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Science of Precise Pricing-Part 2

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“Artists and their Paintings”

In the earlier parts, we briefly introduced various channels through which used car transactions take place. Here, we dig deeper into each channel, analyzing the respective pros and cons.

C2C channel: It’s all about faith

This is the channel where most of the used car transactions take place; these are the transactions between friends or relatives or acquaintances in social circles. Most artists in this channel are close friends. Trust and faith drive these transactions. Pricing is all about hunches, instinct that says - “I am aware of my friend’s car and it is worth buying”.

A fact to note, however, is that this canvas is biased towards the seller - he is able to leverage the trust factor to secure a premium for his car. In fact, the buyer holds on to the intangible color that is trust and decides to pay a premium to buy his friend’s car.

Used car dealers channel: It's all about the lack of faith.

The dealer, the new artist in this channel, is villain personified. The buyer and seller believe the purpose of his existence is to make money at their expense; like a monkey that divides the bread between two cats.

On a closer look, we see that the dealer is the one whose life depends on selling and buying old cars - his existence depends on the goodwill generated with the customer. Unfortunately, even after being rechristened as certified car dealers, used car dealers are caught in a socialistic time warp where anyone involved in the for profit business is portrayed a desperado.

Here pricing is all about negotiations; the seller and buyer are advised not to believe what the dealer says. Buyer value certification and warranty, and they are ready to pay a premium for these. But for a seller, this is a channel that potentially offers a range of product offerings to help sell a car quickly and get full payments instantly.

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Trade-In channel: It's all about upgrading swiftly to a new car

In order to attract upgraders to their showrooms, new car dealers offer various exchange bonuses to potential sellers that not only makes selling off old cars easier, but also incentivizes them.

The new car buyer can negotiate to maximize the value he derives from selling his old car and also negotiate on the price of the new car. Thereby, the common perception is that it is a good deal to look for good exchange bonuses. These old cars are then sold in used car markets via various networks.

If the brand being traded in and bought are same, then car manufacturer certifies the traded in car and sells it through the channel. If the brand being traded in is different to the new car sold then the manufacturer offloads it to a different agent.

In this market the main objective is selling the new car and hence it is ideal for consumers looking to upgrade their cars.

Auctions: Bidding on repossessed cars

When an owner fails to pay his EMIs on time, financial institutions that extended the car loan repossess the car from him. These repossessed cars are then sold via various channels, but predominantly through auctions. The reason why the cars are auctioned is that the banks want to convert their repossessed asset into money, are in a hurry, hence they do not want to refurbish or recondition the car and sell it through retail channels.

Although this channel should have intuitively supported the buyer (as the seller is in a hurry), the auctions market in India is unfortunately very unorganized. In fact, the condition of the cars is extremely deteriorated while the auction is also coloured by the involvement of local agents and their malpractices. Pricing of cars in the auction is also difficult as one cannot assess the cost of reconditioning the repossessed cars easily.

Despite this, a ray of hope emerged in this segment with the advent of technology companies such as EDIIG, which brought in the ‘Online Auction’ to India as well as assistance to banks and other financial institutions with yard management systems etc., thereby helping bring the repossessed cars into the organized market.

To summarize, if one looks at channels through which used cars get traded, there are indeed various artists involved in the dynamics of selling and buying. It is astounding that there are over 3.6 million cars traded in the used car market and the trading price is determined purely through the art of negotiation, leading to a situation predominantly, where there is one victor and one loser, either the seller or the buyer.

Can this win-lose situation become a win-win where both the buyer and seller are happy with the outcome of the transaction? Can we bring science into the pricing of used cars?

We would see that in the next part of precise pricing series.

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