Trade in Value
The trade in value a customer receives when purchasing a vehicle creates as much, if not more, confusion as the discussion about dealer invoice on new cars. If you will learn some important principles about what vehicles are really worth it will help you provide better answers for your customers.
First, let's define what trade in value really means. It is the amount shown on the purchase contract that is deducted as an allowance from the price of the vehicle they are purchasing. Gosh, that's easy to understand, right? Not always.
There is a difference between trade in allowance and what the vehicle is worth as a cash asset to the dealer. The dealership's valuation of the vehicle is called Actual Cash Value, or ACV for short. This value is what the dealership will use as their cost when they put it on their books as inventory. During the buying process the used car manager of the dealership will evaluate the customer's trade in. Based on valuation guides such as NADA Value, Kelly Blue Book, Black Book, Auto auction reports,etc. the dollar amount is set.
Included in the used car manager's decision about value will be vehicle condition, mileage, optional equipment, color and market conditions for demand. My purpose here is not to educate you on how to appraise a used vehicle. Just some information about how the ACV figure is arrived at. Now it is time for some simple arithmetic.
If the used car manager sets the ACV of a vehicle at $10,000.00 and the customer receives a trade in value, or allowance, of $11,000.00 the customer has actually received a discount of $1,000.00 from the selling price of the vehicle they are purchasing. This is known as an over allowance. Any amount given to the customer as trade in allowance that is more than the ACV is an over allowance, which translates into a discount from the selling price.
Now, let's go back to the trade in value and look at it from the perspective of your customer. First, it is their vehicle. They liked it enough to buy it. They have driven it for some time. It has been part of their family. They have even given it a name. Trading it in is an emotional experience for them. What they think it is worth has some emotional value. To the dealer their vehicle is simply a commodity. Is it any wonder that the value of the customer's vehicle, in their mind, might be more than what it is really worth when you consider their emotional attachment to it?
Earlier I told you how the used car manager sets trade in value. Let's examine how the majority of your customers set the value of their vehicle.
- They look in the newspaper
- They call their bank or credit union and ask for NADA value
- They saw one like it for sale somewhere
- They have a loan on it and it's got to be worth at least that amount
As you consider each of these valuation methods think about how easy it is for a customer to arrive at a figure that may be unrealistic. Start with looking in the newspaper.
There are usually two types of vehicle for sale ads. Those placed by dealerships and those place by private sellers. Because of the cost of ads the descriptions are abbreviated and advertisers use as few words as possible. So, we look at the ad and what we do not see
are generally items like mileage and condition. (An unusually low price will indicate high miles or poor condition.)Your customer will look for the highest price to set their value. Without looking at the vehicle offered for sale, driving it or assessing the mechanical condition they will assume their vehicle is the same.
Your customer may ask their lending institution to help them set the value based on blue book or NADA values. Because of their emotional attachment they think their vehicle is extra clean. In reality, very few vehicles fall into this category. Without driving the vehicle, assessing reconditioning costs or considering market conditions it is almost impossible to determine the value of a vehicle using only a book.
DO NOT use the argument so many salespeople have that offends customers.
I have heard salespeople say, "If your bank thinks it's worth that have them write you a check." You might think this answer is cute but remember, the customer, at this point, trusts their bank more than you. Granted, the bank is not in the car business and dealers don't tell them what interest rates to charge but if you try this tact you will alienate your customer.
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Trade in value is only one element