Monday, September 30, 2013

Lessons from another car-buying experience

If you walk into a car dealership and start negotiating over buying a car, there are phrases that you will likely hear.

A few hundred dollars
"We don't want to lose you over a few hundred dollars."

This is a trickier phrase than it first appears.  Digging past the facade of friendliness, the phrase accomplishes several things: (1) it makes the original price seem reasonable, (2) it makes the dealer seem willing to negotiate anyway, and (3) it makes you think in terms of hundreds, not thousands, of dollars.

Suppose you're considering a $20K-$30K purchase.  A few (2-3) hundred is around one percent of the price.  Yet, most car buying guides (example) suggest that your target price should be around 10 percent lower than the price posted.  Regardless of what the salesman is trying to get you to suggest, you should ask for a couple thousand dollars off the price, not a couple hundred.  If the dealer is not willing to go there, walk out.  Car manufacturers make these things on assembly lines.  There are plenty of others around.  Plus, you can always come back.

Make us your best offer
"What price will it take for you to make the purchase right now?"

On its face, this phrase gives the control to the customer.  Being in the position to set the frame of reference for the negotiation is great.  Moreover, in this setting, making a take-it-or-leave-it offer theoretically gets you the most surplus in a  surplus-splitting negotiation.  When the salesman asks you this question, you have the option of making such an offer.  That kind of control is nice, but it is limited by several factors.

First, you don't really know the salesman's reservation price.  They do a really good job of hiding that, and pointing to the sticker price as the focal point in the negotiation.  Moreover, this reservation price is a bit fuzzy because it depends on the dealer's evaluation of how likely another buyer will walk in the door and pay that price or higher (and the cost of getting a comparable car on the lot before that happens).  That's hard to predict, but the dealer knows that much better than the customer.  In this case, information about these factors protects the dealer from overly savvy negotiators.

If you knew the dealer's reservation price, your best bet would be to make a take-it-or-leave-it offer at that price.  The dealer would still make a profit on the books, but he'd be indifferent between selling to you now, and waiting for the next guy who is going to (in expectation) pay a higher price.  Given that you don't know the reservation price, you have to feel it out, and that will tend to raise prices -- both the price that others would pay and yours.  Note: indirectly, this is going to improve the dealer's outside option, and thus, you're going to be stuck bargaining with a less willing negotiator.  Not an accident, I'm sure.

Second, the what-will-it-take-right-now tactic manipulates customer information.  If the customer hasn't done advance research, the "right now" part of the question really bites.  If you don't know what price to ask for, you have no business answering this question.  Plus, there is only so much you can look up while you are under the watchful eye of a car salesman.  Smartphones are great, but they're not a perfect substitute for a laptop and a cup of coffee to mull it over.

Even worse, the dealer has the option of rejecting bad offers and accepting good ones.  If some customers make unnecessarily high offers when put on the spot, this option is valuable for the dealer and costly to the customer.  Again, the dealer can just reject the unacceptable offers, so it is hard to accidentally stumble into a good deal.

Finally, the what-will-it-take-right-now tactic tends to follow closely on the heels of the dealer's framing of the negotiation.  You just heard that they're not willing to lose you over a few hundred dollars. If you haven't spent time looking up fair prices, thoughts creep into your head.  Maybe asking for $500 off will seem like a tough starting position.  Is it crazy to ask for $1,000 off?  A few hundred dollars could buy a few weeks of groceries.  

The dealer wants you to think in these terms because they've built in lots of surplus for themselves, more than a few hundred dollars.  I think they're counting on you making a mistake under pressure.

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Believe it or not, all of that is context.  This post was motivated by the fact that we recently went through the car buying process to buy a second car.  After having another car buying experience, I am glad I will not hear these phrases any time soon.

Informed by our previous buying experience, we did our due diligence.

  1. We narrowed down the make and model that interested us.  This facilitated head-to-head comparisons across dealerships.
  2. We went with a Certified Pre-Owned vehicle.  This slashed the price significantly while retaining most of the factory warranty.
  3. We used Kelly Blue Book and Autotrader to get an idea of what a fair price is before going into a negotiation.
  4. We test drove cars at multiple dealerships, and we let the salespeople know that we were doing so.
  5. We walked out of a couple of negotiations when our terms were not being met.
At the end, we were looking at a Certified Pre-Owned vehicle that was marked down $3,000 below the Kelly Blue Book price for a car of that vintage, with those options, and with the number of miles it had.  We knew that the sticker price was a good deal, but we asked for an additional discount of $1000 anyway, as a start to the negotiations.

We had also conveniently left a chicken in the oven at home, and went shopping around dinner time.  I suppose this could be a credible commitment to leaving the dealership.  Telling him about our chicken, I told him we would start negotiating the next day with $1000 less than sticker (already a good price), and I insinuated that I would commit to buying at the price the next day, but not today.  I was being fully transparent.  I was hungry and our chicken was getting dry.  I was going to come back the next day, and I would pay what I said I would pay.

The salesman must have thought of this as tough negotiating because he came back and said "What price would it take to get you to buy this right now?"  Annoyed, I slashed my offer by another $2000.  He'd have to take $2K off of a good deal for me to delay dinner.  That's not my usual reservation price on delaying dinner, but I really wanted to just pick up the negotiation the next day.  

He went back to his boss, and came back saying, "Boss says it's a no go on $2,000 off, but $750?"  He held out his hand to shake.  
"No.  Not tonight."  
He countered.  "OK, $1,000 off.  That's what you originally asked for, right?"  He held out his hand again, eagerly.
Me: "No!  I said I'd do that tomorrow, but not tonight."
Him: "So, if I go back there, and tell him that you're firm on $2,000 off, you'll do the deal if he agrees?"
Me: "That's what I'm saying."

After a few moments, the dealership agreed to this deal, and I am puzzled.  I flat-out told them I would pay $1000 more the next day, and I was being truthful.  They must not have believed me.  Even if they didn't think I was coming back, they must have (a) higher inventory costs than I thought, (b) lower turnover than I thought, or (c) both.  Regardless, we have a new-to-us car, and we got a great deal.  When our cars wear out, we may be going back to this place.  And, maybe that's the point.

4 comments:

  1. I worked on a car case this summer and found this article really enlightening about what goes on behind the scenes. The reporter went undercover and got a job as a salesman:
    http://www.edmunds.com/car-buying/confessions-of-a-car-salesman.html

    A bird in the hand is absolutely worth 2 in the bush for car salesmen. You know you're being truthful that you will come back the next day, but they have no way of knowing. If I said it, it would probably be a tactful excuse to leave, and they cannot tell us apart :)

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    1. I thought about this inability to communicate that I really was different from you, and then, I realized it wasn't in my best interest. From the article you forwarded, this is my favorite quote (so far):

      "Back to that first couple I greeted on the car lot. I don't remember much about them other than the look of fear on their faces. They didn't buy a car from me. In fact, I didn't have a real good prospect for another two days. I had plenty of people who were just looking. Or said they would be back. Or said they had a doctor's appointment. Or had to pick up their kids at school. These were typical excuses they had for escaping. But the salesmen told me to disregard all these stories that customers gave me. As they put it, "Buyers are liars.""

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  2. The last time I bought a car was a couple of years ago. I did the research on price and then estimated what I would be willing to pay in taxes, title, license, etc. In other words,I came up with a gross total amount that I told the salesman I would pay for the car. That is how I negotiated. I said I will write a check for the amount that includes everything. Made is easy for me--I knew what I would pay and did not have to worry about the escalating fees as the contract progressed, as they usually do. I just said make the numbers fit however you wanted, Mr Salesperson, I know my price. Of course I was reasonable with my offer. THE best car buying experience in my 53 years.

    Love your blog. I visit almost daily. :)

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    1. Gene -- Thanks for the note. Making an offer and credibly sticking to it is another good way to go when buying a car. Sounds like your method involves quite a bit less stress than mine. Mine was fun though :)

      Glad to have regular visitors.

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