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Science of Precise Pricing-Part 1

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"Understanding Various Artists and their role in the used car market"

In this world of materialism, everything has a price tag attached to it. To a certain degree, you can prove those saints wrong, who think money can’t buy happiness - it depends on the amount of money under consideration.

But who decides what should be the price? Economists suggest many ways, yet the two most used pricing methods are -

The cost plus markup, which simply looks at the costs associated with manufacturing and marketing the products. It then adds the targeted profit to these costs to derive the price.

The second is the price associated with the buyer's willingness to pay. In other words, the seller's thought process is as follows: “I’ll charge as much as the buyer is willing to pay”. Here, demand and supply play a crucial role and so does one's negotiation skills.

To us, it appears that most used car dealings make use of the latter scenario.

However, the following question still remains - is the best pricing mechanism available to the used car consumers today?

Before we dig deeper into the pricing of used cars, we should touch upon the market for used cars, or in more scientific terms, channels of used car transactions.

The first channel is customer to customer (C2C), where both the buyer and seller know each other and both are end users of the car. 57% of the used car market lies in this space.
The second channel is where a seller sells his used car to a car dealer and dealer then sells it to a prospective buyer, locking his margins in the deal. 28% of the used car transactions take place in this channel.

The third channel is where the seller trades in his old car in an exchange program at a new car showroom. This is a fast growing segment and currently 15% of the used car transactions fall in this category.

We also have transactions happening in the wholesale market where financial institutions auction repossessed cars to dealers.

Channels of used car transactions

Whatever the channel, the success of the transaction is all about precise pricing; no matter if you are a buyer or a seller, at the end of the transaction you would still be wondering if you got the best deal. In other words, did you overpay or under sell the car in question?

Imagine in a C2C channel, where you buy a car from your friend and later realize that you overpaid for the car. Will your friend still remain one?

This question is fundamental to understand - ‘how does pricing work in the used car market?’

In the next part we will focus on how various artists in the used car market paint the science of pricing.

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