Business & Technology Nexus

Dave Stephens on technology and business trends

Linear Performance Pricing and Used Cars

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Every once in a while you run across a story of someone applying their professional buying skills in everyday situations. Yesterday, I heard a great one! An incredibly smart acquaintance of mine was in desperate need of a used mini Cooper. But, naturally, he needed more than the car. He needed to know he was getting an exceptional deal as well.
Of course, at first glance Edmunds and Kelly Blue Book seemed like they offered more than adequate information on used car prices.

But what if you want to double check them? What if you want to run the numbers yourself? All it takes is a little time, an active mind, and Excel.

Linear performance pricing has been used to source direct materials components for years. McKinsey & Company described the method on page 5 of the June 2003 Automotive OE Supplier News. In short, it stipulates you can correlate price to “performance” once you discover the component of a product most relevant for “customer value.”

The simplest, most commonly used example for pricing for performance is engines. So, if you were buying an engine, let’s say a lawnmower engine, what would be the most relevant attribute capturing “customer value?” Many would say horsepower combined with efficiency or quality would be most important. Let’s ignore efficiency and quality and stick to horsepower. Analyzing lawnmower engine market prices might lead you to something like the chart below (note, I didn’t bother to get the pricing right, this is just boring lawnmower engines, not cool mini Coopers):

Lawnmower engine price vs. performance

Once you have price vs. performance graphed out, it’s easy to see where the value is, even across different brands and completely different product segments. You just look for the data points below the “best fit” line. Honda, for example, sure looks like they build reasonably-priced 11 HP engines, whereas they are a little too proud of their 2.2 HP version.

So, what is the “performance” metric for a used miniCooper that best captures perceived customer value? My smart friend suggests it is nothing more than Year and Mileage. On the one hand this seems absurdly simple since no two cars are treated the same. Factors such as body damage, maintenance records, and number of owners could arguably be included. But let’s stick with it and see what we learn.

A quick search of cars.com yielded 878 results across the US (thanks cars.com!). I live in Half Moon Bay, and the mini Coopers available to me varied from 8 miles away to 2,789 miles away (beware, large sort operations on cars.com take a while, so have a hot cup of tea ready before clicking to sort).

Several hours of clicking and cutting and pasting into Excel and I had all the data needed to perform the analysis and look for uncommon value. Tomorrow I’ll share the results..

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Written by Dave Stephens

02/22/06 5:31 PM at 5:31 pm

Posted in Opinion

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