You’re thinking about buying fleet vehicles with a few extra-cost options. Or perhaps you’d like to offer a trim-level upgrade as an incentive for your drivers. Your employees will appreciate the added performance, safety, utility, comfort or convenience. But from a purely financial standpoint, does spending the money on these extras make sense?
We analyzed factory-installed, extra-cost options on 2002 models and their values at resale after 36 months using Black Book, a national wholesale used vehicle guidebook. We also studied the values of base models and trim-level upgrades in four different segments over the same time.
Charts 1, 2 and 3 demonstrate which options return the highest percentage of original cost at resale in the intermediate, pickup and minivan segments.
Chart 4 illustrates how trim level upgrades fared at resale in six segments.
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The Value of Options
Entertainment packages, fancy wheels, power seats and leather all command a premium to some degree. These options all provide comfort, convenience and an extra dash of style—and they’re all options the buyer can see.
A sun or moonroof is generally a good bet—it averages the highest percentage of return in the intermediate sedan segment.
“Sunroofs historically have a high payback,” says Tom Webb, chief economist for Manheim Auctions, Inc. Webb noted the case of a manufacturer that was remarketing large numbers of a certain model to auction. “Since the cars were coming from rental, they assumed it was unimportant whether they had a sunroof or not,” Webb says. “When it came time to sell those units at auction, they realized that their values were much poorer [without sunroofs]. So they actually contracted us to install them.”
Utility, Safety Are Poor Sellers
Utility features such as running boards, electric rear window defrosters, roof racks and engine block heaters return nothing at resale in all segments.
Safety options fare poorly as well. Antilock brakes, side-impact air bags, locking differential rear axles and stability-control systems also return nothing at resale.
If a safety option prevents an accident, the benefit obviously far outweighs any cost. So it may seem odd that safety options do not sell well, as shown by the used-car buyer’s unwillingness to pay any premium for side- impact air bags or antilock brakes.
Why? The benefits of these internal safety modifications may be harder to grasp than other visible options. An authority on the automotive aftermarket says consumers may feel that the base model is already manufactured well enough to protect them without these costly extras. The history of safety belt implementation gives us more perspective on the issue.
Seat belts, probably the single most important vehicle safety innovation, were first introduced as an option in the late 1950s. Yet at the time only about two percent of the new-car buying public were willing to pay a premium for them. The response was so poor that manufacturers stopped offering seat belts as an option. The safety belt only became standard after the government mandated in the early 1960’s that all passenger cars be equipped with them.
Even then the public resisted, as studies showed that only about one in eight drivers buckled up. One by one the states finally began passing laws making safety-belt use mandatory. Today, with reams of safety statistics and the threat of a ticket, usage is only around 80 percent. Safety is a hard sell.
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Engine Upgrades Fare Well
Engine upgrades always return some value of original cost.
The engine upgrade on the Impala shows a return of only 28 percent, while the upgrade on the Camry returns 57 percent. Why? The upgrade from the base Impala engine, a 3.4-liter V-6, is to a slightly larger 3.8-liter engine. The Camry upgrade is more dramatic, from a four-cylinder engine to a V-6, thus warranting the greater percentage of return of original cost.
The pickups show a return on engine upgrades as well. The optional 5.9-liter V-8 gasoline engine on the Dodge Ram returns 41 percent of original cost at three years. The Ford 5.4-liter V-8 gas engine upgrade brings in 27 percent of its original cost.
The diesel engine upgrade in pickups offers the greatest return on investment of any option studied. The 6.6-liter Duramax diesel engine on the 2002 Chevy Silverado 1500-3500 series returns 112 percent of its original cost, according to Black Book. On the Dodge Ram ST 1500-3500 series, the 5.9-liter turbo-diesel returns 102 percent. The Ford 150 through 350 XL series diesel returns a league-leading 116 percent.
Why? Webb notes that diesels are scarcer than gas engines. And used pickups are often bought as work trucks, so the buyer recognizes the diesel engine for its value in terms of better fuel economy and durability.
Webb cautions, however, that newly popular pickup options such as DVD players and leather seats may have less value at resale because they aren’t needed for a work application.
Know the Rate of Depreciation
Webb says a good rule of thumb on the value of options is to compare the depreciation on the entire vehicle with the depreciation on the option. Let’s say a car retains 50 percent of its value after three years. If the option retains 50 percent of its value or greater, you’re ahead of the game.
Although we’ve provided some general wisdom, the values of options and upgrades at resale vary greatly model to model. When you’ve chosen your vehicle, do your homework. Pick up a used vehicle guide to see how those options fare at resale. How you configure the vehicle may save you a few hundred bucks on the back end.
Entertainment packages, fancy wheels, power seats and leather all command a premium to some degree. These options all provide comfort, convenience and an extra dash of style—and they’re all options the buyer can see.
A sun or moonroof is generally a good bet—it averages the highest percentage of return in the intermediate sedan segment.
“Sunroofs historically have a high payback,” says Tom Webb, chief economist for Manheim Auctions, Inc. Webb noted the case of a manufacturer that was remarketing large numbers of a certain model to auction. “Since the cars were coming from rental, they assumed it was unimportant whether they had a sunroof or not,” Webb says. “When it came time to sell those units at auction, they realized that their values were much poorer [without sunroofs]. So they actually contracted us to install them.”
Utility, Safety Are Poor Sellers
Utility features such as running boards, electric rear window defrosters, roof racks and engine block heaters return nothing at resale in all segments.
Safety options fare poorly as well. Antilock brakes, side-impact air bags, locking differential rear axles and stability-control systems also return nothing at resale.
If a safety option prevents an accident, the benefit obviously far outweighs any cost. So it may seem odd that safety options do not sell well, as shown by the used-car buyer’s unwillingness to pay any premium for side- impact air bags or antilock brakes.
Why? The benefits of these internal safety modifications may be harder to grasp than other visible options. An authority on the automotive aftermarket says consumers may feel that the base model is already manufactured well enough to protect them without these costly extras. The history of safety belt implementation gives us more perspective on the issue.
Seat belts, probably the single most important vehicle safety innovation, were first introduced as an option in the late 1950s. Yet at the time only about two percent of the new-car buying public were willing to pay a premium for them. The response was so poor that manufacturers stopped offering seat belts as an option. The safety belt only became standard after the government mandated in the early 1960’s that all passenger cars be equipped with them.
Even then the public resisted, as studies showed that only about one in eight drivers buckled up. One by one the states finally began passing laws making safety-belt use mandatory. Today, with reams of safety statistics and the threat of a ticket, usage is only around 80 percent. Safety is a hard sell.
{+PAGEBREAK+}
Engine Upgrades Fare Well
Engine upgrades always return some value of original cost.
The engine upgrade on the Impala shows a return of only 28 percent, while the upgrade on the Camry returns 57 percent. Why? The upgrade from the base Impala engine, a 3.4-liter V-6, is to a slightly larger 3.8-liter engine. The Camry upgrade is more dramatic, from a four-cylinder engine to a V-6, thus warranting the greater percentage of return of original cost.
The pickups show a return on engine upgrades as well. The optional 5.9-liter V-8 gasoline engine on the Dodge Ram returns 41 percent of original cost at three years. The Ford 5.4-liter V-8 gas engine upgrade brings in 27 percent of its original cost.
The diesel engine upgrade in pickups offers the greatest return on investment of any option studied. The 6.6-liter Duramax diesel engine on the 2002 Chevy Silverado 1500-3500 series returns 112 percent of its original cost, according to Black Book. On the Dodge Ram ST 1500-3500 series, the 5.9-liter turbo-diesel returns 102 percent. The Ford 150 through 350 XL series diesel returns a league-leading 116 percent.
Why? Webb notes that diesels are scarcer than gas engines. And used pickups are often bought as work trucks, so the buyer recognizes the diesel engine for its value in terms of better fuel economy and durability.
Webb cautions, however, that newly popular pickup options such as DVD players and leather seats may have less value at resale because they aren’t needed for a work application.
Know the Rate of Depreciation
Webb says a good rule of thumb on the value of options is to compare the depreciation on the entire vehicle with the depreciation on the option. Let’s say a car retains 50 percent of its value after three years. If the option retains 50 percent of its value or greater, you’re ahead of the game.
Although we’ve provided some general wisdom, the values of options and upgrades at resale vary greatly model to model. When you’ve chosen your vehicle, do your homework. Pick up a used vehicle guide to see how those options fare at resale. How you configure the vehicle may save you a few hundred bucks on the back end.
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