J.D. Power Valuation Services
Used vehicles, dare it be said, have become somewhat sexy. In the not too distant past, used vehicles took a back seat to their more glamorous new-vehicle brethren. Often relegated to the far back lot, used vehicles were not the sale of choice for many dealers.
Boy have times changed.
Today, used vehicles aren’t simply viewed as a complement to new, but rather, as a crucial factor in a dealership’s operational success. Case in point: J.D. Power data shows that used vehicle sales — as a percentage of new sales — exceeded 98% in 2019, up from 89% from the previous year. This not only represents the biggest annual jump ever recorded in the used-to-new ratio, it’s the highest level ever recorded, even surpassing the Great Recession’s 97% peak figure.
There are several drivers behind this trend, including escalating new-vehicle prices and the fact that used vehicles often present a stronger revenue opportunity than new ones (e.g., gross profits, F&I revenue). Traditional dealers—and CarMax, too—aren’t the only ones looking to capitalize on the opportunity. A slew of industry disruptors has jumped into the used-vehicle game, including notables such as Carvana, Fair and Vroom.
Considering how fierce used-vehicle competition has become, it’s imperative that dealers improve the precision and accuracy of their analysis when making buying and selling decisions to merchandise their used inventory. Unfortunately, the complexity of today’s used vehicle makes realizing this imperative easier said than done. This is especially true given the new level of complexity associated with today’s vehicle content and technology.
Accuracy and precision crucial in today’s complex used-vehicle market
There was a time when traditional Vehicle Identification Number (VIN) decoding and a visual inspection could tell dealers pretty much all they needed to know about a vehicle’s configuration. Ten years ago, for example, one might get DVD-based navigation, heated seats, a rear entertainment system and power sunroof. All of which were usually part of a specific trim level and were obvious to the naked eye. Driver assistance tech, basic blind spot warning lights and perhaps back-up cameras were additional options on a relatively short list.
Today, the story is much different. The range of available options and advanced technology has grown enormously — with many value-defining features outside the scope of traditional VIN decoding and not easily caught by a visual inspection.
Instead of just heated front seats, used vehicles now feature heated and cooled front and rear seats. In many vehicles, that standard sunroof has been replaced by the more valuable panoramic power sunroof. The mix of driver assistance features that may be included in any given vehicle has also become more robust. Vehicles today may — or may not — include adaptive cruise control, adaptive headlights, advanced blind spot detection and avoidance, front and rear collision warning and emergency braking, active park assist, lane departure warning and lane keep assist features. And this is just a partial list of attributes that might be found on today’s used vehicle that can have an immense effect on price.
These advanced features aren’t limited to specific form factors, like luxury vehicles. Roughly 40% of model year 2018 compact SUVs — the biggest single segment in the industry — were equipped with adaptive cruise control and blind spot detection, up from a paltry 3% just three model years earlier.
Identifying the dizzying array of configurations on today’s used vehicles is a tall order, and understanding market demand and value are added layers of complexity. These challenges are amplified for dealers selling used vehicles from multiple brands outside of their own franchise network.
The good news is that consumers seem to appreciate the innovations that are loaded on today’s vehicles. The bad news is that this complexity is only going to rise, and unless dealerships have a full — and accurate — perspective on the features included on a used vehicle, they are increasingly putting profitability at risk.
A case in point
To illustrate, here is a real-world example. As most dealers know, large pickups are notorious for their multitude of configurations and overall build complexity. As a result, it is very easy to overlook important content that contributes to consumer demand and, consequently, used-vehicle value.
Assume for a moment that two dealers need to determine the value of the same used large pickup. One dealer uses a valuation source based on traditional VIN decoding technology, while the other uses a source that enhances the VIN search to capture additional context.
The first decoding method returns a market value based on options that are assumed to be on the vehicle, while the second method returns a value based on what was actually installed. The difference in price between the two methods can end up adding $1,100 in favor of the enhanced approach. That’s a substantial missed opportunity!
The principle holds true in the opposite direction — protecting against the risk of producing an overvalued result using traditional VIN decoding.
Moving beyond the basic VIN lookup
Standard VIN decoding omits the portion of the 17-digit VIN that precisely specifies the features included on a vehicle after it rolls off the assembly line. It’s somewhat akin to a forensic analyst having only two-thirds of a fingerprint to go on. The solution gets you part of the way there, but lots of time and effort are still required to fill in the missing piece of the puzzle. Most dealers today simply lack the luxury of time to divine the exact details of content through exhaustive forensic investigations.
Fortunately, this situation is changing for the better. Advances in data sharing, combined with innovations in data access and analytics, are making it possible to correlate vehicle-specific information in a more automated, precise fashion. As a result, dealers can capture a much more complete picture of the features and attributes of a distinct used vehicle.
As we move into the next decade, dealerships — and other stakeholders in the used vehicle ecosystem — will be well served in harnessing advanced analytics and machine learning to enhance their insights from VIN look ups to determine the market value of individual pieces of equipment.
Solutions are emerging that will enable decisionmakers to select a feature — such as an advanced driver assist technology package — to secure an accurate comparative analysis against vehicles that lack some or all elements of the package. Taking things further, dealers should look for the ability to tap into VIN-based configuration analytics that generate that generate insights into how various
configurations perform in specific regional markets — providing analysis about days to turn, seasonal impact and more.
Auto sales success is heavily dependent on speed and efficiency. Dealers should identify application program interfaces (APIs) that link the output from VIN configuration databases to dealer-specific inventory and sales management tools to streamline the management and pricing of their used vehicle stock.
As the saying goes “innovate or die.” This sentiment has never been more accurate than in today’s intensely competitive used vehicle sales environment. Dealerships will need to be armed with the data and analytical capabilities that will allow them to pinpoint the right vehicle, with the right content, at the right price in the right place.
Larry Dixon is senior director at J.D. Power Valuation Services.
For more anlaysis from Dixon, see the podcast below, recorded at NADA Show 2020.