Pricing That New Car: Just a Numbers Game?
If a new car is part of the American dream, shopping for it can be a nightmare.
“It’s not like coming in and buying something off the shelf,” explains General Motors spokesman Dave Hudgens in Detroit. “It’s a trading sort of business.” Moreover, he says, “there’s evidence that a lot of customers like the bargaining atmosphere. They feel they have a better chance of getting a good deal.”
In fact, some hate it. Going in, they only know that they shouldn’t pay the first price asked, and coming out, one sympathetic car salesman says, “they don’t really know whether they got a good deal.”
It all starts with the “sticker price” on the car window. This is actually only a “manufacturer’s suggested retail price,” and “the word suggested is the key word,” says Ford spokesman David Krupp in Detroit. Car dealers are independent businessmen and each charges what he wants, Krupp says, “taking into account his overhead, the size of his dealership, his profit objectives.”
The sticker is thus only a start: “Every deal stands on its own; we negotiate from list price,” says Scott Young, owner of Crossroads Mazda in North Hollywood. For the consumer, it’s also the ultimate reference, as in, “the sticker price was $12,800 but we got it for $9-something!”
Not Always Explained
The manufacturer’s suggestion isn’t even the highest possible retail price. Cars may bear a second sticker with the “Dealer’s Suggested Retail Price.” Often higher by $1,000 or more, it may cite “preparation” fees (beyond those already paid for by the manufacturer) or some mandatory “option,” such as a $700 “hand-polished” glaze, or, more often, is simply unexplained.
Originally added only on cars in great demand and short supply, such gratuitous premiums may now be thrown on everything and quickly thrown off: “People like to think they’re getting a discount,” one young salesman says, “so you add on something to take off. Anyone with any sense can see it’s just a numbers game.”
If sticker is the top price, “factory invoice” is assumed to be the bottom, the dealer’s own cost for the car--an assumption fostered by offers such as “$99 OVER INVOICE!” or “Tell you what: I’ll give it to you for $500 over invoice!” Obviously, anyone knowing the dealer’s cost can negotiate harder and, to this end, savvy consumers are marching into dealerships with the Consumer Reports annual auto issue under an arm, equipped to figure out the invoice cost (usually between 83% and 90% of sticker price). Thus they’d find that a sedan with a $15,144 sticker price, excluding destination charge, should have cost the dealer $12,876.
But “invoice” and dealer cost, while “essentially” the same, in Hudgens’ words, may not be synonymous, as one might guess from ads pricing cars as much as $250 below invoice--an offer too good to believe if “invoice” were the dealer’s cost. Indeed, dealers may have a further margin, “more room to deal,” as they say. Particularly on domestic cars, there are often “holdbacks”--an inscrutable tradition in which money (usually 2% or 3% of sticker price) is given back by the manufacturer at the end of specified sales periods. There may also be up-front dollar bonuses from the factory for selling particular models and an advertising allowance as well.
It’s No Guarantee
Alpha Pontiac in Los Angeles, for example, recently offered Pontiac Fieros for $200 below factory invoice and left the complete invoices “right on the car,” sales manager Dan Daeley says, to prove “it was a heck of a deal.” In one weekend, the promotion sold 26 Fieros, with a list price of $13,939, invoice total of $12,426.44 and holdback of $408.57--all fully disclosed. Alpha’s cost was thus $12,017.87: the customer’s “$200 below invoice”--$12,226.44--was thus close, but not an outright loss for the dealer.
Knowing the dealer’s actual cost and profit still doesn’t guarantee the consumer a low price: Some prices simply aren’t negotiable. “There are list-price cars,” Young says. “Someone may offer you $200 over invoice on a hot car in short supply, but you don’t have to sell it at that. They may actually be getting a fabulous deal at list price.”
They are if other dealers are charging above list, adding a premium “to get as much as they can on each car,” says Young, who makes an advertising point of never charging over list. “You can hold out for more gross profit per car, or you can sell on volume,” he says, “and win repeat customers.”
This is called competition, and “the consumer benefits from competition,” Hudgens says. But between the two extremes of advertised prices are all the deals that must be individually negotiated, even haggled out--a very different kind of competition and worth questioning. Couldn’t dealers just decide their best price on each model and give it to everyone equally, instead of making consumers compete with each other for the dealer’s lowest price?
