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      08-13-2010, 10:52 AM   #25
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Drives: BMW 335i - Coupe
Join Date: Jun 2009
Location: Washington, DC

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Originally Posted by jferrell View Post
Man is it ironic I read this thread today, a guy I've followed up with months just send me this.

"My justification for the price - I have an offer of $250 over invoice for an order/PCD from an out of state dealer. Since this creates some hassles Id much rather work with a local dealer, plus its only fair to give you a chance to match what he can do."

Match 250 over invoice? Wow thanks for the opportunity, so now I'm invested because I've spent so much time and have to go beg my sales manager to sell the car at 250 over invoice otherwise I've wasted my time for nothing and some guy in some other state gets a flat for 30 minutes of paperwork, he'll never even see this guy.
You can't honestly think that a buyer should pay more than the lowest price they can negotiate? It sounds clear to me that your customer
  • Seems to understand how the car business works
  • Doesn't see the value in buying from you store as opposed to a different store
Ultimately, for you, it comes down to whether you want to deliver the car or let some other salesman do it. For the dealership's owner, it's a matter of whether there is profit in the sale at that price or not.

For potential buyers of cars who don't fully understand car business economics, here's some background and real facts that you can use to negotiate the best price on a car. Yes, if you are successful at this, you'll screw the salesperson's commission, but as a buyer, it's your job to minimize the price you pay.

Given the nature of the car business -- profit from the sale of the car minus cost to put the car on the lot/floor (floorplan) minus commission = dealer gross profit -- the customer's best negotiating position is obtained by separating the salesperson's objectives from the dealer's objectives. The reason for this is simple, and I'll explain it in just a bit.

Like all retailers, for car dealers there is a strategic continuum on which profit can be earned. At one end, they can seek to make money by selling large quantities of product at lower prices. At the other end they can sell less product at higher prices. Like all retailers, dealers maximize profit (from car sales rather than profit from providing car service.) by finding the right balance between those two extremes. Additionally, dealers are motivated (by the car company or the finance company) to move higher volumes because it improves the dealers negotiating position with the car/finance company as goes the cost paid to obtain vehicles and as goes the dealer's priority rating in getting vehicles. The reason for this is also because loans (to businesses) work on the same continuum; therefore volume matters also to lenders.

Thus ordering a car usually puts the customer in the best negotiating position because the customer is haggling price over a vehicle in which the dealer's objectives -- profit, borrowing leverage, and priority -- are met, and the salesperson's objectives are superseded by those of the dealership. Exceptions to this rule are, for example, cases such as when there is so much floorplan invested in a vehicle that the dealership knows it cannot sell the car at a profit and is thus willing to just move the thing to "stop the bleeding."

Let's look at why this is so. Consider that you (a dealer) go to a lender (bank, government, finance company, etc.) and they agree to give you the sum of money it takes to obtain a car, say $45K. The loan is collateralized by the car itself (because you and the lender know/believe you plan to and can sell the car, that is, the car is your inventory) therefore you put no money down. Now, you must make payments on that loan, so at the end of the first month, you will do so, let's say that it's $500. We'll say too that the retail price of the car is $50K and, as said earlier, the manufacturer sold the car to you at $45K.

Now, on the 13th day of the second month, you sell the car for $48K. Your profit (excluding commission since I've not included a salesperson in this scenario) will be:

$48K - $45K - $625 = $2375.

($625 represents a proration of the payment amount for the portion of the second month that you had the car. Or in other words, the amount of the second loan payment you owe the lender for the use of their money for 13 days.)

As you can see, in 43 days, the you have turned $625 into $2375. You calculate the rate of return on that investment...Additionally, it would not surprise me if the monthly payment amount I've used in this example is far higher than reality, but even if it's not, it doesn't matter. They key is that dealers make huge amounts of money due to the incredibly high rates of return they earn on their invested cash. So the next time you hear, "Oh, we can't sell it at that price; that car just got here yesterday." Smile and just keep pushing for your price; there's nearly no floorplan invested in such a car.

Now, let's say that you get a customer who wants to order a car. What does that customer do? He puts down a deposit. What do you think that deposit is? It's at least the amount of money the dealer needs to get the car to his lot. In most cases, it's more than enough to get the car on the lot; thus, the deposit is free money the dealer can play with for as long as it takes to get the ordered car to the lot. So let's say, for example, the dealer must borrow $500 for each car he wants to put on his lot. The ordering customer gives a $2000 deposit. That becomes either three more cars the dealer can put on his lot at a cost to him of zero, or most likely it's three floorplan payments for cars already sitting on the lot. Let me rephrase that: that's three cars that for one month cost the dealer nothing to put them on his lot. Thus the dealer is using the ordering customers', not his own, money to finance keeping cars on his lot. Dealers love this!!! (Do you begin now to see why car businesses are all about the cars sold in a month?) And here you thought that the phrase "No money down" applied only to buying houses...

So now, for the car you, Mr. Customer, want to order, whose money got the car on the lot? It wasn't the loan from the lender, it was the customer's money; your money. And how much is the dealer's investment in that car? Zero. So now we are talking about the dealer making profit while having invested no money to obtain that profit. And therein lies the power of ordering a car rather than buying one off the lot. how often would you let someone walk into your store and say: I'll give you $250 for free?

Another factor to consider is something called "full absorption." When a dealership is fully absorbed, all it's operating costs are covered by the income produced by the service part of the business. That is why you never see a new car dealer (and few used car dealers) that doesn't do service. (You do see service operations that don't sell cars.) In general, if you see a dealer that's been around for a long time, they are fully absorbed (or damn close to it).

(Next time you are are the car store, and not negotiating the price of a car, ask them if they are fully absorbed. Smile broadly and congratulate them if they tell you, "Yes." You just dramatically improved your negotiating position. If they tell you, "No," you may want to make a comment such as:
Really? Did you folks have some weak managers for a time? What I mean is, I'm surprised that for as long as you've been around you haven't yet reached, or you have lost, that status. Why should I buy a car from you knowing that the continued existence of your store still depends on car sales, which we both know is highly susceptible to economic fluctuations, to cover your costs? Any manager you are talking to will get the point.)

As a customer, what does full absorption mean to you? It means that when you are negotiating for a car, your ability to split the dealership's profit motive from that of the salesperson is improved. Here again, given that the dealer puts cars on the lot via floorplan and the dealer is fully absorbed, the profit from the sale of the car is less critical and the quantity of cars sold becomes more important.

So now, the question is, how often will you let someone walk into your store and say to you: I'll give you $250 for free and you won't even have to pay administrative overhead or salesperson commission on it because the service department operations already has that covered? Change that $250 to $1000 and how often would you do it? ($250 is the amount over invoice price the customer is offering...)

When a customer can establish a negotiating position that pits the dealership's profitability against the salesperson's profitability, it likely sucks for the salesperson because the offer from the customer, though yielding no meaningful commission for the salesperson, lets the dealership make a satisfactory profit or advances a volume target. Thus by negotiating on an ordered vehicle, the customer pits the dealer's interests against the salesperson's, and strategically speaking, that's the best position the customer can be in.

It is for these sorts of reasons that I try to buy cars that very recently arrived on the lot or order cars. Indeed, I'd be completely outraged, and tell the GM so, if they thought I were going to walk in and give them some huge amount of my money that provides them with an infinite rate of return (the rate of return on zero invested is infinite), and lets them use my money, interest free no less, to get the car there and using my money to finance at least one other car already there.

One final note: you can be sure that if the dealer obtains the car you want from another dealer, you are definitely paying far more that you should for that car. Again, the reason is simple: that car costs the dealer more than do the cars already on his lot. Indeed, you are paying so much more that you could travel to the car you want (by plane even), negotiate a price and drive home for less than the excess you are paying to have your dealer obtain it from another dealer.

'07, e92 335i, Sparkling Graphite, Coral Leather, Aluminum, 6-speed