CAR BUYING TIPS: Negotiating the Best Deal in December
Five tips to be a creative negotiator
At the start of the pandemic, there was a glut of inventory paired with low-interest rates. The car business experienced multiple consecutive record-breaking months as car buyers were undeterred by a life-threatening virus. In quarter three of 2021, car manufacturers began to see early signs of trouble. Production lines slowed down due to chip availability, and a constrained labor force meant that quarterly sales goals were not to be achieved. Car buyers were met with unreasonable offers. Either pay inflated pricing, wait months for a new car, or spend a couple of thousand dollars less for a car that was four years older. (Read that again.)
At the end of 2022, what leverage do car buyers have with better inventory choices but higher interest rates? Buckle up, and let's uncover some tried and proven negotiation tactics where buyers can still get great deals.
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December: End of the Month, Quarter, and Year
December is traditionally a very popular month for car sales across the globe. In the biggest car market, USA, car sales typically exceed 1 million units for new cars, while in smaller economic countries like the Czech Republic, new car sales eclipse 15K units.
Source: Marklines.com | Link
Regardless if it's a new or used car, the pricing economics is the same. There are three primary core prices -- the source, the selling, and the profit or loss. The price attributed to the source means the manufacturer, dealer, or in the case of a private party transaction, then the current owner. Sources incur a variety of costs that are passed through to the buyer. For instance, a manufacturer not only charges a car dealer the price to produce the vehicle, but there is also a destination charge -- essentially a transportation fee -- assessed to the dealer. Likewise, when a dealer accepts a car as a trade-in from a customer, there is the cost to acquire the car plus the cost to restore the car -- maintenance, cleaning, advertising, etc.
After the source's cost is finalized, the selling price is determined. New car manufacturers determine the selling price, known as the MSRP or manufacturer's selling retail price, based on a complex pricing model that considers all stakeholders -- shareholders, employees, and communities. In contrast, the selling price for used cars from the source of the car dealership is much simpler. With advanced digital tools, dealers price used cars "according to the market." The market can be a nebulous person, place, or thing, but it is transparent. This transparency is what all car buyers desire since they do not want to get screwed by overpaying for a car. For example, a used 2020 Audi A5 Sportback with 10K miles should be priced near the same by competing dealers.
What if the price varies?
If there is a variation in price for the same car at rival dealerships, then the price differences can be attributed to three reasons. First, there are differences in options and conditions. Second, the cost to acquire is substantially different. Third and not as common, the dealer believes there is something so unique about their car that it deserves a higher price.
After the selling price is determined, the profit or loss comes next. The business model of car dealerships is complex and significant. In 2021, US car dealers sold USD $1.2 trillion worth of new and used cars. You don't sell this much revenue without help from other major players like the manufacturers and the government. Also, you don't sell $1.2 trillion in products without taking a few losses.
It is unbelievable to consumers when they hear the phrase, "we are losing money to sell you this car." Assuming the salesperson is telling the truth, then this can absolutely be a true statement. In unit economics, the value of a single item or unit can be extracted from the entire business operation. If one new car sale generates $3,000 in profit, then 1,000 sales equal $3 million in profit. But what if the new car manufacturer is content with $2.5 million in profit? Then, there is $500,000 of room to simply sell units and not worry about profit.
So a dealer may sell a car below MSRP but above the cost and still make a tiny profit. Or a dealer may sell the car below the cost in order to "move the unit." Why would a dealer lose money to move a unit?
The answer isn't sexy or complex. It's simply a business decision that fulfills any of the following criteria: 1) moving the unit at a loss still means earning a customer who may spend money servicing the car in the future at the dealership; 2) moving the unit at a loss may qualify the dealership for a bigger incentive that is paid by the manufacturer; or 3) moving the unit at a loss is an advertising strategy that brings in more customers.
Best Tips to Negotiate on a Car Deal
Let's briefly review macro conditions to negotiate the best deal on a new or used car. First, dealers have better inventory options which mean buyers have better choices. Second, rising interest rates are a filter to disqualify many buyers from entering the market. If a buyer knowingly pays a high-interest rate, then that's a good indicator of a serious buyer. Third, unit economics means that there is room to negotiate, but buyers need to be creative about where to find those opportunities. Combine all of these factors, and here are my top five tips for negotiating a car deal.
#5 Use the leverage of being a serious buyer. A serious buyer doesn't ask for a deal on the phone. A serious buyer is in the store checking out the car and ensuring that this car is one of a handful that will be purchased by whoever provides the best deal to you. If you are to inquire and negotiate on the phone, a serious buyer asks a million questions about the car before they discuss the price. If you are convincing, the dealer will offer some deal or incentive to buy from them, not another dealer.
#4 Negotiate based on the condition of the car. In light of market pricing transparency (see above), many dealers offer no-haggle prices because they apply data and analytics to price their cars competitively. This is especially the case for used cars. For example, a dealer will show you 20 cars within a 30-mile radius priced higher than theirs. When buyers are presented with this data, they are often left speechless and have to beg for a deal because they are not able to outsmart the dealer. With used cars, no two are the same. While buyers may not be able to negotiate on the actual price, negotiating on the car's condition will give you the upper hand. Missing carpet floor mats, filthy black exhaust tips, sticky buttons, or curb rash are a few conditions that change the price of the car. If a buyer can't negotiate a price discount, then asking the dealer to pay to fix the car's condition is a clever way to negotiate the price.
#3 Upcoming service appointment. Buyer, beware of the following service appointment for a used car. A buyer may purchase a car in December, forking out thousands and thousands of dollars; in February, maintenance needs to be completed worth another thousand dollars. Before buying a used car, double and triple-check when the next maintenance is. If the maintenance is due within a few months, then asking the dealer to pay for it would make or break the deal for you.
#2 Merchandise and gear. Buyers feel great knowing that they are getting a new car. Especially if there is no discount on the price, then unit economics tells us there is still profit to be made. One clever way for a buyer to feel extra special about their purchase is to obtain a new t-shirt, sweatshirt, coffee mug, keychain, hat, or any other cool merchandise. Asking the dealer to include the merchandise in the deal can get the buyer some new, cool swag.
#1 Customer experience. It is a simple fact that the definition of a dealer is someone who makes a deal. Even when the buyer pays the full sticker price of the car, asking for personalized touches is nothing to be shy about. A popular request amongst buyers is to ask for home delivery. This process eliminates the needless and countless hours spent at a dealership, and instead, the buyer can wait at home until their car is delivered. If the buyer uses a credit card, dealers will apply a cap to how much can be used because of the hefty fees that dealers must pay. But kindly asking the dealer to accept a larger down payment on your credit card will be another boost in credit card points earned.
Do not show fear, and do not tremble when asking for a deal. You have worked hard for your money and should not be so willing to part with it so easily. Happy car shopping, and enjoy the ride!