Value Pricing Why It's Not Win-Win

September 2006, Auto Dealer Today - WebXclusive

by Stuart Landsverk - Also by this author

Domestic dealers have just been through “Employee Pricing” or “Employee Pricing Plus.” What the correct term should have been is “What’s good for the factory and customer is not good for the dealer.” Yet, it's clear that employee-pricing incentives gave customers a taste of something they want. Most customers prefer one-price, no-dicker stickers instead of negotiating prices.

Value pricing is great for the consumer, who hates the car buying experience. Now, just like going to the grocery store, they can pick out what they want, know the exact price and buy it. What could be easier? The factory loves it because cars fly off the shelves and we, the dealers, have to replace that merchandise. Our factory rep loves us every time we tell him we need more cars.
Our dealership’s motto is “We develop outstanding relationships where everybody wins.” How do dealerships win when the manufacturer effectively cuts your margin to one to two percent of the vehicle invoice? Now, it’s been said that the automakers' employee discount programs have made a pricing structure based on "artificially inflated" sticker prices and complicated rebates irrelevant. That is true. But, can anybody show that a business that invests millions of dollars in property, inventory and personnel is only entitled to a gross profit of only one to two percent of their investment? Now, out of that gross profit pay your managers, administration, flooring sources, insurance, utilities, rent and other overhead related expenses. Doesn’t seem very fair to the dealer, does it?

Dealers dislike no-haggle stickers because it takes away their ability to set prices. We become, in essence, little more than order takers with fixed margins that give us a minimal chance of being profitable. “Employee pricing” was a great idea, no doubt, but if the price on the window reflected the transaction price that would be a win-win situation for everyone. Dealerships would see customer satisfaction skyrocket, reputations would improve and they would be able to provide better customer service.

Here are some inherent problems with “value” pricing:

If the price doesn’t give the dealer a fair margin for their professional services, the dealer will be unable to pay and retain qualified, professional salespeople and managers.

When the manufacturer sets a price on a hot vehicle that the dealer was able to get sticker for it and now has to sell it for “employee pricing”, it demoralizes everyone except the customer. When “employee pricing” ends, we will be stuck with the entire oddball inventory nobody wants, even at a great discount, and the entire inventory we would have made money on is long gone.

In value pricing, the dealer has no room to negotiate trade-in. It’s the “wholesale to wholesale, retail to retail argument.” If a customer is buying a car at wholesale, you can’t give them retail for their trade, which, in turn, will upset a lot of customers who have a distorted view of their trade-in’s worth.

When the dealer has no room to negotiate, because the margin is too thin and the vehicle has little to no incentives to use in financing, customers who owe too much on their trade (“upside down” buyers) can’t purchase a vehicle when normally they would be able to if structured correctly.

Vehicles traded in during the employee pricing promotions are glutting auctions, which are driving down the prices of trade-ins even further. The average wholesale price of used vehicles dropped 4.1 percent in July compared with June, according to ADESA. Supplies will increase even more as large numbers of fleet and rental cars return to market as well as the vehicles traded in start to age on the lots where they were taken in. It makes it difficult to step up on a trade when the market is dropping around you.

When everyone can buy a vehicle for the same price, no matter which dealer you go to, why would they buy from specific dealership? Dealers who carve out a niche, due to great service or other incentives or because they have all the hot merchandise, may have an advantage, but most dealers don’t. That makes conquest business that much tougher to get.

When it comes to value pricing, full price is a fair price, but only when it protects the dealers and dealer employees that sell them. Customers do not buy because of how much they saved on a vehicle. The only thing they really want to know is that they didn't pay more than their neighbor, church member or the person they saw at the supermarket. When it’s Win-Lose, the manufacturers and customers win, but the dealer and employees lose, and that’s not a healthy paradigm for a “partnership”.

Vol 2, Issue 11

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