Guest commentary: Growing CPO sales are key to driving customer loyalty

How should we think of certified pre-owned vehicles? Are these used vehicles, new vehicles, or should we stick to calling them “like-new”? Regardless of how we classify certified vehicles, we treat them like a different product. How we market, advertise, label and sell these vehicles proves that.

Exiting the Great Recession, sales of certified pre-owned vehicles barely exceeded 1.5 million units. The industry had to wait until 2013 for annual CPO sales to top 2 million vehicles. But growth has picked up pace in the intervening years. Since 2012, annual CPO sales have expanded by nearly 1 million vehicles. Sales of 2.5 million to 3 million CPO vehicles a year might seem small compared with the broader used-vehicle market, which sees 40 million vehicles typically sold each year. But the CPO market matters because of its significance to the used-retail market, the market that involves dealers.

Bear with me as I dust off my industry insights hat. CPO sales are interesting to forecast because a few variables can impact supply.

First, the strength of the retail leasing market two to three years in the past plays a crucial role in determining the possible universe of vehicles that can be certified in any particular year. Typically, vehicles coming off lease drive the supply of what ends up being certified. It’s important to note that not all off-lease vehicles become CPO vehicles.

Second, the current market influences CPO sales levels. Overall strength in the used-retail market affects dealers’ demand to certify off-lease vehicles as well as their ability to certify them.

And last, automaker incentives for CPO programs can influence the rate at which eligible vehicles are certified by dealers.

Keeping all this in mind, where do we see CPO sales going?

It’s hard to envision an environment with a dramatic pullback in CPO sales. Could it take a year or two to set a new annual sales record? Sure. Do we drop back to 2012-14 levels? Probably not.

The challenge in the CPO market today (and for the foreseeable future) is not demand but supply. A lot of new-vehicle production was lost after the onset of the coronavirus pandemic. As we think about getting past those challenges, the best bet for the next couple of years is that CPO sales could hover from 2.6 million to 2.8 million vehicles annually, not going beyond 2021’s level of nearly 2.8 million.

The beauty of certified pre-owned offerings is not what’s in the respective automaker programs. Instead, it’s about the consumer who’s jumping into a CPO vehicle.

A common term used to describe some CPO shoppers is budget-conscious. And while that may be true for a subset of that population, I think we need to emphasize that these consumers are, broadly speaking, value-driven shoppers. They are willing to pay a premium for a vehicle because of what the CPO program offers and what that means to them about the quality of their purchase.

Here you have the perfect loyalty scenario if you are a dealer or an automaker: a consumer willing to spend extra on a vehicle to get peace of mind on their purchase. A good-to-great experience in that vehicle and with that brand adds strength and support in laying the foundation of consumer loyalty. Add in a customer’s in-store experience related to service, and you have a great tool to keep a customer engaged with both the brand and the dealership.

How can we test this?

Let’s think about incentives. Shoppers respond to incentives, and we know the industry is not shy about spending billions of dollars on such programs. Why not conquest shoppers into certified vehicles to drive loyalty? What is the long-term return on incentive spending if it gets a non-CPO customer into a brand’s certified program? What will that mean for the customer’s next one, two or three vehicle purchases? Sure, current market conditions suggest it might not make sense to allocate incentive dollars to test this idea. Still, it might someday be an economical way to drive sales and consumer satisfaction and strengthen loyalty.

There is no denying CPO sales volume will likely be limited by the pandemic’s new-vehicle sales disruption and the drop in the retail leasing rate the last couple of years. But even with CPO sales likely slowing in the near term, the value of the vehicles sold is expected to increase greatly because of the changing mix of vehicles being certified. As that mix skews younger and favors light trucks and eventually electric vehicles, the average transaction price will rise.

The CPO market offers consumers a wider range of options under $30,000 than the new-vehicle market. Regardless of how volume swings in the short term, it’s safe to assume this $50 billion-plus (and growing) industry isn’t going anywhere. Near-term supply constraints can be overcome in a few years, but the foundation of demand vital to the growth of CPO was laid over a decade ago and continues to strengthen.