The Slow but Certain Death of Negotiated Pricing

Dennis Galbraith
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.
Jared Hamilton
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.
Michael Midgley
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.
Dennis Galbraith
@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).
Bart Wilson
@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.
Jeff Scherer
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.

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