There’s a strong trend in the car industry around ridding the most stressful aspect of car buying, price negotiation, or as others call it, haggling. Companies are sprouting up left and right arming consumers with the price data they need to get a “good deal” when purchasing a car. More and more dealerships are participating in fixed price sale events like Car Week, where dealerships offer cars at set prices below fair value.
Everyone seems pretty excited about all this. It feels like progress for the auto industry and for consumers. But it’s not.
If the goal is to improve customer experience, the removal of haggle by itself is a backwards step. The disease that car buying has isn’t the negotiation around the price of the car, but the dual forces of an industry culture of finding ever more creative ways to scrape the last penny out of customers’ pockets and the unaddressed and unchanged costs of running dealerships.
Let’s start with a couple facts. The average dealership spends $2,000-$2,500 per car sale to run their dealerships. They have to get that back somehow. Are customers getting a $2,500 experience? In 1990 dealers made 80% of their retail income on the price of the car; today they make 20% there and 80% in darker corners.
The internet has given customers power on price. There are a myriad of tools at their disposal to ensure the price is fair and dealers aren’t making much money there anyway. Removing haggle does one marginally positive thing and one large negative thing – it reduces time and friction in negotiation and it causes customers to put their guard down and believe the process is fair. It provides them with a false confidence, which is exactly what the dealerships want. The consumer today is just as vulnerable as they were 20 years ago, they’re just vulnerable to different, less obvious threats.
The removal of haggle is the latest in a series of Band-Aids the industry has used to try to save a patient that’s bleeding to death. These band aids result in the temporary let down of customer guards and actually make the process worse by forcing the retailers to get more creative in hiding profits deeper and deeper in the transaction. Is there any other product with concepts as opaque as MSRP, Invoice Price, Dealer Holdback, Incentives, Dealer Participation, 0% Financing, Cash Back, Payment Forgiveness Plans, Undercarriage Protection, Subvention ad naseum…What is all of that? Why does it exist in the automotive industry and nowhere else? The answer is simple. The underlying causes have never been addressed. Customer research has been targeted at continually relieving customer fears with ineffective marketing gimmicks like “no haggle” and at hiding profits in places customers don’t understand.
A quick Google search will reveal a 50-year history of automotive retailers claiming “It’s better now,” because of X, Y, and Z superficial process change. If that were true, why has the reputation remained? Why do customers actually spend more time at dealerships now than they did just 3 years ago? Until dealerships address the underlying causes of their disease – a focus on short-term profit over the customer experience and a cost structure that’s simply too high – auto consumers will continue to loathe the dealership experience.
The underlying causes have finally been addressed legitimately and it isn’t just the removal of haggle. It’s the introduction of Carvana, a whole new way to buy a car!