Sunday, March 1, 2009

Thoughts on pricing discipline in must-have cars

How much did you pay for your car?

If you bought it new, I guarantee the price you paid was not the one on the sticker.

In 1985, Saturn Motors Corporation, a mostly autonomous division of General Motors introduced a new kind of automotive experience. Some of the tenets of Saturn's brand launch were:

- an easily changeable body shape due to plastic body panels,
- a company owned dealership where every buyer was cheered when he bought a car
- a single factory where people could visit and tour if they were customers
- an annual summer picnic for all owners, and
- fixed price (aka "no-haggle" pricing)

This last one is the subject of tonight's blog.

Why is it that you pay a SINGLE, sticker-advertised, fixed price for an ipod at the Apple Store or a used car at CarMax, but with new cars it is always negotiable?



People have answered this question with varying reasons for years, but my opinion is that "competition between sellers" is the reason why new car prices are negotiable.

Dealers compete to get your business. Period.

MSRP - Manufacturer's Suggested Retail Price - is just that..... Suggested. With scarce, popular cars, pricing of a model may seem like a unified front, but even in those cases, you can usually look far and wide enough and find a dealer willing to do better than another in order to get your business.


Dealers compete to get your business. Period.

This is why Saturn had it right. Own the dealerships and set the price.

Sounds easy right? Well, it is really, except for the capital and people necessary to "own" all of those dealerships. All that stuff costs time and money; so if you need to grow fast in order to support the scale of your operations, then you need to find a way to enlist huge amounts of help. That is why franchises can work so well. They encourage a person to share in the growth of a business in return for that franchisee taking the risk to set up a branded dealership. But given a choice wherein I could grow a business profitably in doing so, I would always choose to own my own path to market as a business because you can protect the product, the brand and the profit margin much better.

Time for a real life example.


A friend of mine from California recently bought a new Audi. She was deeply excited about the new S5 (see above), and wanted one badly....Can't say I blame her, right? This is a sexy coupe compared to the competition. She asked for my help - as many of my car-buying friends have lately - in finding a way to get the best deal. I gave her some tips and even introduced her to some folks whom I thought could help her. For the first week of calling around, she got the same answer that this "exciting car could be had for MSRP". But with just a little bit of stick-to-it-iveness, she began to uncover some deals, which then lead to more deals, and before long, dealers who had earlier quoted her MSRP as "their final offer" were now willing to go as low as anyone else to get her business. After the purchase (at a significant discount to MSRP), I called her to ask one key question: "If every dealer had quoted you MSRP, without a discount, would you have bought the same car?" And she said, without much thought.....


All that time and effort that Audi took to make the S5 a must-have product for my friend, and then the dealers collectively stole it away. There is a valuable piece of profit that Audi will never see again.

The moral of the story: Make a must-have product then price with discipline.