Fixed Price Car Buying?

  • May 30, 2023

Buying a car is kind of like buying a house in that what the seller is asking isn’t necessarily what you’ll be paying. There is usually a negotiation before the sale is concluded and – usually – this benefits the buyer, who ends up paying something less-than-advertised.

A long time ago, GM tried to sell cars the way appliances and most other consumer items are sold – by putting a price on the item and hoping people would buy it. The idea – as regards the cars – was that most people would prefer not to haggle over the price, even if if means just paying whatever the seller is asking.

It didn’t work out very well for GM, which abandoned the idea back in the ’90s and went back to the manufacturer’s suggested retail price (MSRP) way of doing it. The sticker – MSRP – says it costs this much. You – the prospective buyer – say you’ll only pay this much.

A buyer willing to haggle will usually end up paying less than MSRP.

On the other hand, maybe not. It depends on how much the buyer knows about how the game – and that’s what it is, after all – is played.

The MSRP – what you see on the window sticker – is whatever the manufacturer suggests. What do you suppose the manufacturer suggests? If you answered: A price that encompasses a substantial profit for the dealer that wants to sell you the car, you’re hip to how the game works. Appliances have the same prices; the difference is they’re not “suggested.”

They just are.

Anyhow, there’s lots of room – to haggle – built into the manufacturer’s suggested retail price. For the buyer and the seller (i.e., the dealer). Put more precisely, the MSRP might be more than high enough to encompass that room to haggle and leave a generous profit for the dealer while leaving the buyer to believe he got a great deal.

And maybe he did – relative to the MSRP.

But it’s hard to know for sure – as opposed to on paper – because of the opacity of the transaction. How much did the car really cost the manufacturer to  . . . manufacture? How much did the manufacturer kick back to the dealer? How much profit is built into the suggested price?

The successful haggle might be more an illusion, if a happy one.

Tesla did away with it, for what it’s worth – and Ford CEO Jim Farley said the other day they are considering doing the same. It has worked – so far – for Tesla. But that may be due to the fact that Tesla is selling appliances and the people who buy them are used to buying them that way.

But will it work for Ford?

And will it work for you?

Much depends on who you are – and what you know. Some people really like to haggle over the price of things because they’re good at it – and because they know about it. They are willing to do the work of researching what the dealer paid the manufacturer, know about most (though it’s hard to know about all) of the “holdbacks,” which are inside baseball deals cut between the manufacturer and the dealer and what a reasonable profit is for a given vehicle. This latter – usually about 3 percent of MSRP – varies according to the specific vehicle and is based, in part, on how popular it is and how many other people are lining up to buy it.

If they aren’t – and you know it – you might end with a really good deal. But if you don’t – maybe not.

The fixed pricing model takes the knowing (and the not) out of the equation, but not the opacity. Does anyone have the slightest idea what it costs Elon Musk to manufacture a Tesla?

There is no dealer network to support – so the cost of that isn’t folded into the price of the car.

But what about all the other costs? You – the prospective buyer – have no idea what they are and even if you did, it wouldn’t matter in that there’s no haggling over the car’s price. You pay what Tesla says you’ll pay if you want to buy the car – and that may be a lot more than you’d have paid if you’d been able to haggle over the car.

Right now, the free market – and the inertia of tradition – give you, the buyer, the alternative. You can pay what Tesla (and maybe soon Ford) says. Or you can tell the seller of some other make what you’re willing to pay for that model.

The one-price-fits-all business model is kind of insolent, when you think about it. Would you like buying a house this way? Yet we buy almost everything else this way.

It’s entirely possible we’ll be buying new cars that way soon, too.

. . .

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