The Realities of Vehicle Markdowns in the Auto Industry

The practice of markdowns has long been a cornerstone of retail strategy across various industries, and the auto sector is no exception.

Historically, the manufacturer’s suggested retail price (MSRP) has been a constant part of a vehicle’s pricing, and an important element of the car-shopping process for consumers despite changing economic trends. As the auto industry has grown increasingly competitive, dealerships have sought ways to attract buyers and move inventory, often resorting to price reductions.

However, while markdowns have been traditionally viewed as a surefire method to boost sales, the complexities of modern markets reveal that this strategy is fraught with misconceptions. To navigate this complex landscape, it’s essential for auto dealers to better understand the nuances of vehicle markdowns and debunk the myths that surround them.

Myth No.1: Marking Down Cars Will Increase Vehicle Detail Page Views and Equal Sales

One of the most widespread beliefs in the auto industry is that reducing a vehicle’s price will automatically attract more views to its Vehicle Detail Page and directly translate into sales.

Real-world data paints a different picture. Approximately 69% of used-car listings and 76% of new-car listings do not experience a significant increase in organic or direct views following a price reduction. This suggests that merely lowering the price does not necessarily make the vehicle more attractive to potential buyers. Additionally, any brief spike in activity often comes from repeat visitors who are already familiar with the vehicle and are alerted to price changes rather than new shoppers.

Another misconception is that a single price reduction will secure a sale. In reality, eventually sold vehicles often undergo three to four price reductions. This pattern demonstrates that relying on one markdown to close a sale is far from realistic, so dealers need to adopt a more sophisticated approach, integrating multiple factors such as market trends, customer behavior and competitive pricing.

Tailoring Pricing Tactics for Aged Units and Varied Price Ranges

Another myth is that price reductions should be reserved only for older inventory: used vehicles that have lingered on the lot for 30 days or more, and 45 days or more for new vehicles. However, data shows how dealerships that implement pricing strategies early, within the first seven to nine days, often see higher sell-down rates and increased profitability. Early price adjustments help manage inventory more effectively, reducing the number of days vehicles remain unsold and minimizing carryover costs.

Contrary to the belief that any price cut will lead to a sale, data also reveal that the initial average reduction for new vehicles is around $1,700, but the total reduction needed to sell a car often exceeds $6,000 after 100 days. This shows that small, incremental price cuts can lead to aging inventory and erode profit margins over time.

It is also inaccurately believed that higher-priced vehicles respond differently to markdowns compared to lower-priced ones. In reality, both categories require similar price reduction strategies and face the same challenges with aging inventory.

For example, a luxury SUV and an economy sedan might both experience similar market forces that necessitate strategic pricing adjustments. Understanding the market dynamics for high-priced vehicles can help in adjusting prices more effectively across the dealer’s entire inventory.

The Final Verdict

Debunking these common myths about vehicle markdowns is crucial for dealers to maintain profit margins and enhance sales performance. Recognizing the limited impact of price reductions alone and the importance of early and strategic pricing adjustments allows dealers to improve inventory management and customer engagement.

Advanced inventory management systems and pricing algorithms can greatly assist in making informed pricing decisions. Analyzing a vast array of data points, including market trends, competitor pricing and historical sales data, these solutions can recommend optimal pricing strategies for dealers to move beyond gut feelings to ensure their pricing strategies are based on factual data.Effective pricing in the auto industry is far more complex than simply reducing prices to boost sales. Adopting a strategic and data-driven approach to suggest the best times to implement price reductions and the optimal amount by which to reduce prices can maximize the chances of a sale while preserving profit margins.