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. Now read Part 2...
How do the leading car buying Internet information sources operate?
Kelley Blue Book (kbb.com), Edmunds.com, Cars.com, and TrueCar.com are four key websites new-car shoppers visit. They provide us with lots of valuable information. Specs on the cars we’re considering. Reviews of their pluses and minuses. Cost of ownership estimates between competing vehicles. And more. When we’re ready to buy, we turn to them for pricing data and negotiating advice.
They’re all for-profit corporations that get gazillions of visitors each month. And they get virtually all their revenue from the auto business, but not a penny from you. Their main revenue sources, which can vary by site, are: (1) advertising dollars from automakers and dealers; (2) small referral fees from dealers when visitors click through for price quotes; and (3) richer “finders’ fees” when those referrals turn into sales. (A common number: about $300, which is built into the price you pay.)
Those sites are “third-party lead generators,” conduits for conveying shoppers to dealers, who turn them into buyers. They recommend target prices you should aim for and send you to dealers in their networks that will sell at those prices, based importantly on “what others have paid.”
They provide a useful service for consumers who’d rather have all their molars pulled than negotiate the price of a new car. But they’re in business to help dealers sell cars profitably, not to help get you the best price. And the dealers in their networks know that you’ve been told by online “experts” you trust that with the prices they recommend, you’ll drive that car home with a smile on your face.
But this is not a product category in which “one purchase method fits all.”
I’ve spent 20+ years dealing with over 130,000 consumers whose objective was to get the best price available. And knowing the truth about the inverted invoice/retail price relationship, they approach the purchase process with a plan for getting that price from dealers they choose to contact.
They know they’re shopping for a commodity, and that the only negotiating leverage comes from making sellers compete on price for their business. They do that from their home or office, not by haggling in car stores. And given all the hidden ways dealer incentives work today, they know there can be a wide spread between the high and low bids. (It’s rare to have less than a $1,000 difference on a $25,000 car if there are six to ten dealers participating. And the spread can be much greater because dealers will sell cars at a loss to stay on track to reach a multi-month sales target.)
Getting price proposals from only two or three dealers in a site’s network isn’t a negotiation, it’s a capitulation. If I were one of those dealers and you were coming over to buy at my offer price, I’d send a chauffeur-driven limousine to make sure you didn’t stop at another dealership on the way.
Do those four key car shopping websites know about the long-term program that has shifted gross profit dollars into the invoice price to disguise incentive dollars as cost dollars?
Yes, they all do.
I presented the evidence to their senior executives in a November 27, 2012 USA TODAY “open and candid” automotive roundtable discussion on “whether online car shopping services are believable and are relevant in today’s market.” (A Consumer Reports exec was also there. I’ll discuss that organization in a subsequent article.)
I distributed this exhibit, which illustrates for 47 popular models of 23 brands how the visible gross profit has been cut systematically, year after year, since 1995. You could have heard a pin drop. No one there was aware of that upheaval in the automaker-dealer financial relationship, though that pricing data had been in their information wheelhouse every day for over a decade! If it had teeth, it would have bitten them.
At one point I challenged their “pay what others paid” recommendations with, “You’re treating consumers like they’re idiots. Why would anyone pay close to an average price, when, by definition, it means that about half the people got a better price — maybe a much better price?”
The Kelley Blue Book representative’s reply was, “Overwhelmingly, our market research shows that consumers ultimately don’t want the best price. They just want a fair price.” (No one disagreed.) He later said that a fair price “means that when I tell my neighbor what I paid for the car, I won’t be embarrassed.” (No one disagreed.)
TrueCar’s Executive VP echoed that claim, saying, “We have data to support exactly what he said. We do post-purchase surveys of 100% of our consumers, and the ones who pay the least are the most dissatisfied.”
That research has the ring of truth. Most folks believe that to get the best price, they must walk into car store after car store and spend an hour or two haggling in each one. If that were true, I wouldn’t want the best price, either.
Do those statements accurately describe your objective when you buy a new car? Are you sitting there thinking, “I sure hope I get a price that’s at least in the ballpark of what others are paying?”
Have any of those trusted information sources reported the dramatic 20-year change in the invoice/MSRP relationship to you? No. They don’t want you to know it, for two compelling reasons:
1. Knowing how the car business really works today would create significant doubt about the value of their advice. For decades, you’ve believed that the invoice price is a bona fide dealer cost estimate, and that a selling price close to that number would be a good deal. That belief chain is the foundation for the target prices they recommend. Knowing the truth, you’d quickly see that foundation as a house of cards.
2. Revealing the truth would make their network dealers madder than a mosquito trapped in mannequin warehouse and dry up their revenue stream.
My mission is to spread that truth to every new-car shopper.
So whose side are those new-car pricing sites really on?
They deserve praise for the information they provide to help consumers choose vehicles that best fit their needs. And they provide a useful service to shoppers who abhor the negotiating process so much that they’re willing to pay “an average price,” including their “finder’s fee,” to avoid it. But their business models are built to protect dealers’ profitability, not to help you get the best price. Given their industry-dependent relationship, telling you the truth would be financial suicide.
They have nothing to offer knowledgeable consumers, who know the invoice price is a bloated imposter and that the way to get the best price is to make several dealers compete for their business.
What’s my opinion?
Let’s just say I agree with this Matthew 6:24 quote from the New Testament:
“No one can serve two masters.”