Author’s Note: The catalyst for this series was the eye-opening discovery that over the last 20 years, the dealer invoice price has been turned into a bloated imposter that has nothing to do with any true vehicle cost — a fact which torpedoes the foundation for the ubiquitous “target price” negotiating advice on the Internet. The indisputable evidence of that fact is in Part 1 of this series. You can see the response I got in Part 2, when I presented that evidence to the senior executives of 5 major new-car pricing/buying services over 2 years ago. Part 3 debunks the conventional wisdom about vehicle-specific dealer cash incentives and reveals how those programs really work today. This piece adds several additional facts, some common-sense conclusions and recommends a relatively painless action plan that could help you end up with a better price than those Internet offers. I don’t invent the truth; I just dig it out and report it when no one else will. Here's Part 4...
Fact #1: The industry’s 20-year pricing subterfuge continues unabated in 2015.
On November 27, 2012, I presented this exhibit to senior executives of Kelley Blue Book, Edmunds, TrueCar, Cars.com and Consumer Reports. It illustrates how the visible gross profit has been cut systematically by all brands, year after year, since 1995. They all left the meeting with that exhibit, but not one has revealed that truth to you.
The total reconstruction of the invoice-retail price relationship remains an ongoing process. Here’s a quick look behind the 2015 pricing curtain, starring last year’s #2 luxury brand, BMW:
% Gross Profit Built Into The Base Sticker Price Of The Highest Trim Level
|Vehicle||2014 model||2015 model|
Once again, there’s living proof that “the invoice price” has little or nothing to do with any true vehicle cost. It hasn’t for well over a decade. But those major online information sources still use it as the touchstone for the “target prices,” which they tout as “right” or “fair.” Isn’t it time for them to start telling you the truth?
Fact #2: No dealer ever pays “the invoice price” to an automaker.
Some auto-pricing sites claim to tell you “what the dealer paid for the car” (which they typically define as the total invoice price minus “holdback,” money some brands’ dealers get after the sales are made). That was a reasonable dealer-cost estimate 20 years ago, but it’s been nonsense ever since.
Today there isn’t a single vehicle with more than a 10% difference between the invoice price and the MSRP, which no one pays except the guy who thinks Taco Bell is a Mexican phone company. The average gross profit at the base sticker price is only 6% to 8%. It’s even less on some brands.
• It’s just 7% on every Mercedes-Benz.
• It’s 6.4% and 6.2% on the RX 350 and ES 350, which together total 58% of Lexus sales.
• It’s 4.3% to 5.6% on all Mazdas except the CX-5, on which it’s a tiny 2.9%.
• It’s a measly 4% on 12 of 13 VW models and 5% on the 13th.
Yet over and above the cost of the vehicle, every dealership has an “overhead” expense load of 10% to 15% of its revenue. That’s the sum of selling, general and administrative expenses, depreciation and amortization charges, and “floorplan” and other interest expense. (In 2013, that totaled 12.3% for AutoNation — the largest and smartest automotive retailer in the country, with 228 stores.) And dealers need to earn a profit on top of that to get a decent return on their multi-million-dollar investment. (Welcome, car-buying sites, to Lesson One in Retailing 101.)
To own a Mercedes dealership, you’d need at least a $10 million net worth, more than half of which would be invested in your store. Assuming “stupid” didn’t get you to $10 million, would you be writing checks to Mercedes for 93% of a sticker price that almost no one pays? Really?
Fact #3: Those “free” online price offers aren’t free.
Those sites profit by helping dealers profit, not by helping you get the best price. They get their revenue from dealers and automakers, but not a penny from you. They funnel you to a small number of stores (frequently 3) that advertise with them and/or send them a finder’s fee for every sale. Those costs, of course, are built onto the price you pay. For example, TrueCar shows you “what others have paid for the same car in your market,” then sends you to a few dealers who know you’re a slam-dunk sale because you’ve been pre-sold on those “fair prices.” In return, those dealers pay TrueCar $299 of your sales price. Is TrueCar or any of those organizations (including Consumer Reports) that send you to TrueCar dealers leveling with you about that? Wouldn’t they, if they were truly transparent?
Fact #4: They present those “fair” prices and “True Market Values” to persuade the faint-hearted that the right price to pay is close to “what others have paid.”
At a market research luncheon meeting in the mid-1980s, I sat next to J.D. Power himself, the key speaker. I asked him, “David, who’s buying Saturns, the GM car for which everyone pays the full MSRP?” He answered, “The Caspar Milquetoasts of the world, the timid souls who can’t stand any kind of confrontation, no matter how mild.”
The Saturn option is dead, but the “timid souls” sales concept isn’t. Most consumers still turn into milquetoasts when they enter the car-buying mode. They’d rather take a long walk off a short pier than walk into a car store. So they go to the current “milquetoast option,” an online buying service, where they’re told what all the milquetoasts who preceded them paid, and they end up pleased to pay a similar price. They even buy into those sites’ overblown claims of “the dollars they saved vs. the MSRP” (which almost no one pays) — a number which often includes cash rebates that everyone gets, no matter where they purchase a car. If that’s not world-class hype, what is?
Anyone smart enough to seek information on Clark Howard’s site should see through that obvious puffery. (Surely you’re not a timid soul, sitting there hoping to pay something close to what all those milquetoasts paid.)
Fact #5: Given the 20-year “redesign” of the invoice-retail price relationship and the concurrent ascendancy of volume-based dealer incentives, there is never a “right price” to pay for any car.
As revealed in Part 3, today the bulk of “dealer cash” dollars are attached to secret dealer-specific, multi-month total sales targets, and reaching each interim monthly objective is critically important to keep dealers on track for those big-bucks rewards. Those trailing an interim goal near a month-end will sell cars at a loss, often a substantial one. And the best prices will almost always be well below “what others have paid for the same car in your market.”
Example: The Honda Accord Sedan
The Accord was the 2nd best-selling passenger car in 2014. I checked the last 118 country-wide transaction summaries from Accord buyers, all of whom got competitive prices from six to ten Honda dealers near the end of a month. They report how much they paid over or under the total invoice price — including the destination charge and any dealer fees for documentation, etc., but excluding the impact of any cash incentives. Check the range of their winning prices below.
Percent of 118 final deals that were:
|Above invoice - 5%|
|At invoice - 5%|
|$1-$200 below invoice - 9%|
|$201-$500 below invoice -18%|
|$501-$800 below invoice - 15%|
|$801-$1000 below invoice -14%|
|$1001-$1200 below invoice -14%|
|$1201-$1600 below invoice- 10%|
|$1600-$2400 below invoice -10%|
Question for those car-buying sites:
What “fair” or “right” prices should I have recommended to those 118 consumers?
Here’s why you won’t get that wide a price spread from online car-shopping services:
1. Those outfits understand well “the milquetoast factor.” As the Kelley Blue Book leader said in a USA TODAY meeting, “Overwhelmingly, consumers just want a fair price,” which he added, “means that when I tell my neighbor what I paid for the car, I won’t be embarrassed.” The TrueCar representative concurred, saying, “We have the data to support exactly what he said.” (Yes, that’s exactly what they said.)
2. So they constructed products aimed at that huge market of faint-hearted consumers, sending them online to dealers offering prices in the ballpark of what others like them have paid — prices they wouldn’t be embarrassed to tell their neighbors.
3. Given the small number of dealers participating, there’s little or no serious price competition. By contrast, if you get price proposals from 6 to 10 dealers, there’s usually about a $1,000 difference between the high and low bids, and this month’s winner may be the high-priced store next month.
4. Most of the best deals happen in the last week of every month, when dealers trailing their interim objectives get much more aggressive with pricing. But not one of those sites is telling you that.
In my view, “the ability to discover what others have paid” is not the greatest automotive breakthrough since the invention of the wheel . . . unless you’re a new-car dealer or an online car-buying service.
Even a milquetoast has an excellent chance of beating those online offers, maybe by a lot, without leaving home.
• All new cars are commodities. The one you want, configured as you want it, is the same car with the same price structure at every dealership selling that brand.
• Leverage is the key to negotiating the price of anything. In the new-car business, that leverage comes from price competition between dealers. There is zero leverage in knowing what others have paid. When you accept that as a target range, you cede all the leverage to the dealer.
• It’s the second most expensive purchase you make. Your goal should be to get the best price available — not a target price that any online info source recommends. To do that, you must take control of the process.
Here’s how to do that:
• First, find the best price offered by dealers on your favorite car-buying website. Get both a price for the car and a detailed “out-the-door” price, including motor vehicle department fees, sales taxes and any dealer charges for documentation, etc. Then keep that number in your hip pocket.
• On the weekend before the last 3, 4 or 5 consecutive weekdays of the month, check dealer inventories online. Many stores list it there. Choose 5 or 6 stores (ideally, but not necessarily, with cars you’d buy if the price were right), even if some are 50 or more miles away. More remote dealers may see you as a sale they’d never make and sell at a better price than they’d offer their neighbors.
• Call their Internet sales managers on the 1st morning if there are 3 consecutive weekdays, the 2nd morning if there are 4, the 3rd if there are 5. Describe the car you want in detail, say you’re ready to buy by month-end, that you’re contacting a limited number of dealers to get price proposals and you’d like to get one from that store. That you need both the price of the car and an itemized out-the-door price (with the details listed above) by phone or email by 11:00 AM the next morning. (Be sure they know your location, so they can figure the sales tax correctly.)
• Say you’ll call all responders that next afternoon, tell them the best out-the-door price and give them one shot at beating it. (It’s none of their business where it came from.) You’re ready to buy, and you want someone to knock your socks off at month-end. But you won’t buy from anyone who doesn’t participate from the beginning.
• The next morning call those you haven’t heard from by 11:00 AM, tell them you have proposals from other dealers and you’re waiting for their response. If any responses have been incomplete, call and ask for the missing info. Call everyone that afternoon with the best out-the-door offer. If the initial o-t-d price from the online car-buying site is the best Round 1 offer, use that price in those calls. (When you’re eliminating the cost of the middleman, that won’t happen often. But it could happen.)
• The store offering the best o-t-d price is the winner. “There will be no third round.” Ask the winner to confirm all the numbers via email because you hate surprises, and say you’re looking forward to giving that store nothing but the highest scores in the questionnaire about how you were treated. Make an appointment to sign the papers and pick up the car. Finally, as a courtesy, call the other dealers to thank them for participating.
A very personal note
There will be some who think I’m writing these pieces to increase my business. They’re dead wrong. I’m a 78 year-old man who runs a small “information boutique” from my home with the help of one assistant. The business is a perfect size today — small enough for me to have daily contact with my customers, answer their questions and learn truths from their experiences that I can pass along to you. I work a 60-to 70-hour week, period. If I get my wish, my “retirement” will start and end simultaneously . . . . in about 10 years. (I hate golf.)
On average, over 35,000 consumers buy or lease a new car every day. My two-pronged mission is:
• First, to expose the truth to them about how the total reconstruction of the invoice-retail price relationship has (a) turned the long-held consumer perception of “dealer cost” into absolute fiction, (b) radically transformed the nature of dealer cash incentives and (c) torpedoed the core assumption behind all the “target price” negotiating advice on the Internet.
• Second, to show them how to apply that knowledge to their financial advantage.
I believe the sources you trust for information and advice about the second most expensive purchase you make should take on the same mission — especially when they’ve been shown the incontrovertible evidence of the truth. But they aren’t. Are they more concerned with their bottom lines than yours? Ya think?
I’ll make this offer again: If any of them would like to debate me about that truth in a national media forum, I’m sure CNN would love to host that show — almost as much a I’d love to expose their failure to uncover the patently obvious sea change in the invoice-retail price relationship in their signature product category and their subsequent campaign of silence to hide that core fact from you.