Absolute price transparency is turning auto retailing on its head.
“Transparency” is the new buzz word in auto retailing. Let’s look at the word’s various meanings and economic implications.
Legal transparency is absolute. It is what it is. There is no wiggle room. Dealers should follow both the letter and spirit of the law, period.
Transparency in customer negotiations is relative. Perception plays a large role. Consumers typically think there is such a thing as a “best price.” They will never be convinced that there is no such thing.
Consumers feel entitled to know what that enigmatic best price is so they can use it to shop for a better price. If a dealer doesn’t cooperate, consumers are capable of becoming upset and showing it on satisfaction surveys and social-media rating websites.
Of course, they can also leave any dealership that doesn’t give them exactly what they want and go to another one.
The Internet has exacerbated the consumer’s search for the best price, a pursuit that has existed for decades. Economists call this “price discovery.”
The history of auto retailing is littered with people who wanted to provide a single best price. They provided a quote, tried to give a world-class product presentation, killed the consumer with kindness, buried them with information and waited for them to buy.
They only thing that might please consumers more is for dealers to bid against each other for their business in the proverbial race to the bottom.
Some dealers are more artful than others at negotiation. Consumers have never had the cards more stacked in their favor. Yet, surveys indicate they increasingly are dissatisfied with the negotiation process.
Vendors are lined up to help dealers do a better job of giving away gross profit in a never-ending effort to please consumers and provide transparency.
As said, there is no so-called best price in negotiation. If neither party gets their feathers ruffled somewhere along the way, someone left money on the table. Buying a vehicle is like buying real estate, except there is far more transparency in buying a vehicle that in buying a house.
How many vendors, promising to interject more transparency into our sales processes, have ever owned and operated an actual dealership, let alone made a daily living selling cars on commission while looking consumers in the eye?
Many are Silicon Valley-types out to make their fortune or add to existing fortunes by saving the world from both real and imagined problems.
Some of their dubious ventures have even sold vehicles at a loss to help consumers avoid the “dealership experience.” Buy low, sell lower. That’s a recipe for success?
Dealers need about 10% on the sale of a new vehicle. That’s about $3,000. It can come from front-end and back-end gross profit, but that’s about the average.
If a dealer lets a particular consumer negotiate a deal for $2,000 gross profit, the next car buyer might have to pay $4,000 to bring the average back up.
Or perhaps we should all get together and set the margin at 10%. Surely consumers would be happy to all pay the same, right? Isn’t that what they want? But then there’s that annoying impediment called “jail time” standing in the way of price-setting like that.
Dealers have always been free to provide as much transparency as they think they should to attract consumers.
Consumers overwhelming say they dislike negotiating for a car. In the case of some dealerships, that is understandable. Dealers who churn their sales and sales management staffs tend to have the worst sales processes and the most bruised customers.
But otherwise what consumers really dislike about negotiations is the lack of a guarantee they will “win,” however “winning” is defined.
Perhaps gross profit shouldn’t be the objective? Perhaps we should be completely transparent, disclose absolute triple-net cost and negotiate the margin? Would that satisfy consumers? Would that produce the gross profit necessary to survive?
Previous attempts at operating dealerships on happiness and volume haven’t lasted long. The fantasy of many dealers is to wake up one day and to learn all competitors have gone to absolute transparency as a business model.
Our job as sales people is not necessarily to give consumers what they want, but to make them like what we give them. The customer is not always right. Unreasonable people who want us to sell cars at a loss are wrong.
Consumers can find another dealership more quickly than a dealer can find another customer. Consumers are free to shop until someone satisfies them. But shopping takes time and effort, which they resent. Yet, they don’t carp about transparency when they buy furniture, jewelry or groceries.
Car deals are complex. Trades need to be taken. Financing often needs to be arranged. Only about 28% of consumers are potentially fast-trackable with a credit score of 720 or higher.
Of that, about 5% have a debt-to-income ratio that makes them a ticking credit time bomb. Getting them financed might be an issue. In the remaining 23%, we find some the most analytical and ruthless of buyers.
Despite the desires of the millennials, who are supposed to be using the Internet to drive the new transparency movement, their credit scores and disposable income can be dismal.
Many of them still are trying to pay off college loans and purchase first homes. Some still are a threat to move back in with their parents.
They might have $500 available on a credit card to buy a flat screen TV or computer online, but most aren’t auto credit fast-trackers. Selling them a car and helping them obtain financing often involves additional time, effort and strategies. Dealers frequently obtain financing for consumers who can’t get it on their own.
So why are millennial consumers polled as if they are running the world? We’re selling cars, not $300 electronic gadgets. Among other things, dealers need to provide post-delivery warranty service, unless someone figures out an imaginative way to transport a vehicle back to the auto maker.
Absolute transparency for consumers in the sales process isn’t practical. Most dealers don’t provide that level of transparency to their own employees. Most employers in general don’t. It would be like showing your poker hand before everyone places their bets.
Here are the economic realities of absolute transparency. When buyers and sellers both have identical information, an “efficient market” exists, and the product becomes a commodity.
An efficient market can lead to disintermediation, an economics term dealers need to become familiar with.
In short, disintermediation is cutting out the middleman. Companies deal with customer directly, via the Internet for example.
It lowers costs. It also reduces available services. Disintermediation initiated by consumers often is the result of high transparency, in that buyers know supply prices direct from the manufacturer.
In disintermediation, buyers bypassing the middlemen may pay less – until manufacturers become free to raise prices without having to worry about bothersome competition.
Dealers currently are protected by state franchise laws that prevent direct sales like that, but a dealer rendered insolvent by transparency in the market is not helped much by those statutes.
Consumers should be careful of what the wish for. They might benefit from transparency for a short time until the franchise dealer system, which is fueled by competition, disappears and is replaced by a direct-from-the-OEM business model.
In the current system, dealers are barred from price fixing. In the other model, manufacturers can charge whatever they want.
If they have a hot car, why wouldn’t they charge market price? Or consumers could bid for them. I’m sure that would be a hit.
Once a product becomes a commodity, it becomes subject to the volatile swings of the market. I’m pretty sure consumers would complain about that, too.
With dealers potentially eliminated by the efficient market and disintermediation, the OEMs would have to figure out how to finance massive amounts of inventory and set up a network of sales and service centers.
Previous auto maker efforts to own all the sales and service outlets in particular markets have failed miserably, in particular theCollection in Tulsa, Oklahoma City, Indianapolis and Salt Lake City.
These operations used one-price discounting, giving away gross profit before consumers even asked for it. It was an attempt to mollify the consumer and earn trust.
Instead, shoppers took the best prices to competitors just outside theCollection markets, where they bought a vehicle for an even better best price.
Here is a message for dealers who believe consumers either are reasonable or smart enough to understand the costs that have to be subtracted from vehicle gross profit before reaching the bottom line, and who think consumers can be entrusted with making decisions that ensure dealer survival and return on investment:
Be as transparent as you think you need to be to satisfy those shoppers.
But the rest of us should give utter transparency a rest and get back to the business of salesmanship. A good deal is a state of mind, not an absolute.
David Ruggles is an auto consultant and former dealership general manager. He can be reached at Ruggles@msn.com.