Buying a car in the old-fashioned way is a nightmare. You step onto a dealer lot, and some guy in a cheap tie snuffs out his cigarette and intercepts you. That marks the beginning of a stressful ordeal that takes hours or days, and more often than not leaves you unhappy with the car you were once so eager to buy.
By the end of the 1990s, the Internet had changed the car-buying game – at least for those who knew how to access the information and use it. You could specify a car online, and someone from the “Internet Sales” department would call you with a price. Because you could get bids from several dealers, they couldn’t tie you up in the endless “sales manager” game of wearing you down to utter defeat, so they just gave you a pretty good price.
More recently, outfits like CarMax and TrueCar further refined that process by putting a nationwide stock of used cars together and telling you how much you can really expect to pay for a new car. On top of that, Tesla’s direct-sales model truly put fear into the heart of every car dealer in America. All of that was just phase one. And what’s next is really going to shake things up.
A new way to pay
Phase one is how traditional car dealers and automakers are responding to the innovations made possible by the Internet. Lexus is set to begin an experiment in which 12 dealerships across the United States volunteered to offer firm “no-haggle” pricing on the full line of Lexus vehicles. This has been done before, most notably by GM’s failed Saturn brand. But it’s not fair to say that fixed pricing was what killed Saturn – lackluster product did that. More recently, Mini and Tesla have both used fixed pricing with great success because they have cars that people want to buy.
Few people are good at haggling, so the fixed price really should be better than you can really get at a competing traditional dealership.
Lexus’ Group Vice President and General Manager Jeff Bracken recently said, “While negotiation-free pricing is not revolutionary, we strongly believe the concept will further elevate transaction transparency and customer care.”
From the customer perspective, there are two big wins with fixed pricing, and Bracken hits them both. First, you know what you’re going to pay, and you can decide without pressure whether the price meets your wallet. Second, because the dealer can’t make an extra buck by screwing you, you’re likely to get a better customer experience overall. In fact, the dealer will have every incentive to make you happy so you’ll come back for service and your next car.
But in order for fixed pricing to work, the price you pay at a fixed-price dealer has to be at least equal to the price you can get if you know how to work a traditional sales process. Few people are good at haggling, so the fixed price really should be better than you can really get at a competing traditional dealership.
Lexus will be emulating a Scion tactic called “Pure Price” to get close to true fixed pricing, but dealers may still set a price that differs from the car’s sticker price. That means the dreaded “Market Adjustment” premium can still be part of the Lexus or Scion buying experience. Simply put, if there’s a popular car in a big market, the dealer can still demand a higher price, giving you every incentive to shop around. That creates new opportunities for Internet-savvy dealers to make a play for your business.
What Comes Next?
Max Zanan is the co-founder and CEO of IDDS Group, an automotive dealership consulting company. He spends his days helping auto dealers navigate the modern world of online-oriented car sales.
“The market economy will prevail and market forces will adjust the price. It’s not whether dealers welcome it or not, it’s whether they’re willing to adjust with the times,” Zanan says.
Innovation has come first and hardest to the rough-and-tumble used car market.
“If successful, these companies could take away the lion’s share of used car business from new car dealers.”
“There are several companies such as beepi.com and vroom.com that are changing the way we buy used used cars,” Zanan says. “You don’t have to go to a dealership. You can complete the entire transaction online and have the car delivered to your house. If you’re not happy, you can return the car.”
Each service handles things a little differently. Beepi advertises itself as a peer-to-peer marketplace – essentially acting as a broker for your private party deal, but adding inspections and a warranty to sweeten the pot. In exchange for that, they take the difference between the seller’s price and the buyer’s price – just like a used car dealer.
Vroom works a bit more like CarMax – they have the cars, and they’ll sell you a car and take your trade-in. But unlike CarMax, they don’t have a big dealership you can walk through – it’s all online and they deliver the car to you, with the delivery charge baked into the purchase price.
“If successful, these companies could take away the lion’s share of used car business from new car dealers. A lot of income for new car dealers comes from selling used cars, and they may not survive without that, unless they become competitive in terms of the price and the sales process,” Zanan says.
Heeding Zanan’s advice, traditional dealers are retooling to meet the challenge.
“Progressive dealers will find a way to adjust to the times and change their business practices,” Zanan says. “One of our clients is among the largest Chrysler dealers in the Northeast, and they started a program where they’ll guarantee a test drive and deliver a car to the customer’s house within 45 minutes within a 20-mile radius of the dealership.”
But the changes necessary for a traditional auto dealer to compete with innovations happening online go deeper than convenient test-drives.
“They need to retrain sales staff. They need to understand that certain sales tactics that were effective yesterday might not be successful in this environment. It’s not limited to a particular generation – everyone uses technology,” Zanan says.
So what’s the bottom line? Competition to bring you the car you want at a better price and with less stress is driving innovation throughout the automobile industry. More efficient competition to buy your old car and sell you the next car is going to give you better prices at both ends of the transaction. That’s good news no matter how you choose to buy.
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