Auction bidding strategies can make or break your profit margin as a used car dealer. “Money is made in the buy and lost in the process” — it’s a saying you’ve heard many times before if you’ve been on lot in the last 10 years.
The competitive nature of auctions often leads to overbidding, driving up prices and cutting into dealers’ profits. Here we’ll explore the reasons behind overbidding at car auctions and discuss strategies that dealers can implement to break this cycle and secure vehicles at prices that drive profits.
Understanding the Problem
Overbidding at car auctions can stem from various factors, including:
- Fear of Missing Out (FOMO): In the fast-paced environment of auctions, dealers may feel pressured to bid higher than they initially planned out of fear of losing out on a desirable vehicle.
- Competitive Atmosphere: Auctions foster a competitive atmosphere where dealers may engage in bidding wars to assert dominance or secure inventory ahead of their competitors.
- Emotional Decision-Making: Auctions can evoke emotions such as excitement or adrenaline, leading dealers to make impulsive bidding decisions that exceed rational price limits.
- Perception of Value: Dealers may overestimate the value of a vehicle based on its perceived desirability or scarcity in the market, leading them to bid beyond its true market worth. Relying on metrics like Market Day Supply, Days on Market and other local market supply and demand factors that are updated in real time
- Lack of Information: Insufficient market data or a reliance on past performance (i.e. bidding high on Toyota RAV4s because they were solid profit drivers 6 months ago) on vehicle pricing and market trends can result in dealers paying more than necessary at auctions.
Strategies to Combat Overbidding
To mitigate overbidding and make more informed purchasing decisions at car auctions, dealers can adopt the following strategies:
- Set Clear Budget Limits: Establishing predetermined budget limits for each vehicle type or model can help dealers avoid overspending in the heat of bidding wars. By adhering strictly to these limits, dealers can maintain profitability and prevent impulse-driven decisions. For example, using the Carketa Appraisal ProfitBuilder tool to build in your auction fees, transport costs, recon expenses and target profit can help you set a max bid automatically based on how competitive your retail pricing strategy and target gross margin are.
- Conduct Thorough Research: Prior to attending auctions, dealers should conduct comprehensive research on vehicle pricing trends, market demand, and inventory availability. Accessing historical auction data and utilizing pricing tools can provide valuable insights into fair market values, enabling dealers to bid more strategically.
- Develop Buying Criteria: Define specific criteria for the types of vehicles that align with your dealership’s target market and inventory needs. By focusing on vehicles that meet predetermined criteria, dealers can avoid bidding on less desirable or overpriced inventory.
- Practice Patience and Discipline: Encourage a culture of patience and discipline among dealership staff participating in auctions. Emphasize the importance of staying composed and avoiding impulsive bidding behaviors, even in the face of competitive pressure.
- Utilize Proxy Bidding: Leveraging proxy bidding services or software platforms can streamline the bidding process and help dealers avoid getting caught up in bidding wars. Proxy bidding allows dealers to set maximum bid amounts in advance, automatically placing bids on their behalf up to their predefined limits.
- Diversify Sourcing Channels: Explore alternative sourcing channels beyond traditional auctions, such as wholesale networks, trade-ins, and direct purchasing from private sellers. (Carketa’s appraisal tool has the only For Sale by Owner database available for sourcing from such listings.) Diversifying sourcing channels can reduce reliance on auctions and provide access to a broader range of inventory at potentially lower costs.
- Build Relationships with Auction Houses: Cultivate strong relationships with auction house representatives and auctioneers to gain insights into upcoming inventory, auction dynamics, and potential bidding strategies. Establishing rapport with auction personnel can provide dealers with a competitive edge and access to exclusive opportunities.
Overbidding on auction vehicles poses a significant challenge for car dealerships, impacting profitability and inventory management. By implementing strategic approaches such as setting clear budget limits, conducting thorough research, and practicing discipline, dealers can mitigate the risks of overbidding and make more informed purchasing decisions. Breaking the cycle of overbidding requires a combination of careful planning, market intelligence, and disciplined execution. By adopting these strategies, car dealers can optimize their auction purchasing practices and achieve greater success in sourcing inventory at fair prices.
