Do you agree that fixed pricing will eventually overtake the auto industry? The following is an except from my new book, Sales Integration:
With transparency into market prices, negotiating does not make as much sense as it once did. Posting a higher starting price, rather than an aggressive offer price, results in fewer shoppers contacting the store. Shoppers carry the market prices around with them in their internet-enabled phones, so the switching cost is lower than it was. As more and more merchants move to an aggressive one-price approach, the consumer has greater knowledge of their options. For competing stores leaving themselves a margin for negotiations, the result is less traffic to the store and tougher negotiations with those who do come.
There is a tipping point in any community. When enough stores begin posting their best price online, every store needs to do it. Within the auto industry, the St. Paul-Minneapolis market is quickly reaching that point. Those dealers who do it first and focus their branding advertising around this positioning have a sustained competitive advantage. From a purely economic perspective, it is clear that price discrimination is eventually on its way out in any industry where inventory prices are commonly posted online.
This movement toward putting the best price up front would be moving even faster if dealers knew the consequences. Most auto dealers are not economists, and they have little transparency into the impact of switching pricing strategies. Worse yet, many dealers report taking an initial loss through the transition period. More than one dealer has switched to a one-price operation, switched back, and then discovered they needed to switch again.
Selling cars is about making money, improving deals.Now things are changing. See example of Toyota one price stores.http://www.onetoyotaofoakland.com/ .Please note I am not promoting any store.Dealership has to make some policy that even after this one price Salespersons/internet managers should be able to make their living.More stores will be posting prices on websites.Technology has changed everything Car business has no exception.
Ali khan
Dealers solutions.
Great discussion!
A couple of considerations...
You have to be in the first five in a low-to-high price sort on AutoTrader or Cars.com search results page (SRP). That is the "market price". So the parameters that these sites ask consumers to enter have much to do with how much you can charge. For example, if all the consumer has to enter is Toyota Corolla, then your Corolla LE is going to get compared to everyone else's Corolla CE and you will lose plenty of eyeballs. Now that just about everyone is publishing a price with their listing and consumers are sorting results based on price, the dealer community should be demanding that AutoTrader and Cars.com require or at least encourage a tighter search criteria. If you advertise a 2005 Corolla XRS with 45,000 miles on AutoTrader for $10,500, you'll be on the seventh page of the search results behind all of the 2005 Corolla CEs with 80,000 miles offered for $7,500.
Once you are in the game (first five on a low-to-high price sort on AutoTrader or Cars.com), then you also need to merchandize your inventory better than your competition. The video walk around and a Carfax report linked to the search result will vastly improve your turn. AutoTrader and Cars.com research confirm that the online listings that are "fully merchandized" get many more click-throughs to the vehicle details pages and many more leads submitted. It's amazing that some dealers still spend hundreds of man hours and thousands of dollars merchandizing their vehicles on the lot for 50 walk-up customers and completely neglect to merchandize those same vehicles online for the 1000's who are looking at them on the web.
Also add in the fact that even with a great price on your vehicle and if you were comparing apples to apples AutoTrader will bury your great priced cars 3 or four pages deep unless you are paying for a premium AutoTrader package. All the premium customers get their cars listed first then the other packages trickle down from there.
Wow Dennis, very well said! Ive got lots of thoughts swimming through my head. (My mind map at the moment would look like your spaghetti process graph from last years DSES :-) )
However, Ill stick to two points on my mind:
1. I do not think fixed pricing and market pricing are the same thing. What I mean is that I think dealers will go towards a market pricing, perhaps with a small amount of negotiation room (perhaps a couple hundred dollars) but the fixed pricing will not come from the OEM or be nation wide or be "Absolute". In other words there is a difference between negotiation stores who price their cars on the market, and one price dealerships who have fixed pricing. Am I off base? How would you define the two?
Anyhow... depending on how you define it, yes, I think the market is moving towards a commodity type price model where dealers MUST price their cars on the money. I do believe each dealer will determine where to place their price in the market, depending on their market and value prop.
2. Price compression and commoditization of products is not new... it just may be new to car dealers. When this happens firms compete on two fronts, because price becomes a mute point. Firms learn to compete on service, and marketing. In other words, its what story you have to tell, and how you tell it to connect with your customers.
To succeed in that market, dealers need to defined their internal culture well, and then find innovative ways to tell the world why they are different. The same old stuff will be ignored...
super thought provoking Dennis. I think ill organize my thoughts and write a whole post on this soon. Very inspiring.
I work in a bottom line price store and I lose deals to negotiating stores. I don't know if you can ever completely rule out negotiation because someone will always sell a car for less.
Don't get me wrong, I like selling this way. But I think it works because the other dealerships negotiate and we are different.
@Jared You have the right idea. Together maybe we can make some clear definitions. We all know what a fixed-price or one-price policy is. Market pricing can be a price close to the dealer's walk-away point, but with a bit of room for negotiations. It can also mean the broader category of market pricing policies, including a fixed-price strategy. From an economics standpoint, leaving just a little negotiating room might best be described as a low-ZOPA (Zone of Possible Agreement) policy. However, I'm not sure that is going to catch on with dealers. I'm eager to hear suggestions. For now, I'll stick with it.
There are two problems with a low-ZOPA strategy once a significant number of dealers adapt a fixed-price strategy. One is that the dealer is disadvantaged in online listings. If I list my vehicles at the lowest price I'm willing to sell them at, I'm more competitive online than if I leave some room for negotiations. The second is that the fixed-price dealers can brand themselves as such and I can't. Fixed-price dealers will try to differentiate themselves from low-ZOPA dealers and make the latter look like old-school negotiators. This may not seem fair, but playing on consumer fears when contrasting your store to others is an old tactic that is not going to fade away.
@Michael Good point. There are several strategies for how to price within a fixed-price policy. I'll write more on that in the future. For now, know that in a competitive market with pricing transparency every dealer should lose deals some of the time. Both examples have to do with inventory asymmetries between dealers serving different but overlapping markets. There are times when your vehicle has a slight disadvantage in configuration. There are other times when the customer wants a yellow one and you are down to your last yellow one while your competitor has nine. Your opportunity cost is higher than your competitors is, so his walk-away point should be lower than yours. No shame in getting beat when this happens, and it will happen whether you have a fixed-price or low-ZOPA policy.
The evolution probably looks like a massive shift to market pricing using one policy or the other. From there, I think fixed-pricing wins out as consumers increasingly rely on technological interactions. Whether I'm right or wrong about the second phase, the greatest source of competitive advantage will have to do with better demonstrating the value of buying from you (back to Jared's point).
@Dennis,
I think you're spot on here. My feeling is whether we want it or not the availability of information is going to make it progressively more difficult for a dealer to make gross. The opportunities will become less and less until eventually market pricing will rule the day.
I have had first hand experience with one of the innovators of one-price selling about 12+ years ago and safe to say at that time it was a foray into an unknown land. Salespeople had to believe in it first. (Some couldn't and they left the dealerships). From a consumer standpoint, they also had to be educated and sold on the one-price concept. The car business has been the poster child for the term "negotiation" since the first dealership was created. The internet and access to information certainly chaned that, but many dealers still feel like if they don't get into a negotiation, something is missing from their process. I believe that most consumers appreciate one price (side note- I feel the term "fixed-price" sounds too close to "price fixing" to me :\) once they understand it, and of course, assuming the price is right for that market.
We also have a national client that sells boats under a one-price philosophy. In a turbulent market (you think auto has had a rough go??), this client is outperforming their competitors by a significant margin.
One final comment- if you ARE going to be one price, the BE one price. Know when to say NO and you will see better grosses overall in the long run.
Unfortunately, Dennis is right. The Internet has given such an advantage to the consumer as to make negotiation counterproductive in a general sense. There will always be negotiation is the auto business but the classic "desking" scenario is dead except in a few domestic stores in rural areas. It pains me to have to acknowledge this.
What this means is yet to be completely determined, but one thing is clear! Efforts by manufacturers to compel dealers to spend more on their facility is denying the current trend. In the near term, this business will be all about cost control. On the pre-owned side, those who employ technology to identify the vehicles they should stock and where to buy them will flourish.
I also worked with an organization that delved into one-price selling back in the late '90s. After a rocky start (tough to break those paradigms), the program became an extraordinary success. There were some unusual circumstances - the group owned 6 out of the 7 Nissan stores in the market area - but I believe the success was attributed to doing it right.
Many of the "old timers" ran off to work at the 7th dealer, because after all, the only dealership willing to negotiate in a market where a big dealer group ran a "one-price monopoly" would be in a great position, right? After all, customers love to negotiate, don't they?
It didn't work out that way. Our dealer group consistently had between 90 and 95% of the market penetration.
The naysayers claimed that only reason why it worked was because the dealer group effectively "owned their market" and the "other" dealer couldn't compete (insufficient inventory, etc.). I don't agree. The 7th dealership was owned by a well-established, extremely successful dealer with deep pockets. Nissan certainly would have supplied him with the vehicles necessary to satisfy increased customer demand (that was back in the day when Nissan almost went belly-up and needed Renault to save their bacon).
So why was this one-price experiment so successful? Here's my take on it:
The dealer invested in massive training, on-going staff development and committed to an absolute culture change. If long-standing, high-producing employees refused to get on board, they were politely kissed goodby.
Along with the one-price strategy, the dealer developed an extremely customer-centic sales process. Every salesperson had a computer on their desk that shared all of the information with the customer including the value price, discounts/rebates, fees, available accessories/F&I adds, payments, etc. No BS, WYSIWYG. In addition, the trade-in process was well-developed and transparent - the appraiser drove the trade with the customer then presented an offer to purchase with KBB printouts, recon estimates and a common-sense explanation of how they arrived at the figure.
The sales staff was extensively trained on HOW TO BUILD VALUE - in the vehicle, in the dealership, in the process, and in themselves. They couldn't negotiate, so they had to learn how to sell - what a concept!
Again, it took some time to get the system up and running, but once most people were on-board, we started to rock. It got to the point where we happily invited stubborn customers to go visit our competitor (the 7th "negotiating" dealer) and come back and see us if they didn't like the experience. Needless to say, most of them returned to us and purchased.
In my opinion, one-price selling can work extraordinarily well if it is done right. Most customers don't like to negotiate, they just want to feel like they were treated fairly. We need to teach value-selling instead of old-school shell games.
Interestingly enough, I work in the internet department of a dealership in the Twin Cities, where we negotiate prices. When a customer calls in and asks if we're a "one price store" I say "No, we're a BEST price store". Consumers are smart enough to call other dealerships no matter what the "Best Price" at a no negotiation dealer is. They tell me what it takes to earn their business. Then we beat it. Often times by a tiny amount and the credibility of the 'one price' store is shot when the customer ends up calling them back to see if they'll go even lower and they negotiate beyond their one price.
Unfortunately it turns into a 'Who's willing to bleed more' for the deal situation. You hope you have the car the customer really wants in stock, you tell the customer how great the cookies and coffee are at your dealership, scrapping, clawing, to get a $100 mini for your sales guy. It's rare when a car doesn't go out below invoice anymore.
It looks to me like every store negotiates no matter what they put on the internet.
One price car buying will never overtake the automobile industry as a whole. There will always be one dealer that will "offer" a better deal to the customer to keep them from "thinking about it", or ensure that their customer won't go somewhere else and shop. -AND- Any self respecting TRUE salesperson will NOT work for one of these dealers who cuts their paycheck, they will go work for the dealer that will let them EARN their paycheck.
Plus-no matter what a customer tells you, they want to feel like they got the "best deal". That won't happen when you say, "here you go, this is the best we can do".
For the job security of every Good/Great Salesperson, I hope this NEVER happens! If the auto industry goes to one price system, that's when commission will be replaced with hourly wages... and anybody can come in and "sell" a car.
Dan - I disagree. When everyone goes to one-price then only the salesperson who can build value in themselves and their dealership will succeed.
I have worked in a one-price scenario, and I think what made it work was were the only dealer in the area doing it. We could take the "high road" and that appealed to a niche market. Consequently we did very well. That was 10 years ago.
@Dan makes a good point when he said customers want to get the best deal. Its a buyer's market now. They have the information and dealers are really struggling to make some gross. Whether we like it or not the industry will have to move to market pricing. It may not be a fixed price structure but it will need to be transparent.
From what we're seeing at CarWoo! the answer is market pricing will survive. Here is why...
On CarWoo! we've built a completely transparent marketplace for buyers and dealers to work out a deal. All dealers can see the price point other dealers are offering our buyers so they know exactly where to price their vehicle. Great for buyers and surprisingly great for dealers. We hear time and time again from our dealers that "I don't want to lose a deal by $50 and now I know if that's happening."
Also, almost 60% of the time we see deals that transact that are NOT the lowest price. There are so many variables involved in a car deal... relationships still matter, dealers who treat buyers the right way and are responsive don't have to be the lowest price AND there is a breaking point in price where distance to the dealership matters as well. Dealers closer in distance to a buyer don't have to price as aggressively as consumers still like the convenience of a relationship with their local dealer. These are facts we are seeing every day on CarWoo!
Another fact that really highlights the issues with one-price. We have plenty of Scion dealers using CarWoo! As you know, Scion is a single fixed price product and Scion dealers can not adjust lower their prices. In theory this sounds great, but in reality we have seen many Scion deals that have transacted below listed price.
It's a classic prisoners dilemma. To break a one-price model, all it takes is one dealer willing to break the rule and it falls apart. Because there are so many dealerships, competition amongst them is a requirement. The only way we see one-price as a ubiquitous model is if manufacturers start selling cars directly to buyers. This won't happen and it's in no one's best interest to see that happening.
Woo!
I will offer that it has never been all about price in the first place. It's about customer experience.
The dealers who are committed to offering a transparent and positive sales experience will win, regardless of the pricing strategy they use.
Our On-line Negotiation dealers are not losing a dollar of gross, while offering their customers a great experience. Customers actually LIKE to negotiation as long as they can do it online.
Dennis,
Great topic with plenty of room for debate.
I'm obviously biased when it comes to a one-price, no-negotiation buying environment - the high volume/low-margin model can work.
It's a bit difficult for a traditional dealership to convert to this type of model. A large multi-rooftop group in one of our markets just tried to make the transition. They have been a local leader for 2 decades - but the perception is still that a buyer can come in and negotiate. Creating that culture will take time for the traditional dealers.
We created that environment from day 1. That was the rule, no exceptions.
Do the buyers enjoy it? Yes. A lot.
Does it work? Yes. We sold the most used units in the country in '09.
@David - Yes, we are...have been since the beginning & wouldn't have it any other way.
There is market pricing today, regardless of whether a dealer negotiates or not. Every desk manager knows how low he will go on each vehicle. The only question is whether the customer can negotiate hard enough to get there.
With grosses continuing to shrink, dealers have to find ways to take cost out of the sales process. We have done a lot of research and the average store has one person (manager, closer, F&I) for every 2.3 sales people!
When the process is negotiation-free, the desking time is greatly reduced, the store needs less managers, and the sales person can sell more cars. Costs to sell a vehicle are dramatically reduced. An added benefit is that you can attract people who would never normally consider selling cars (Gen Y and women).
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