Wednesday, July 3, 2013

An Addendum: Framing and the Upsell

In my writeup about our new car negotiation process, I stuck primarily to discussing the choices that we made.  I alluded to some of the tactics that car dealerships use on their side of the negotiation table, but I didn't belabor or bemoan these tactics, mostly because I figure that they are well understood.  

Here's a simple observation to put car price negotiation in perspective.  Most people buy cars infrequently, and hence have little experience when it comes to negotiation.  Car dealerships do it all the time, every day, repeatedly, and their livelihood depends on it.  As such, they have car price negotiation down to a science.  If it is a dealership that has been around for a while, you can expect them to be very good at it.  In other words, my previous post isn't so much about bamboozling the car dealership as it is about making sure that you are not bamboozled... too much.

A corollary to the "car dealers are good at negotiating" theorem is that it pays to look closely at their tactics.  In our negotiations, I noticed more tactics than I could recount in one blog post, and I'm sure they slipped even more by me, but one tactic stood out as particularly effective.

After you've hammered out the final price, financing terms, monthly payment, etc., it is time to sit down with the finance guy.  Make no mistake.  He's a salesman too, and this is part of the game - to sell you on something that you really shouldn't be buying in the first place.  In our case, he was selling extended warranties and service plans for the car.  In broad brush terms, here's the choice he presented us.

Premium: Seven-year bumper-to-bumper warranty, Supreme maintenance plan, Chip coating the car, gap insurance, window tinting, Ultimate Protection Plan (in case supreme maintenance isn't enough), and some other option I'm forgetting.
Almost Premium: Seven-year bumper-to-bumper warranty,  Supreme maintenance plan, Chip coating the car, Ultimate Protection Plan (in case supreme maintenance isn't enough), and some other option I'm forgetting.
Less Than Premium: Seven-year bumper-to-bumper warranty, Supreme maintenance plan, and Ultimate Protection Plan.
Not Premium, but Good: Seven-year bumper-to-bumper warranty, and Supreme maintenance plan

In addition, he added that we could create our own package by selecting any of the programs in the Premium list individually.  He admitted that not all options are for everyone.  He even got the chance to say, "I couldn't sleep at night if I sold you gap insurance.  It's just not a good deal for you."  The remaining options must have passed his filter, so they must be good, right?  Not exactly.  To see what goes wrong, here's how I could frame the same choice over options and add-ons.

Standard. Five-year 60,000 mile drivetrain warranty, Five-year 60,000 roadside assistance, and three-year 60,000 mile bumper-to-bumper warranty.
Upgrade.  Five-year 60,000 mile drivetrain warranty, Five-year 60,000 roadside assistance, seven-year bumper-to-bumper warranty, and pre-paid oil/other fluids changes (this is the Supreme maintenance plan).
Primo Upgrade. Everything in Upgrade, plus whatever features you want to add on.

My "Upgrade" option is exactly the same package as the dealership's "Not Premium, but Good" option.  The dealership's framing is carefully orchestrated to sell extended warranties to people who haven't given it much thought.  The dealership is wielding two behavioral economic tricks in this framing: they order the choices and present us with irrelevant options.  By presenting us with options and extravagances we don't need first and then working down to a "slight" upgrade, the dealership is putting the extended warranty and service plan in the context of all of the other options we could add.  In this context, the warranty looks attractive.

On the other hand, in context of the coverage we already have, the upgrade doesn't look especially attractive, especially when it costs 15-20 percent of the full price of the car.  Context matters a lot.  It is no wonder that the salesman didn't include the Standard package explicitly in the list of packages to present to us.

If I didn't appreciate the behavioral economics behind it, I would just think this practice is downright shady.  To be clear, I still think it is shady, but at least it gives me an example of how context can matter for economic choices.

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