What is residual value?
The definition of residual value is quite straightforward; it’s the value of a car at the end of the lease period/time of sale compared to its original worth. However, the factors that dictate its amount are not as simple.
Traditionally, to estimate the expected car depreciation (so how much value the vehicle lost over its lifetime), dealers, lease companies, and fleet managers would rely on several key metrics: the car’s age, mileage, and maintenance. However, as the choice of brands, engine and fuel options, and in-car technologies are expanding, accurate calculation of a vehicle’s residual worth becomes more complex.
On top of that, another question arises when we only consider basic components when trying to foresee the residual value of a car. Namely, how to slow down the depreciation and preserve as high residual value as possible. To answer it, we need to dig deep into data.
What causes cars to depreciate?
To find ways to optimize a car’s residual value, let’s first establish what impacts its worth. Sometimes, these factors aren’t intuitive. For example, you might be surprised to learn that some car makes hold value better than others. This is down to elements such as perceived (or confirmed) durability, reliability, or popularity on the market, making them easier for owners to sell.
Or think about the skyrocketing fuel prices. They are pushing record numbers of drivers to switch to electric cars. In the USA, 53% of shoppers are considering transitioning to a more fuel-efficient vehicle following the surge in gas prices. Europe mimics that trend, with the number of battery-powered cars doubling in 2022 compared to the previous year.
What does it have to do with residual value? Well, think how much your combustion engine vehicle will be worth in three years when the demand for gas-powered cars diminishes significantly (especially among the recent news that the EU authorities have banned the sales of new petrol and diesel cars from 2035).
Sophisticated AI-driven predictive analytics solutions can help anticipate demand trends for specific vehicle brands, body types, or power sources. But these predictions still tend to be volatile and require more data to deliver accurate, actionable insights. Moreover, not every organization can afford to implement and sustain enterprise-level data hubs, nor feed them enough data for that investment to pay off.
However, there’s a way out. Already today, you can accurately predict and optimize your car’s or fleet’s residual value based on smart but simpler solutions that analyze vehicle maintenance and performance data in a broader context of the road, weather, and the driver’s style.