Car Negotiation: The 10 Step Guide – Part 2

Category: New Cars. Written by Grant 

Step 6: How to Set a Price For Your Car

The trickiest part of the negotiating game is to set a price that is fair to both you and the dealership. As good or bad as a dealership might be, they still have to make a profit. In fact, you might be surprised to hear that dealerships average about a mere 1% profit per year on total sales.

Normally, I advise to set a general price point around 1% to 3% over dealer invoice on a new vehicle (that’s $200 to $600 for a $20,000 vehicle). In the current economic situation however, dealers are becoming very desperate, so it’s reasonable to aim for invoice pricing and even lower. Checking with sites like Edmunds.com is a good way to figure out what other people have been paying for similar vehicles.

Figuring out the price on a used car is a bit more tricky, but uses the same method. What you want to do is find the wholesale value on the car you’re looking at. This can be estimated by using the Kelly Blue Book and finding the trade-in value of the vehicle. After that, you should add about 10% on top of that value to get a pricing figure. Note that the auto industry and your dealership doesn’t use Blue Book pricing, but instead use what is called the Black Book. This is a wholesale pricing guide similar to Kelly’s Blue Book. While the the pricing is different, it’s similar enough for your needs.

In addition to standard profit percentages, there are many other things that can effect how much you should expect to pay:

  • Base car price: The pricier the vehicle, the more you generally pay in mark-up.
  • Vehicle lot age: The longer a vehicle sits, the less flexible the price due to reduction in holdback profit
  • Demand and supply: Hot cars will simply demand more money
  • Day of month: End of the month is better due to monthly sales quotas
  • Month: End of the year (Nov, Dec) is also better due to yearly sales quotas
  • Dealership: Each dealership has a different philosophy on price point
  • Salesman: Each sales guy you meet will be different – some flexible, some not
  • Manufacturer: Different auto makers have different holdback percentages, which affect how low a dealer is willing to go

Also, be sure to look up any current factory to dealer or customer incentives on new vehicles. Throughout the year, many manufacturers have a rebate or other incentive to help spur sales, which usually ranges from $1,000 to $5,000 in cash back, 0.00% APR or other goodies. These are the biggest savings you’ll receive on a car purchase and should not be overlooked.

Lastly, it’s a common myth that you can get a great deal by buying a car in cash. Unfortunately, that is not true – and in fact, probably the opposite of the truth. Dealerships can make thousands of dollars on the financing side of a sale, so it’s actually in their interest that you finance a vehicle through them.

Step 7: The Actual Sales Negotiation

This is the part everybody hates. Your friendly salesman seats you across from him, offers you the coffee or a soda and then asks the magic question: “What would it take for you to drive home with this vehicle today?” Every salesman asks this question in the hope you might be that 1 in 100 sucker that actually replies by saying you’ll take it for sticker price.

Of course, you know better and will reply with the price determined in Step 6. Upon hearing this, your sales guy will make a sour face (don’t worry, they make this face for every reply they get – even sticker price). Your sales guy will say something to the extent of, “Boy, I don’t think this is going to fly with my manager, but I might be able to work something out,” and proceed to head to the sales manager’s office.

This type of sales tactic is used by 99% of the dealerships out there and is known commonly as the “Good Cop, Bad Cop” routine. Your salesman pretends to be your friend, working for your side, while the “evil” manager is working against all of you. Of course, it’s all a well-rehearsed theater that has been performed hundreds, if not thousands of times by your salesman.

The purpose of this sales tactic is subversive, in that it attempts to make you think you are powerless in the decision making process. Emotionally frustrated individuals will then resign themselves to giving control of the process to their salesman and his sales manager – which is exactly what the dealership wants.

When your salesman returns, he will come back with an initial price thousands more than the price you stated. This is just typical push-pull negotiation that tries to shock you into submission – which is why you should completely ignore what he comes back with. Simply stick to the plan and state that you want the price you originally mentioned. Not a cent more.

At this point, your friendly salesman will quickly realize that you mean business and will unleash every sales tactic at his disposal. Among the wide range of tactics you might encounter are:

  • Blame: You’re being unreasonable, we would lose money, I need to make a living
  • Deflection: My manager won’t let me, I wish I could help you guys
  • Disinformation: Your printed invoice is wrong, the price has gone up recently
  • Distraction: Let’s talk about your trade-in or financing instead
  • False Logic: This is a popular car, this is our last model on the lot
  • Hostility: You’re wasting my time, my manager is angry at you guys, I’m getting tired of this
  • Lies: We added feature X to the car (not on manufacturer sticker), had to replace the windshield or repaint that car
  • Persuasion: You’ve already won- this is the lowest we’ve ever gone, you’ll look great in that car
  • Pressure: C’mon- let’s do it (repeat), don’t you want a new car today, this is a one time deal
  • Stonewall: That’s our best offer, we can’t go any lower
  • Tag Team: “Hi, I’m Jim the finance guy. Steve here tells me you guys want to clean us out!”
  • Urgency: We have another buyer who just needs to get financing, take it or leave it

Depending on your salesman, this can be a very stressful situation for you – which again, is another reason to be emotionally prepared for negotiations. Your salesman knows that trying to debate you rationally will probably be a losing cause (i.e., explaining the need for $3,000 profit on a $20,000 car), so most sales tactics rely on pushing your emotional buttons. Again, just remember that is is all theater and to stay calm.

What you should do during negotiations is stick to your guns and ask for the price point you came in at. Say little and stay on the topic of sale price. You can expect that after 20 to 30 minutes of this, your salesman will either collapse and give-in, or you will have a stalemate. In the event of the stalemate, where the dealer refuses to go any lower, you’ll have to make your own call on whether or not their figure is reasonable. If it’s within $100 or $200, you might just say fine. If it’s more, it may be in your interest to say, “Thanks for your time” and walk.

Many people have an aversion to walking out of a dealership, almost as if it’s a social offense. It’s odd, because that couldn’t be further from the truth. Walking out of a dealership is like walking out of Macy’s without a buying new sweater – it simply means you didn’t like what you saw and will now shop elsewhere. A car dealership is the very same way; either both parties are happy or there’s no deal.

If you’re willing to walk out after 30 minutes, you could easily hit up three different dealerships in the same day and figure out who is willing to offer you the lowest deal. That’s how the school car negotiations worked before the days of the internet, when consumers didn’t know car pricing and only through walking, could buyers find out how low dealers were willing to go. It’s time consuming and not for everyone, but it works.

Stay tuned for Part 3 of the Car Negotiation Guide

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Comments

5 Responses to “Car Negotiation: The 10 Step Guide – Part 2”

  1. Alex on June 29th, 2012 2:50 pm

    You never want to throw out the first price, if they ask just say what is your best offer and go from there! First to speak always takes a step back… always!

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