Which factors decide your future model’s residual value?

26 May 2020

Ana Gutierrez, head of production at Autovista Group in Madrid, and her team, consider which factors influence residual values in this the first of a series of articles.

When determining a residual value (RV) forecast for a brand-new vehicle, experts rely on statistical models and historical data. These models take into account local differences, segment specifics and whether the model in question has a predecessor or not.

However, there are factors of the car itself that will have an important influence on its future RV performance. Good management of these aspects in the new model from OEMs will be crucial for successful RV of the used car. What are these RV influencers?

One of the more obvious influencers is the exterior design, as it is one of the most important purchase considerations when buying a car. But what is the key to car design’s success in the market?

The appearance of a car evokes powerful feelings and emotions, and appeals to our sense of beauty, sophistication and sportiveness, for example. All these emotional responses are crucial to the purchase decision; positive responses create value and a desire to own the car, while negative responses, produced by the lack of appeal of the car, generate a low perception of enjoyment and therefore a low perception of value. This, therefore, leads to less demand from customers.

It is also important that this emotionally positive response is maintained over time, otherwise, there is a risk of bringing a vehicle to market that looks old right from the start. This is crucial for potential buyers to find emotive and fresh cars even in the used-car market. Therefore, designers should pay attention to the most likely future trends in the market and to the time effect on a car’s performance when designing a new model, as an emotional and attractive new car could quickly become outdated in the future used-car market, and negatively impact RVs.     

This also applies to the interior design. The future used-car market will benefit, supporting RVs, along with lasting effects in terms of attractiveness of the new model, particularly in relation to high-tech appearance and a modernised look. This is highly appreciated by used-car buyers.

The quality of materials used in a vehicle is one of the more obvious and immediate factors in the purchase decision when buying a used car, particularly at the first sale of the vehicle as a used car. Quality of materials is an indicator of robustness and reliability after some years of use, a major concern to used-car buyers. When potential buyers find high quality in materials and controls, as well as good tactile impressions and workmanship a long time after the new car purchase, their expectations are satisfied, leading to a positive effect on the desire to own the product, helping RVs.

Other aspects provoking an immediate reaction from potential customers include quick understanding of functions of the car, spontaneous comfort and convincing practicality. They are crucial especially for a used car since in most cases there is no salesperson explaining everything in detail, benefiting RVs. A complex offering leads to disappointment in potential buyers and a decreasing interest in the car, as a consequence.  In addition, driving behaviour also influences the RV formation, and is highly related to emotions and expectations. OEMs should avoid disappointing the customer in this aspect in order to keep interest and expectations high.

However, there are used-car buyers that appear to be quite rational and make decisions based on costs and efficiency, wondering what return they can expect for the investment (e.g. equipment, and reduced costs). Therefore, a model with superior cost performance can strengthen the manufacturer or the model position both in the new and used-car markets. An adequate list price of the new model is very important as ambitious pricing leads to an amplification of potentially negative influences coming from high discounts. An aggressive cash discounts campaign for any manufacturer is always dangerous for all models in terms of residuals. First of all, the cash discounts allowed for single products can have repercussions on other RVs since the customer has the choice between several similar vehicles and the single products have to stay within a plausible price ranking. Secondly, the potential used-car buyer will have higher expectations in terms of discounts in the used car market, harming RVs.

Equipment is among the most important RV influencers; the equipment setting on the new car and on the used car should be as close as possible to reduce the risk of dissatisfying personal preferences, and to ensure that all vehicles sold as used cars are in line with their segment and customer requirements. Missing features that are commonly considered essential result in almost unmarketable vehicles, weakening RVs.

The demand for fuel-efficient cars (models with reduced CO2 emissions and fuel costs, together with alternative engines such as hybrid, plug-in or all-electric models) is increasing for both costs and environment reasons, thus future used cars should reflect these preferences and trends to avoid disappointing potential buyers and to avoid a clear disadvantage in the market. OEMs constantly working on reduced CO2 emissions and environmentally friendly engines will support RVs.

Turning to warranties, a long warranty makes the future used car more attractive as on the one hand, it makes the model and brand increase the perception of reliability and, on the other hand, it reassures the buyer in terms of costs. Therefore, long warranties continue to represent a major incentive to buy a used car, helping RVs.

A crucial RV influencer managed by OEMs is the model’s sales planning. An adequate sales plan for a new car is crucial for the future used-car performance in terms of RV. This is because supply and demand in the used-car market have to be balanced, and ambitious volume planning for the new model will lead to RV-harming measures such as cash discounts and self-registrations to achieve sales targets, resulting in over supply, with negative influence on RV formation.  The management of planned sales by different channels (private, fleet, OEM/dealer registrations and rental) will also influence RV since the demand on the used-car market is mainly characterised by private buyers. A strong fleet presence can lead to an imbalance between supply and demand. This is because the vehicle might be in high demand from corporate buyers but not from the private buyer to the same extent.  However, short-term business (OEM/dealer registration and rental) is the most RV-harmful channel as these registrations are aimed at generating volume in an artificial way.