Today, I’ve decided to address certified pre-owned programs. More specifically, I’m going to tell you why certified pre-owned programs actually benefit car companies with a reputation for poor reliability.
For those of you who do not live in a country where certified pre-owned programs exist, such as the country of Europe, please allow me to explain what the hell they are. Here’s the gist: if you buy a new car, you get a warranty, and everyone is happy. But in the past, if you bought a used car, you got no warranty, and everyone was sad. So automakers came up with an idea: why not sell used cars with a warranty and come up with some catchy name beyond “used cars with a warranty”? And thus, certified pre-owned was born.
So the way it works now is, if you want a car with a warranty but you don’t want to spend big money on a new model, you buy a certified pre-owned vehicle. This way, you get a fairly recent car with a long, factory-backed warranty that’s almost as good as a new one. Meanwhile, dealers get to sell their own car a second time, with a higher profit margin than a typical used vehicle. Everyone is happy again.
Or at least, almost everyone. You see, certified pre-owned programs benefit certain brands more than others. Specifically, they benefit brands known for making unreliable vehicles; dubious vehicles; the kind of vehicles whose rear wipers don’t work when you turn up the radio volume too high. I’m not going to name names here because I don’t want to embarrass anyone, but I am of course referring to Land Rover. And today I’m going to explain why.
I’m going to do that by providing us with a fictitious person who constantly fears that his vehicle will break down. We will call him Henry. Henry knows how to do precisely two things with his vehicle: get in, and turn it on. Henry can also place gas inside the vehicle, though occasionally he gets it all over his hands.
Henry has never visited Jalopnik.
But when it comes time to buy a new car, Henry wants something cool. Something exciting. Something unique that will help him stand out from his peers at Smith and Jackson Widget Inc. So Henry does what any good car shopper would do: he consults his favorite bedtime reading material, Consumer Reports. And he learns that vehicles made by the brand he was considering, Land Rover, work about as well as arguing with people on Facebook.
Disappointment consumes Henry, until he discovers something: Land Rover has a certified pre-owned program, with a warranty that lasts for up to six years or 100,000 miles. This means Henry can buy the Land Rover he’s always wanted: an LR2 SE.
Meanwhile, Henry is also considering buying a Lexus—which, Henry no doubt notices, has excellent ratings in Consumer Reports. So Henry goes looking for a used RX, and he discovers something: the average price of a regular ol’ used 2012-2014 RX on Autotrader is $33,600, while the average price of a certified pre-owned 2012-2014 RX is $35,300. In other words: he’d have to spend about two grand more to get a certified warranty.
This causes Henry to think to himself: Why the hell would I spend more money to get a longer warranty on something I already know is reliable? So Henry saves the two grand, and he gets the Lexus from a dealer called Toy Carz LLC, and it runs flawlessly for the next 100,000 miles, until Henry tragically dies in an accident that OSHA will later classify as a “freak fax machine incident.”
Henry’s story is not unique. Over the last few months, I have had several friends purchase recent used cars, and each time they’ve reached the same conclusion: there’s no need to get a warranty on a Lexus, or a Toyota, or an Acura. There is absolutely a need to get a warranty on a Land Rover, a BMW, or a Mercedes.
In other words: car companies with a reputation for poor reliability actually benefit from this reputation when it comes time to sell off used inventory. And it isn’t just certified pre-owned programs where they pocket extra cash. Want that heavily marked-up dealership extended service contract? On a Toyota? Nah. On a Mercedes? Er… probably.
Of course, the flip side of all of this is that these companies start to lose a little of their extra profits when it’s time to pay out claims associated with all these warranties. That’s why the best position for an automaker is one where you have a reputation for poor reliability, but you’re actually very reliable.
This perfectly describes Porsche: while car enthusiasts harp on about IMS bearings in the 996 and the secondary air injection system in the 993, Porsche seems to find itself near the top of most J.D. Power studies. It’s probably no coincidence that they have one of the longest certified pre-owned warranties.
But then, Henry would never buy a Porsche. Unless Consumer Reports told him it was OK.