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USA TODAY AUTOMOTIVE ROUNDTABLE DISCUSSION

Los Angeles -November 27, 2012

Subject:
”Are Online Car Shopping and Information Services
Believable and Still Relevant In Today’s Market?”


DAVID vs. 5 GOLIATHS
The "Showdown" Meeting Between
Fighting Chance And The Auto Info Industry's Giants
Here’s the USA TODAY article that ran in its December 7, 2012 edition:
___________________________________________________________________

Surprising Tips For New-Car Buying In The Internet Age


No. 1: Don't Trust That Invoice Price

James R. Healey, Chris Woodyard and Fred Meier, USA TODAY – December 7, 2012.

While sharp-minded buyers are likely to feel almost smug nowadays, armed with more inside information than ever, it can be incomplete and misleading.

STORY HIGHLIGHTS

  • INTERNET CAR SHOPPING ISN'T A MAGIC BULLET FOR DEALS.

  • CAR-BUYING SITES SAY BUYERS DON'T REALLY WANT LOWEST PRICE.

  • CONTRARIAN CALLS THAT A BOGUS ATTITUDE.

    LOS ANGELES — It's nearly two decades into the age of Internet car shopping, but despite the information explosion, most buyers don't have a clue.

    In fact, at least one shopping expert argues, neither do some of the online services that a lot of people count on to guide them toward the best price for the new cars they crave.

    As the Internet has made car shopping seemingly more transparent, the auto industry has moved to change the process to make the waters even muddier.

    And as the Web has let people shop nationwide, freed from the tyranny of often-uncompetitive local prices, it also has let dealerships see what rivals everywhere are offering — effectively leveling prices because no dealer is likely to offer much bigger discounts than the competition.

    While sharp-minded buyers are likely to feel almost smug nowadays, armed with more inside information than ever, that information can be incomplete and misleading. Buyers in some ways are as vulnerable as ever to professionals whose livelihoods depend on making the sale.

    To probe the secrets of car buying and data available on the Internet, USA TODAY invited representatives of six shopping services to a roundtable discussion at the Los Angeles auto show. They were candid, even blunt, and what they said sometimes was shocking.

    One key point: What once was the holy grail of in-the-know deal-seekers — uncovering the dealer's "invoice price" (what the dealer paid) for a new car — now is easy to find on the Net.

    But at the same time, the industry is making that "price" increasingly meaningless.

    Automakers have fattened dealers' "invoice" or wholesale price so it looks as if they're paying a lot more than they used to — perhaps 95% of the retail sticker price, vs. 85% before Internet car shopping began in the mid-1990s.

    But that modern invoice number now is padded enough to let automakers send significant sums back to dealers in hard-to-track give-backs and bonuses that make the dealers' real (and well-hidden) wholesale cost for the vehicle well below "invoice."

    HOW 'HOLDBACKS' AND OTHER DEALER CASH INCENTIVES ADD UP

    Such give-backs are beyond the traditional "holdback" by most automakers that has long inflated the invoice price. The holdback is an amount roughly equal to 2% of the sticker price (it varies by automaker, and a few don't use the practice) that the car companies usually refund to dealers periodically. It also has given automakers leverage over dealers, which are independent franchisees — the car company can withhold the amount if dealers don't meet automakers' requirements.

    The hidden dealer cash incentive programs inflating today's invoice come in many variations.

  • Some are variable amounts based on meeting sales targets set dealer-by-dealer — and are sometimes even retroactive to the previous quarter. These programs can mean that even the dealers might be uncertain of their final cost per car until they sell their final car of the period.

  • Others are so-called "atta-boy" payments of up to hundreds of thousands of dollars for achieving the highest scores on the customer satisfaction surveys sent to new-car buyers.

  • A small number are simply the old-fashioned, direct factory-to-dealer incentives, often unadvertised, that might or might not be passed along to buyers.

    WHY ALL THE COMPLICATED GIVE-BACKS?

    "It tells me that (automakers) and dealers responded to the publishing of invoice pricing online and said, 'We need to find another way to mask what (dealers) are being paid so that people don't feel like they're getting screwed,' " says Patrick Olsen, editor-in-chief of Cars.com and a roundtable participant.

    Another participant says we shouldn't be surprised. "The fact is that consumers still think the dealer invoice price has some magic to it. It doesn't," emphasizes James Bragg, head of Fighting Chance, a small car-buying advice-giver he founded in 1993. "We've let ourselves, over the decades, get conned into believing that a family with a $10 million net worth, of which $5 to $7 million is in their car store, is going to let you and me know what they're paying for their cars. Does that make sense to anybody? That's nuts!"

    But perhaps surprisingly, given how often they use "invoice price" as a touchstone, many brand-name online car shopping sites tend to agree with Bragg's dismissal of that price.

    Exception: Jessica Caldwell, Edmunds.com's director of pricing and industry analysis. She says the invoice, however true or false, is another data point, and "every piece of data you have out there is helpful and can be critical" as a shopping tool.

    In addition to Caldwell, Bragg and Olsen, at the table were: Larry Dominique, executive vice president at TrueCar.com; Jared Rowe, president of Kelley Blue Book, which operates KBB.com, and Jake Fisher, head of auto testing for Consumer Reports, who is involved with the magazine's pricing data and who buys from dealers the cars the publication tests.

    BUYERS DON'T WANT A DEAL?

    Bragg, a peppery contrarian, considers the big-name shopping sites no friend of buyers, arguing that they don't work hard enough to show the lowest prices.

    Kelley Blue Book's Rowe says that might be so, and — with an attitude likely to stun hard-core horse-traders — explains: "Overwhelmingly, our research shows that consumers ultimately don't want the best price."

    "We have data to support exactly what he said," adds TrueCar's Dominique. "We do post-purchase surveys of 100% of our consumers, and the ones who paid the least for their cars are the most dissatisfied with their cars. The ones who paid average or above average are actually the more satisfied."

    How is that possible?

    Those who didn't haggle over the last dollar "spent an average of one to two hours less at the dealership. They feel they got treated fairly on the price, they feel they got treated fairly on" financing and trade-in values, Dominique says.

    Adds Olsen, from a personal experience, "I went to buy a car and the dealer sat down and said, 'I want $300 over invoice,' and I said, 'Fine with me. Let's do that and cut a deal right away.' It wasn't rock-bottom price. It wasn't even the invoice price. And if I really pushed, maybe I could have spent three more hours of my life arguing with this guy," but it wasn't worth the hassle.

    Bragg finds that hard to accept: "I have customers who will drive 120 miles to save a thousand bucks, and there are more of those than you would believe."

    Rowe does not. "There is a segment who absolutely wants that rock-bottom price and will drive 500 miles to save $50. But overwhelmingly, consumers just want the fair price."

    What is the "fair" price? "I don't think anybody in this room can tell you what the fair price is on any vehicle for any specific individual," Rowe says. He says a fair price "means that when I tell my neighbor what I paid for the car, I won't be embarrassed."

    A LOOK AT SHOPPING SERVICES

    To understand the viewpoints, it's helpful to know how the shopping services operate.

  • Fighting Chance charges customers: $39.95 for help on the first vehicle and $15 for more ordered simultaneously. The price buys advice on "exactly what to do and say each step of the way as you conduct a competitive bidding process from your home or office, without walking into a single car store."

    Bragg says it winds up like this: "Ignore all the (price) advice you find on the Internet. When you decide what you want, get on the phone and call 10 dealers and tell them you're going to buy where you get the best price."

    In Bragg's view, the best use for the Internet is to help decide what to buy, not how to buy it or how much to pay.

  • TrueCar.com considers itself a buying site, not a shopping site. It costs nothing to use. But once a user prices a vehicle on the site, he or she is encouraged to submit information to the local dealer listed at the end of the pricing exercise for follow-up sales calls.

    The site provides a price curve of prices being paid for a specific vehicle, showing the midpoint price, and stretching out to show the best and worst prices.

    The site makes money from car ads, and auto dealers pay TrueCar.com $299 for every referral that leads to a sale.

  • Consumer Reports charges $14 for a pricing report on one vehicle, $12 for each additional report ordered at the same time.

    CR provides what it calls a "bottom line price" from which to start negotiating. No advertising is involved, but pricing information is provided by TrueCar.com.

  • Edmunds.com, KBB.com and Cars.com consider themselves pure shopping sites. They cost nothing to use.

    They provide "market" or "target" prices that take into account what others paid for similar vehicles as advice for negotiating.

    Cars.com also offers a list of similar vehicles in stock at dealers within the radius shoppers specify.

    The sites' money comes from advertising, which automakers hope is targeting people at the perfect moment — when they are seriously shopping for cars.

    All the online sites foresee fast changes in their businesses, such as providing real-time help for people as they buy, for example.

    "I think people are looking for some human touch to tell them this is good, this is bad," Caldwell says. "We just developed something last year where it's live advice. So if people are in the car-shopping process, they can now call. They can do a live chat and they can e-mail, too."

    Also emerging: comparison shopping or instant purchasing data via tablet or smartphone. For instance, photograph the vehicle identification number of a car on a dealer lot "and you get a quote from that dealer while you're standing there. That is the kind of speed expected, especially by the Millennials and Gen-Y's," Dominique says.

    SOME DO'S AND DON'TS

    Though they disagree on some important points, the panelists have been in the car-shopping business long enough to have valuable insights. Some of their advice:

  • Don’t fixate on price. Dealerships make what they need to, or they won't sell the vehicle. If the price is extraordinarily low, the dealer financing will be at high interest, or you won't get much for your trade-in, or you'll pay more for that extended warranty.

    You can arrange your own financing in advance, to skip the dealer loan. You can sell your car instead of trading it, to make the new-car deal simpler and thus the true price easier to understand.

  • Take a test drive. No matter how much research you've done, it won't tell you everything.

    Olsen: "You don't know how you fit; you don't know the ergonomics; you don't know if you got the car that went through a bad day on the line, a lemon. Make sure you take a test drive to make sure that things are working."

  • Don’t shop and buy the same day. Fisher: "When you go into the dealership the first time, which you're going to do, just swear to yourself this is not the time to buy. Separate the purchase part of it and the shopping part of it."

    That's because you'll be unprepared to make a wise choice until you've done a lot of research — and you're easy to seduce at that point.

    Olsen: "When a new-car dealer is smooth-talking you, it's really easy to get hooked. God knows when I was younger, I did.”

    _________________________________________________________________________

    HERE'S THIS "PEPPERY CONTRARIAN'S" TAKE ON THAT MEETING

  • First, I like what the folks at USA TODAY were able to do with that story. They walked very well the fine line between telling the truth aggressively and alienating five other nice people who participated — people they turn to for information when they're covering other stories. (I'd have no problem alienating them, but I'm that "peppery contrarian.") I believe the essential truth came through quite clearly.

    I think these are the key things the meeting revealed:

    1. All those big companies have been providing consumers with dealer invoice prices for up to 30+ years, but none of them seemed to be aware of the pivotal fact in my book— that automakers have been continuously moving previously-visible profit dollars into the invoice price to disguise them as dealer cost dollars.

    Early in the roundtable discussion I passed around a 12-page exhibit covering showing exactly how this had been done, year-by-year and model-by model. I listed that data for 47 popular models of these 23 brands: Acura, Audi, BMW, Buick, Cadillac, Chevrolet, Chrysler, Dodge, Ford, Honda, Hyundai, Infiniti, Jaguar, Jeep, Lexus, Lincoln, Mazda, Mercedes, Nissan, Subaru, Toyota, Volkswagen and Volvo.

    Here’s one example from that exhibit that illustrates how the visible gross profit built into the sticker price has been cut dramatically over the years as car companies have continually raised the invoice price more than the MSRP to squirrel away big dollars for truly secret, “below-the-line” dealer incentive programs.

    % MARKUP BUILT INTO THE STICKER PRICE
    (MSRP — Invoice Price ÷ MSRP = % Markup/Gross Profit)
    ACURA TL SEDAN
    1994 – 15.2%
    1996 – 13.2%
    1998 – 10.7%
    2000 – 9.8%
    2003 – 8.8%
    2007 – 8.3%
    2008 – 8.1%
    2011 – 7.2%
    2012 – 6.4%

    There were similar illustrations on that exhibit for 46 other vehicles. (EVERY AUTO BRAND HAS DONE THIS.) You could have heard a pin drop as they read it. No one said, "That's old news. We've known that for years." I doubt that any of them ever thought about examining that change! But surely they all took that exhibit back to their people who seemed to have been asleep at the switch for the last 18 years.

    2. No one disputed those numbers. As noted in the USA TODAY article, the Editor-In-Chief of Cars.com said, "It tells me that (automakers) and dealers responded to the publishing of invoice pricing online and said, 'We need to find another way to mask what (dealers) are being paid so that people don't feel like they're getting screwed." And the Exec VP of TrueCar acknowledged that because of these hidden incentive programs, there are times when a dealer might sell a car for thousands less that he’d normally charge in order to reach specific bonus targets. No one disagreed.

    I pointedly asked the Consumer Reports representative why that organization hasn’t discovered this and reported it to consumers long ago. I said, “You’ve been selling invoice prices since 1983. That data has been staring you in the face for almost two decades. Who’s been running your New Car Price Report Program, Rip Van Winkle?” (I may not have been his favorite participant.)

    3. I was amazed that there was common agreement that "consumers don’t want the best price"!

  • Edmunds’ director of pricing and industry analysis said the invoice, however true or false, is another data point, and "every piece of data you have out there is helpful and can be critical" as a shopping tool.

  • Kelley Blue Book’s President said, “Overwhelmingly, our research shows that consumers ultimately don't want the best price. Consumers just want the fair price." He added that ‘a fair price’ “means that when I tell my neighbor what I paid for the car, I won’t be embarrassed.”

  • TrueCar’s Executive VP then added, "We have data to support exactly what he said. We do post-purchase surveys of 100% of our consumers, and the ones who paid the least for their cars are the most dissatisfied with their cars. The ones who paid average or above average are actually the more satisfied."

    Again, no one disagreed with these statements.

    This ain’t rocket science, friends and neighbors. Isn’t this what they were really saying?

    If you want the lowest cost on the second most expensive purchase you ever make, don’t expect to get it by using our service. That’s because we get all our revenue from auto companies and their dealers. And if we told you the whole truth and exactly how to best use it to save the most money, we’d be out of business.”

    4. TrueCar.com and many of those others sites base their recommended "target prices" on "the average of what others have paid in your area.”

    I challenged them on that, saying, "You are treating consumers like they're idiots. Why would anyone want to pay that price, when, by definition, it means that about half the people got a better price — maybe a much better price?" Their answer: "We're showing consumers what a 'fair deal' is. Our research shows that price isn't everything. They want a hassle-free experience, one they can feel good about. That's what our dealers give them."

    5. Those that use the phony sticker price as the basis for their claims of consumers’ “dollar savings” using their service actually defended that misleading practice by stating that “the states won’t let us make any other comparison.”

    I had some fun with that response, saying, “So it’s the states that require you to mislead consumers with those numbers. You’re saying ‘the Devil made you do it,’ right? That straw man is loaded with more hay than Ray Bolger had as the scarecrow in 'The Wizard of Oz' movie!” There was no response. Obviously, they like using that inflated savings number. It makes them look like bigger heroes. Sadly, there are consumers who don't see through that bogus claim.

    In net, little David was the only true consumer advocate at that table.

    I probably had more fun there than the other participants, but they were all relatively cordial. I think they viewed me as a harmless ant on an elephant’s back. (That’s their bad.)

    If I have to join the witness protection program, will you visit me?

    James Bragg

    Copyright & copy; 2015 Fighting Chance

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