Automotive

The Psychology of Why Carmax is a Vacuum for Acquiring Used Vehicles

Brian Kramer takes a look at the human aspect behind used car appraisals.
The Psychology of Why Carmax is a Vacuum for Acquiring Used Vehicles

Dealership trade-in appraisal values are always a controversial topic, for consumers and for dealerships. Here is an interesting look at the psychology of what drives human behavior around appraisals is a fascinating exercise to deep-dive.

“Can you believe the STUPID money that Carmax put in that trade-in? If they want to bury themselves in that <insert low mileage, desirable model, clean Carfax vehicle here>…they can have it!!"

The interesting thing is that Carmax continues to acquire the most desirable units every day at those “stupid numbers”, and they’re laughing all the way to the bank. This strategy has allowed them increase the amount of vehicles they acquired from consumers 69% last quarter, resulting in Carmax's ability to acquire a staggering 324,000 used vehicles from consumers. Over 100,000 used vehicles per month.

Looking at Carmax's YTD numbers are even more interesting. Carmax purchased 1,412,000 vehicles from consumers (a 95% increase YOY), and 707,000 units through their nationwide instant appraisal online process. They also wholesaled a record 706,212 units (a 65% increase YOY). What do they know about acquiring units & wholesale opportunity so many dealers do not know?

One huge difference is that Carmax relies on FACTS, not FEELINGS when determining the appraisal value of a vehicle. Their goal is to win every trade, regardless of whether it is a retail or wholesale disposition. They don’t treat the wholesale business like blasphemy, as many retail dealers treat the wholesale business. If a Carmax appraiser determines that they are not the best-end-user, that appraiser isn’t viewed as a heretic.

Carmax is leveraging the Law of Reciprocity. They provide clients accurate appraisal values, rather than providing trade value "ranges". The interesting thing is that they provide these values without requiring any form of "commitment" from the client. They focus on what the upside potential of acquisition volume, rather than focus on whether the client is going to tell the truth. They give the client the benefit of the doubt. Looking at the total aggregate of appraisal data, most clients tell the truth when you leverage the Law of Reciprocity. Dr. Robert Cialdini, Professor at Arizona State University, states that "You must not take, without giving in return." If we trust others, they will feel obligated to trust us. People will say YES to people that they owe. Many car dealerships are not willing to provide an exact trade value without some form of "commitment".

Battling the "Better than Average Effect" Heuristic:

Most people rate their abilities as better than “average” even though it is statistically impossible for most people to have better-than-median abilities. Some investigators explained this phenomenon in terms of a self-enhancement bias.

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Definition: The Lake Wobegon Effect - noun. The tendency to treat all members of a group as above average, particularly with respect to numerical values such as test scores; in a survey, the tendency for most people to describe themselves or their abilities as above average.

The Lake Wobegon effect is the human tendency to overestimate one's achievements and capabilities in relation to others. It is named for the fictional town of Lake Wobegon from the radio series A Prairie Home Companion, where, according to Garrison Keillor, "all the children are above average".

Ole Svenson (1981) found that 80% of respondents rated themselves in the top 30% of all drivers. Asking college students about their popularity, Zuckerman and Jost (2001) showed that most students judged themselves to be "more popular than average".

In 1976 the United States College Board attached a survey to the SAT tests that year. One of the questions asked was, “How would you assess your ability to get along with others, compared to the average person”? 85% of students considered themselves “above average”, and 25% ranked themselves in the top 1%. Obviously these answers are mathematically impossible.

A 1991 study of 1,000,000 high school students revealed  that only 2% of students ranked their own leadership ability to be “below average”. Average would be 50%, so this confirmation bias is what drives students to this conclusion. This is a perfect analogy of why we fail to deduct enough for late model, high mileage, bad Carfax vehicles & fail to add enough for low mileage, clean Carfax vehicles.

Experiments and surveys have repeatedly shown that most people believe that they possess attributes that are better or more desirable than average. Dealership appraisers are guilty of believing that the majority of others do not know as much as they know. They fail to give credit to Carmax, Carvana and others that they may have a better "Best End User" strategy, allowing them to achieve higher retail and wholesale values in many cases.

In sum, my recommendation is stop vilifying Carmax and others as being guilty of placing unrealistic trade values on vehicles, and being dismissive of their ability to execute. We need to begin to understand how they are able to acquire so many vehicles that should be acquired by retail dealerships. The auctions have dried up, and it's long overdue that we stop allowing others to move our cheese...

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