Working Those Residuals Pays Off for Volvo

Two years ago, Volvo Cars finished dead last in a ranking of premium car brands' residual values.

Today, the Volvo XC90 crossover/utility is tied for first with the Mini Cooper as a vehicle that's expected to retain the highest percentage (52%) of their new-car prices by 2010.

It's not a coincidence that Volvo residuals went from the bottom of one list to the top of another.

Before the XC90 hit the market in 2002, Volvo executives focused on a plan attempting to make sure it would have an attractive residual value as a used vehicle.

“We haven't waivered from the plan,” says Walt Langley, vice president-product marketing for Volvo Cars of North America (VCNA). “We weren't at all passive about it.”

He says lessons learned on how to build residual values include offering the right product with proper pricing, style, content and quality.

“Those are the sweet spots,” says Langley.

Residuals are especially important to a premium car company such as Volvo that depends heavily on residual-driven leasing.

Moreover, low residuals can hurt demand, claw into new-car sales and tarnish the overall brand image.

“Residual values are critical,” says VCNA CEO Victor Doolan. “They help define monthly payments. More than that, they build brand value.”

Adds Langley, “Residuals mean everything to a brand. They represent the worth of the brand. A vehicle with a high residual down the road instills a lot of confidence for the brand.”

It's tough for an auto maker to try to bolster residuals on existing vehicle models. New products offer the best opportunity for that, says Langley.

What happens in the new-car showroom can ultimately lessen a car's worth as a used product. Example: “Cash incentives kill residual value,” says Langley. “We stay away from that.”

Instead Volvo uses incentives in the areas of lease offers, option allowances and annual percentage rates.

Doolan says depreciation is the biggest cost of car ownership, followed closely by insurance premiums.

“You can hear some brands depreciating in the night,” he says. “That's not the case with us, and that's why we pay a lot of attention to it. It's not just a financial equation, it's an ethical equation.”