marketplace concerns fade away.
That leaves the only main concern to be price.
And the one thing private marketplaces have always been good at for both buyers and sellers is price.
Which One is Right?
Ultimately all of these options have their role to fill in the market.
The deliver to my door obsession of the younger generation will likely lean towards options like Carvana where you can buy a car easily and have it dropped off in a few days. Just like UberEats and Doordash, you pay a major premium for this service but for some it's worth it.
Those who don't have the time or desire to deal with their vehicle will always find solace in the option to quickly get rid of it at a local dealer. Maybe they can use it to sweeten the deal on a new vehicle or lease. Some states offer a trade-in tax credit. Others may really like the idea of trying a few similar models on one lot before buying, and dealerships are really the only option for that.
The people who value their vehicles, and want to make sure they get the most for them often turn to other means. Topmarq is a way for owners of luxury, exotic and other high end vehicles to get the value of their car in a stress-free way with a known cost.
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