Balance of Trade
Trade-ins blur car purchase lines
By Marc Stengel
JANUARY 25, 1999: Even if you're not in the market to buy a used car, you're still participating in the used-car market when you trade your existing car for a new one. Because the used-car market has its own rhyme and reason for setting prices, new-car dealers have yet another tool for obscuring the exact nature of your car-buying transaction. It's not so much that they're attempting to deceive. Let's just say that a used-car trade-in tends to fuzzy-up the math somewhat, and there are precious few salespeople who will volunteer to clear away all the cobwebs so you can see clearly what's going on.
There are actually four key building blocks with which a typical trade-in deal is assembled: 1. the wholesale value of the used car you're trading in; 2. the "functional cost" to the dealer of the new car you're trading for; 3. the fair and reasonable profit a dealer deserves to make on the new car you want; and 4. the "packing" or "pack" that a salesperson will use to negotiate the deal. It's important to understand where these numbers come from before you start negotiating your trade-in.
Actually, the wholesale price of your used car and the "functional cost" of a new one are relatively simple to figure. The best references for wholesale value, despite the variances between them, are the standard pricing guides (Kelley Blue Book, NADA "Yellow Book," Edmund's, Buy-Rite, etc.). In fact, most dealers use Kelley and NADA guides, albeit in dealer-only editions.
Determining "functional cost" is a bit more involved, but it's still straightforward. Essentially, this is the actual cost of a car to the dealer; you can determine this by comparing list price (manufacturer's suggested retail price, or MSRP) to the dealer's invoice price, then factoring out what's known as the "holdback." A holdback is a special incentive that manufacturers pay (usually quarterly) to dealers for each car sold. My favorite free source for these pricing numbers is the Edmund's Web site (www.edmunds.com), where you can find invoice and list prices for virtually all new models, along with line-item pricing for available options and even the holdback formulas used by each manufacturer.
As an example, let's estimate the "functional cost" of a hypothetical Ford Contour SE with no additional options. MSRP is $17,535, invoice is $15,971, and Ford's holdback is 3 percent of MSRP, or $526:
less holdback ($526)
equals "functional cost" $15,445
The dealer's "functional cost" or investment in this car, then, is $15,445. So if the car is being offered for sale at list, then the dealer's markup is $2,090--i.e., $17,535 less $15,445. (Remember that options have their own invoice and list prices, so they all need to be listed and totaled to determine the "functional cost" of the car that's equipped the way you want. To keep things simple, I'm also ignoring floorplan financing and factory rebates, which increase and decrease, respectively, the calculation of "functional cost.")
Now, neither the dealer nor you should expect that the full markup will translate into profit. More likely, for a car in this class, a net profit of $700 to $1,000 is expected. That's just 4.5 percent to 6.5 percent of "functional cost," after all--quite fair. The difference between the actual profit a dealer will take and the markup built into his sticker price is called "packing":
less 5.5 percent profit ($850)
equals "packing" $1,240
This $1,240 is the "funny money" a salesman will use to manipulate the trade-in value of your used car during a horse-trade.
With all these numbers in hand, here's how you play 'em: Say you've established a solid $5,000 wholesale value for your trade-in, and you're wanting this new Contour, which stickers out to $17,535. You figure the dealer will settle for an $850 profit (i.e., 5.5 percent of functional cost). The salesman flatters you by offering $6,000 as a trade-in allowance--"That's 20 percent over wholesale, since you've obviously taken good care of this little jewel," he'll say, playing on your pride as much as your pocketbook. But you know he's got $1,240 of "pack" to play with, so you counter this way: "Tell you what...if you'll come off list by just 7 percent to $16,295, you can have my trade-in at flat wholesale for $5,000."
less "pack" ($1,240)
equals 7 percent discount $16,295
In other words, his deal only benefits you by $1,000, but your counter lets you pocket the entire $1,240 of "packing" that you discovered was available. (Bear in mind, however, that destination charges, taxes, license, and prep remain to be tacked on the backside of the deal.)
The same negotiating principle works with any combination of trade-in premium ("over-allowance") and discount off of sticker. A fancy sales pitch will try to make it look like you're benefiting at both ends (an over-allowance and a discount), but the key is to add them together. If the resulting sum is less than the amount of the "pack," you're not getting the best deal for yourself. And, as we all know, the best you can do is the least you deserve.
To comment, recommend, or blow off steam, your e-mail is welcome at Autosuggestive@compuserve.com.
Off the FloorMaking a show Amidst all the new-model hoopla at this month's North American International Auto Show in Detroit, it was the release of official sales numbers that automakers craved. There were no real surprises regarding the overall car and truck champs in '98: Toyota's ubiquitous Camry edged arch-rival Honda Accord by 6.6 percent with total sales last year of 429,575.
In the heavy-lifting department, Ford continued for the 17th consecutive year its status as maker of the world's best-selling vehicle, the F-Series pickup. The best sales contest of the year, however, was in the luxury-car weight class, where Cadillac half-nelsoned Lincoln with a last-minute burst of just 222 additional units, for total sales of 187,343. Caddy's 49-year domination of the category remains unchallenged--barely. Mercedes, meanwhile, posted the best gain in the class, with a nearly 40-percent leap to 170,245 units--its strongest showing ever in the U.S.
Ironically, all three luxo-carmakers owe much of their favorable results to sales of high-end sport/utility vehicles. And that's precisely why Ford signaled its determination during the week of the auto show to make the biggest sport/utility vehicle on the market. The company revealed plans to spend over $173 million to spiff up its Louisville, Ky., truck plant in preparation for producing a monster SUV, tentatively known as the Excursion.
The new SUV will likely be six inches longer than GM's reigning behemoth, the Suburban. Ford will base the model on its successful line of Super Duty pickups. Along with ample girth, the Excursion is expected to offer ample profits as well. According to analysis cited by the Detroit Free Press, the huge Lincoln Navigator earns Ford a pretax profit of approximately $13,000 on every unit sold--and the Navigator is just a Boy Scout compared to what's planned for this new Excursion.
Of course, the new models and the sexy concept vehicles were the conspicuous crowd pleasers at the Detroit Auto Show, but one easy-to-overlook announcement certainly deserved more attention than it got. Sure, you never see it mentioned in fancy TV spots or glossy showroom brochures, but the humble three-point seat belt celebrates its 40th birthday this year. No doubt, many crash survivors are enjoying additional birthdays as well, thanks to the engineers at Volvo who first combined lap and shoulder retention into a single-latch passenger restraint device for the 1959 model year.
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