How CarMax Has an Edge

How CarMax Has an Edge

CarMax. We all know them. But do we all love them?

Maybe when we need to try to sell a car, they’re a first thought, but how are they able to do what they do successfully every single day?

I wanted to take a deeper look.

As we all know, CarMax has been a leader in the used and pre-owned automobile space for a while now. They sell far more than 2X the inventory than even their biggest competitors. They also make significantly more profit doing so.

So what are they doing right?

It turns out – they know a trick about consumers. They get most people to overpay for their cars.

Let’s find out how.

To put it in perspective, CarMax sold over 170,000 vehicles in this first quarter of this year. Penske Automotive, who is their largest competitor, sold over 73,000 cars. When it comes to gross profit, on average per car, CarMax brought in $2,147 per vehicle. Lithia Motors, on the other hand, came close with $2,038. Others such as Asbury, Penske, AutoNation, and Sonic fell into a general profit range between $1,565 and $1,090.

It’s worth noting that the popular startup, Carvana, only managed to average $902 per unit in Q1.

What separates CarMax? It turns out it’s something I know very well. Marketing.

The way they promote buying their cars is through a super low-friction, hassle-free car buying experience. Their physical presence everywhere helps take advantage of buyer curiosity. Their entire network is at their disposal, and they don’t mind shipping cars at no cost to the buyer. Not very many dealerships have that luxury.

Yet, CarMax, when analyzed next to competitors, seem to always have the highest priced options. The cars may be in great shape and can include generous warranties, but most buyers wonder why there is such a price disparity.

I dug up a few example of this in the wild.

In Colorado, CarMax is selling a 2016 Toyota Highlander XLE with 26,000 miles for $32,998.

Mountain States Toyota, on the other hand, has a Certified Pre-Owned 2016 Highlander XLE priced at $31,994.

In North Carolina, CarMax has a 2016 BMW 328i with 25,000 miles for $26,998.

AutoNation, like Sonic Automotive, also uses a “no-haggle” strategy and they have a 2016 BMW 328i with 24,881 miles for under $23,000.

If you’re looking for a truck, you could get a used 2018 F-150 Lariat with 14,000 miles from CarMax for $41,000.

However, with heavy discounts and rebates on pickup trucks right now a brand new truck with likely cheaper financing is not much more.

CarMax customers and/or representatives will suggest that CarMax cars are of superior quality. But does that justify these higher prices?

We’re not saying that CarMax doesn’t offer good deals. They are competitive. We’re just saying that they have much more wiggle room and resources to leverage in the buying equation.

If you are looking for a used vehicle, it’s worth your while to look at your smaller local shops first. Not only do they need your business to survive, but they are probably more personable and understanding of exactly what you’re looking for.

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