Vehicle Replacement Strategies: How to Manage Depreciation and Maximize Value
A key variable in total cost management is knowing when to dispose of your vehicles. It impacts the total depreciation (purchase cost less resale value) of your vehicle as well as repair and maintenance costs.
Many factors play into the ideal time frame to cycle vehicles, ranging from new and used car market dynamics to mileage. They all play into the value of the vehicles as well as repair and maintenance experience.
The ideal time to sell a vehicle is when the depreciation cost and the repair and maintenance costs are at their lowest. This is based on a cost per mile (“CPM”) calculation. The CPM equals the annual cost to operate a vehicle divided by annual miles. The target is to cycle vehicles at the point at which CPM has trended down and begins to uptick. It’s true. Older vehicles typically cost more than new vehicles at some point. Identifying that point drives the replacement cycle timing.
When is the annual depreciation and repair costs at their lowest? This is precisely when you should sell; before the vehicle incurs that expensive repair due to age and before the resale value drops substantially. When it comes to selling, timing is everything.
The value of vehicles decreases throughout the holding period, but not evenly. There are certain triggers during the life cycle of a vehicle that causes a steeper decline in value, known as the “value cliff.” Your vehicle needs to be sold before it hits specific cliffs and its value drops significantly. If not, you’ll have to keep it for quite a while to recover from the drop in value. Value cliffs include mileage benchmarks (like hitting 100,000 miles) or changes in body style.
The fleet management strategy for your fleet should include expected holding periods for all categories of vehicles in your fleet, defined by years and miles. This is not an absolute, but a guide. To learn more about the Fleet solutions and strategy, the first tenet of Fleet Wellness®, click here.
Certain vehicles retain their values better than others and have lower repair costs as they age. Therefore, these vehicles can be kept longer to minimize the total cost of ownership. In the example above, 100k was a value cliff for some vehicles. The mileage value cliff is different depending on the class of vehicle. Your fleet program should also evaluate the number of actual miles put on a vehicle every year in comparison to the mile estimate in the fleet management plan. If you have outliers where vehicles are incurring significantly greater or fewer miles than average, you might want to consider Fleet Rebalancing©. This allows you to hold onto the vehicles for the maximum amount of years versus running over on mileage prematurely. Excessive mileage decreases the value when you want to sell and prohibits your company from realizing the maximum economic life of each fleet asset.
To learn more about fleet solutions that teach you how to turn vehicles more often and save money, check out this blog.
2. Maximize Resale Value
Resale value is what you sell your vehicle for at the end of the term. Two of the largest factors that impact resale value is condition and market demand.
Reconditioning your fleet can enhance its demand at the time of resale. When you take the time to make a final investment in your fleet, the effort can net you a factor of two to four times your cost. There are many ways to go about reconditioning your vehicles, including:
- Decal removal
- Repairing damage
- Restoring to like-new condition
- Paint touch-ups
- New tires
- Windshield repair or replacement
Reconditioning shows your potential buyers that the vehicles were properly maintained and cared for while in your possession. This results in more bidders/buyers. Even minor improvements can greatly impact your fleet’s resale value.
Make sure to follow steps for proper de-identification to avoid damage. Most fleet management companies have a list of preferred vendors they can work with to recondition vehicles at competitive prices. The key to de-identifying vehicles is not damaging them in the process. Never use a shop that plans to scrape decals off.
Remarketing vehicles is a fleet solution offered by Fleet management companies. Fleet management companies are adept at reselling vehicles at the end of the lease, resulting in 10-30% higher sales proceeds. This equity will be returned to your company in open-ended leases. Fleet management firms work with many sources, verses the one or two dealers with whom your business may have a relationship. These sources can include auctions where twenty plus bidders bid on each vehicle and drive prices up.
3. Proper Selection
It may sound odd, but “specing” a fleet vehicle for your firm and for the eventual second buyer is ideal. This is a best practice for maximizing resale. Selections of the right types, colors, and features when acquiring vehicles yields greater returns when selling them at the end of the holding period. For example, an extended cargo van costs $900 more initially but yields a $1,500 premium over a traditional van at resale.
Fleet management companies can help you purchase vehicles through large fleet-buying programs with substantial rebates, making it more cost-effective. This usually holds true for out-of-stock purchases and ensures you get what you need, how you want it, when you want it, and at the lowest cost possible. Purchase timing is also a factor that needs to be considered. There are good times to buy and lease, and there are bad times.
Make sure to purchase the vehicle at the lowest possible cost by taking advantage of fleet rebates. These rebates are generally not offered by dealerships.
Fleet management companies are your advocate and can advise you on company fleet strategy and fleet solutions. They provide the fleet manager with important guidance on topics like how long to keep vehicles, which vehicle options make sense, and how to remarket vehicles to maximize sale prices. This is the essence of the total cost of ownership mindset that reduces fleet costs immediately and makes a major impact on the business bottom line.