What is the Importance of Cost-to-Market Appraisals?

August 5, 2016

When you’re doing car appraisals for your pre-owned inventory, you likely have two goals:

  • Acquire cars your customers want to buy
  • Reinforce your bottom line

Further simplified, you’re looking for the right car at the right price. How can you guarantee that these goals are in line with one another? Those are two birds just waiting to be taken care of with a single stone, but you need the proper tools and strategy if you want to pull it off.

MAXDigital offers just the solution you need: an exclusive Cost-to-Market Appraisal tool that lets your dealership effectively leverage data.

Let’s take a closer look at what we mean by cost-to-market appraisal and why it’s vital to your success in the digital age of car-shopping.

How do I calculate cost-to-market?

The cost-to-market metric for a car is best understood as a ratio. Divide how much money your dealership spends acquiring and reconditioning a car by that model’s average retail price. The resulting percentage tells you how much you have to spend on a given car. What’s leftover is what you stand to gain.

Say you buy a trade-in for $8,000, then you spend $400 reconditioning the vehicle. You look up what that model (and similar models) are currently going for and find that it’s about $10,000. In this case, the cost-to-market ratio of that car is 84%. If you then sell the car for $9,000, you’re seeing a 6% profit.

(Note this equation doesn’t account for any packs you might add to your cars).

It’s simple math, but it’s important when taking a cost-based approach to appraisal. You’re operating under the assumption that a customer won’t pay more for a car than it would cost to buy an equivalent model. If you’re competitor is offering lower used car estimates across town, customers are going to do business there instead.

If you’re figuring it out yourself, the best indication of a car’s market value is to take the cost of the model, subtract depreciation, and add the value propositions (features, trims, colors, etc.). You won’t ever need to eyeball a car’s price, though, for reasons we’ll discuss in just a moment.

Why should my dealership use the cost-to-market approach?

Now you know the math, but what are the advantages of this type of appraisal?

Knowing your target spread makes it that much easier for your dealership to meet its front-end profit goals. You’ll know what you should be spending on the back-end in order to make the most at the other end of the funnel. When you account for cost-to-market and play your cards right, everybody wins – the customer and the house.

Any dealer will tell you that used car sales aren’t so easy as sitting down at the table. You’ve got to make sure you’re dealt the right hand, too. It takes discipline to find and acquire the right cars. Running cost-to-market analysis on every vehicle that crosses your lot is no small task.

You also need to know what to discard. Evaluate your process to make sure you aren’t wasting time and money on cars with an unfavorable spread. Proper cost-to-market analysis will reveal the cars you should be giving due diligence and help you separate those from units that should be sent to wholesale or auction.

One area to pay close attention to here is the reconditioning step of your process. If you’re spending excess time and money just to bring some cars up to sale-worthy status, you’re probably looking at an area that you can improve. See if there are opportunities to mitigate the cost of reconditioning. Finding ways to cut add-on costs can have a positive impact on your spread.

Making more money off of used car sales sure sounds like a great reason to appraise by cost-to-market. But how do you easily integrate that kind of analysis into your appraisal process?

Streamline your car appraisal process with help from MAXDigital.

If only you knew a provider that offered used car appraisal tools to instantly improve your dealership’s acquisition process. Someone who offered resources that help dealerships close trade-ins effectively and favorably. Someone with 15 years of experience working in and with car dealerships across the country.

It’s a good thing you’re well acquainted with the team at MAXDigital. Our cost-to-market appraisal tool makes your entire process that much easier and more efficient. It takes that math problem from before and solves it for you.

Using our car appraisal calculator, you can tell us the cost-to-market ratio you would like to achieve for your inventory. MAXDigital then leverages accurate and comprehensive vehicle market data to find out what a given model is going for in your region. The appraisal tool then solves the equation for the exact amount you should be spending on that car in order to maximize profits.

When you use the MAXDigital Appraisal Tool, your dealership can appraise cars at a much faster rate than you would otherwise. More appraisals means more opportunities to find the right cars. Even if you’re looking at a greater number of cars that don’t make the cut, you’re still able to cast a wider net and bring in more cars that do have a favorable spread. Critically, you can appraise more vehicles than your competitor, which will give you an advantage in your market.

It’s worth noting that you’re probably saving more money by acquiring through trade-in than otherwise. Buying from wholesalers and auctions is comparatively expensive. Every time you have to buy inventory from a third party you’re giving away money that could be kept in house.

As a final note, using superior appraisal tools will give your dealership superior transparency. There’s no reason you can’t sit down with customers looking to make a trade and show them the numbers behind your offer. Now more than ever, car-buyers are looking for honesty and a reason to trust dealers.

You can schedule a demonstration of this product when you get in touch with us. We’re also happy to answer any questions you might have about our appraisal tools or our other solutions. The world of car sales changes every day, and it’s worth knowing that you have a friend in MAXDigital.