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. The indisputable evidence is in Part 1 of this series. You can see in Part 2 the shocking response I got when I presented that evidence in this exhibit to the senior executives of 5 major new-car pricing services in a November, 2012 USA TODAY automotive roundtable discussion. Part 3 went into exposing myths around dealer cash incentives, while Part 4 looked at how to beat the pricing from new-car buying sites. This piece wraps up a five-part series.
Conventional wisdom has always had a limited shelf life
For centuries, the world’s most respected thinkers believed the earth was flat, and that became common knowledge. Then Ferdinand Magellan woke up one day in 1519 and said, “That’s whacko! If the earth were flat, all the ocean water would fall off the edge.” His expedition was the first to circumnavigate the globe . . and it put a few thousand wise guys on the unemployment line.
We’re all a tad gullible. If there’s something we know little about, we look to those who appear to be more knowledgeable. A body of “conventional wisdom” develops that is widely spread by “authoritative sources.” They feed us what they believe, and we swallow it — hook, line and sinker.
But what’s the basis for their belief? Is it logical? Fact-centered? Current? What if the answers had been “yes” for decades, but the underlying facts changed dramatically, invalidating all their information and advice? If they failed to bring their position into synch with the new reality, would that mean they were lying, or “conning” us?
Not necessarily. It might simply mean they were behind the curve of events and hadn’t caught up with the current facts on the subject. (You can’t be telling a lie if you don’t know the truth.)
But alternatively, it might mean that they had a vested interest in the status quo and found the newly revealed truth threatening to their livelihoods. And that they were doing everything they could to prevent that truth from gaining broadscale awareness and acceptance.
That’s exactly what’s happened in the new-car information business.
I’m no Magellan, but it didn’t take one to watch the average spread between the dealer invoice and the sticker price narrow dramatically over the years to only 6% to 8% and say, “That’s whacko! Almost no one pays the sticker price, and every dealership has a 10% to 15% overhead to cover. No dealership could make a profit selling cars if the invoice price were a real cost item.” And that fact has made the conventional wisdom you’re getting all over the Internet light years past its “sell by” date. It’s based on the assumption that the invoice price minus “holdback” (which one third of auto brands have either dumped or never had) is, or is close to, what the dealer pays for the car.
That’s nonsense. Whether you’re running a car store or a lemonade stand, profit = total revenue minus total expenses.
Five new-car pricing services know the truth, but don’t want you to know it.
As I reported in detail in Part 2, senior executives of Kelley Blue Book, Edmunds, Cars.com, TrueCar and Consumer Reports left that USA TODAY meeting with this exhibit. The subheading in the paper’s 12/07/12 article on that meeting was, “NO. 1: DON’T TRUST THAT INVOICE PRICE.” It’s over two and a half years later, and not one of them has shared that game-changing fact with you.
I wouldn’t expect Kelley Blue Book, Edmunds, Cars.com or TrueCar to enlighten you on the subject. They’re in business to help dealers sell cars profitably, not to help you get the best price. They get all their revenue from the auto industry and wouldn’t risk jeopardizing that income stream.
That leaves one other meeting participant: Consumer Reports
This revered organization is the nation’s rock-ribbed icon of consumer protection. In its 2011 Annual Report President Jim Guest stated, “Everything we do is characterized by an unrivaled independence and scientific rigor, which together insure we tell the truth each and every time.”
How well has the organization lived up to that promise in its signature product category?
A moonlighting court reporter typed every word said in that USA TODAY “on-the-record, open and candid roundtable discussion” put together by USA TODAY to “determine whether online car shopping and information services are believable and are relevant in today’s market.” I took extensive notes.
You could have heard a pin drop when I distributed that exhibit. It was clear that no participant was aware that the auto industry had been turning the invoice-retail price relationship on its head continually since the Internet arrived in 1995. The general response was defensive, even dismissive of the importance of that revelation.
Consumer Reports has been selling invoice and retail prices to us since 1983 via its New Car Price Service, an important revenue source. Automakers typically change their vehicle price schedules several times ever model year. Those running that service were smack dab in the middle of those changes, day after day. If that information had teeth, it would have bitten them.
But incredibly, not a single employee noticed the visible gross profit being cut by 40% to 73%, with those dollars being folded into the invoice price, disguised there as “dealer cost” dollars that have fueled a myriad of hidden, “below-the-line” dealer incentive programs. No one had the curiosity to say, “That’s funny,” and dig into what that sea change in pricing meant for the 35,000 to 40,000 consumers who buy or lease a new car every day. Yet an old man (a robust 79 now), working alone, easily “cracked the code” and unearthed the most important fact they need to know. Go figure.
CR’s participant in that USA TODAY meeting was its Director of Auto Testing, who is also involved with its pricing data. I asked him, “Who’s been running your New Car Price Service for the last 20 years, Rip Van Winkle?” He was not amused.
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How does Consumer Reports explain the dichotomy between Jim Best’s strong claim and its astounding failure to recognize the revolution in new car pricing that’s been playing out in its information wheelhouse for over 20 years?
More importantly, why has this esteemed organization, committed to “telling us the truth each and every time,” been silent about this pivotal fact that it’s known since November 2012 — a fact that all new-vehicle shoppers have a right to know about the second most expensive purchase they make?
After the lunch that followed that meeting, I said to the Consumer Reports representative, "Give me the name of the person who runs your New Car Price Service, and I'll update him or her on what's been happening in the car business." He gave me a dismissive look, then, like Elvis, turned and left the building without a word. Was that a message that his iconic consumer organization doesn’t want you to know the whole truth about new-car pricing? Ya think?
I’m not inventing any of this. It’s exactly what happened at that meeting. I was there, along with several others who heard every word, and a court reporter.
My take is that this cold, hard fact is “an inconvenient truth” for Consumer Reports because it reveals that its invoice-based information and “target price” advice is built on a house of cards — a number that has little or nothing to do with any dealer’s true cost.
In summary, the “conventional wisdom” about how to buy or lease a new car that floods the Internet is based on the assumption that the automaker-dealer financial world is essentially unchanged from its pre-Internet status. That world was flat, static, two-dimensional, open, uncomplicated, and easy to understand and describe accurately to consumers. It was one where you could “start with this number, add these numbers and subtract those, and voila, there it was — the truth!”
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That world has been dead for well over a decade.
Today it’s round, dynamic, multi-dimensional, closed, complicated, and impossible to decipher to determine any vehicle’s true cost. There are no numbers you can ‘start with, add this and subtract that’ and end up with anything but “boomfog!” (Boomfog: A meaningless statement or conclusion, unrelated to reality.)
To the consumer, reality matters. Honesty matters. Competence matters. Current facts matter. Behavior consistent with your principles matters. The truth matters — the whole truth.
On this subject, the horse called The Whole Truth has left the barn, and it’s not going back.
What takes the place of that fairy tale we’ve bought into for so long?
The common sense and competitive bidding advice you’ll find in the 4th article in this series, “Beat the Pricing From Online Car-Buying Sites.”