CarFling Asks Richard Scott-Martin about tools, frameworks, and technologies for valuating used cars.
We're big believers in letting the market determine the true value of a vehicle, because at the end of the day, it's the only way to truly know what it is worth.
The best way to let the market decide? Well that's an auction. The traditional school of thought that "an asset is only worth what someone is willing to pay" doesn't acknowledge the other side of the equation, the seller's willingness to sell.
Much like the buyer's willingness to pay, the seller's propensity for sale is incredibly reliant on the individual context and circumstances that they're in.
Let’s look at a few scenarios to understand this a bit better.
Scenario 1: Someone looking to sell a financed vehicle.
Sometimes when a deal looks too good to be true, it is. Many consumers are finding themselves stuck in negative equity cycles as vehicle finance offers are becoming increasingly lenient in today's market. Large balloon payments, generous loan terms and rising interest rates are meaning that consumers often owe the bank more than what the vehicle is worth for a large portion of the loan term.
This negative equity trap means that their only way out of that car, is by paying in the difference, digging deeper into their pockets and deepening the debt cycles.
As a seller, it is important to remember that there's a difference in vehicle valuations between what the market tells you it is worth, and what that asset is worth to the bank based on what it owes them in their book.
Scenario 2: A dealership sitting on ageing stock.
As soon as a vehicle hits a dealership floor, the clock starts ticking. That clock accounts for the costs for that vehicle; the cost of depreciation, reconditioning, interest, overheads, the list goes on. As these accumulate, the discrepancy between what the vehicle owes them and what the market says it's worth grows.
It's a vicious cycle, but one that all dealers are accustomed to. Every day that a vehicle stays on a dealership's floor without selling, it's market value decreases.
In these scenarios, you can see that the more information the buyer has about the seller's position, the stronger their relative understanding of the acceptable selling prices will be. This acceptable selling price will always be contextually dependent. Not only on the factors we typically consider such as the vehicle's condition, but also the context of the seller themselves.
With this understanding, let's look at some frameworks that anyone in the industry can apply to help improve the thought processes involved in valuing a vehicle.
One of the frameworks we like to use is from a book written by Guhan Subramanian, titled: “Dealmaking: The New Strategy of Negotiauctions”
There are two different ways in which price is determined based on the economic forces at play.
There's a fundamental difference between a negotiation and an auction, and this difference means that looking at a sale as a combination of both of these strategies will deliver the optimal result for both parties.
In a negotiation, the buyer and the seller sit across the table from one another, immediately creating a competitive setup. This competition is ultimately what influences the price as each party has competing interests in the sale.
With an auction however, the competition is derived from the same side of the table. It's the pressure between multiple buyers competing for the purchase of the asset, as well as different sellers with similar vehicles for sale in the market, that will drive the final price of the vehicle.
What does this mean? Well, we shouldn't have to decide whether we are auctioning or negotiating, the combination of both is the optimal strategy. Negotiauctions.
This framework means that the seller can apply across the table pressure, as well as increasing the competition between the buyers to achieve the best possible price. It's a unique dynamic that is worth bearing in mind, particularly when it comes to an online auction platform like DealersOnline.
The progression of thinking in the Negotiauction world is one piece of the puzzle. The increasing adoption of technological advances that push business models forward, are playing a vital role in ensuring that vehicles sold on auctions reach their true market value.
There's certainly growing fears that technology, and artificial intelligence in particular, that the roles of human beings will be replaced. However, today they are merely assistants to our decision making in the industry. There's a human component and emotional competency required to navigate this industry that these tools simply can't action yet.
The technology is becoming readily available, and decreasingly restrictive, and this gives our industry the ability to enhance our human capabilities and improve the overall health of our market.
In particular, the processing of data is one such activity that we can outsource to technology. Allowing the complex algorithms to scan reference points, sales data and other market factors to help us understand the inner workings of the supply side of the market. Namely; the availability and pricing of other vehicles that are currently in the market and where a vehicle potentially fits in and what might be a realistic starting point for the deal to begin.