RealDeal.com is the industry’s first live and objective price check on pre-owned vehicles. With RealDeal, dealers can show customers how their prices compare against the prices of similarly equipped vehicles for sale, allowing customers to feel confident in their purchase price before they sign on the dotted line. Today, dealerships using RealDeal are able to limit the amount of the discount between the asking and the selling price to an average of a few hundred dollars. Often vehicles are transacted at the original asking price or with just a concession of floor mats or a tank of gas. Every time a RealDeal report is presented, both the customer and sales representative have the experience of knowing that the dealership prices their vehicles on facts and fairness. Closing ratios and gross profits rise as the new system replaces negotiation with compelling and credible documentation.
Why is there such a need for RealDeal? Because the used vehicle industry has experienced significant changes in the last seven years — never has there been as much change in as short of a period of time. As an industry, we are learning the used car business all over again. Just about every traditional practice is being replaced by new and more effective procedures. One of the greatest challenges that has occurred is the industry’s recognition that a vehicle needs to be priced to sell rather than to negotiate. Simply stated, if a vehicle’s asking price isn’t justifiable, it’s not likely to produce a potential customer.
As dealers have come to this enlightened recognition, they have experienced a great deal of difficulty managing profitability. It is essential to examine the rules of proper pricing and the corresponding implication for the selling process.
Rules for Proper Pricing
Historically, dealers have priced vehicles based on a markup from their cost, usually $3,000 - $5,000 for the first 30 days or so. If the vehicle does not sell after an initial period of time, then the price is gradually reduced until it does sell. The method of marking vehicle’s prices up from cost has proven to be less effective over time. In today’s environment, consumers determine their shopping destinations, in large part, based on identically equipped competing vehicles on the Internet. If your price isn’t in the ballpark, then you’re not likely to see or hear from the prospective buyer.
Does this mean that all vehicles should not be priced high for the first 30 days? Do they all need to be priced low from their inception? The answer is “no,” but they all must be priced based on the dealer’s knowledge. The dealer must know which ones should be priced high, and dropped slowly if necessary, and which ones should be priced low from the start, with an awareness to drop them fast and rapidly. Understanding which vehicles can be priced high versus the ones that should be priced low requires a two-step process.
First, the individual pricing the vehicle should know the physical and aesthetic quality of the vehicle. Because there is still an emotional aspect to the car shopping process, understanding the unique appeal or lack thereof for the vehicle in question is essential. With a firm understanding of the vehicle’s appeal in mind, the second step is to determine the odds of a fast sale and high gross. This assessment is most rationally based on the relationship of the vehicle’s supply and demand in the market at that very moment. Vehicles of high supply and low demand are less likely to bring a fast sale and high gross than a vehicle of high demand and short supply.
If a vehicle is truly special to the eye and has high demand with short supply, then it should be priced high against competing vehicles with a deliberate patience. Conversely, a vehicle of ordinary appeal with high supply and low demand should be priced extremely low among its competitors from the onset with a willingness to adjust pricing frequently. This two-step process represents the best practice for maximizing the return of vehicle inventory investment.
Problems of Proper Pricing
When a vehicle is priced properly, consumers are naturally attracted through the Internet shopping process. Unfortunately, when buyers appear, they seldom, if ever, announce their arrival as a result of the vehicle’s proper pricing; rather, the opposite usually occurs. Despite the fact that shoppers may have traveled a great distance to see the vehicle in question, they inevitably still expect a further discount. Accordingly, sales representatives have been trained to anticipate further price discount expectations. What generally ensues is a negotiation process that results in further discount, only sometimes results in a sale.
The problem with this approach is that once a vehicle has been priced properly, there is generally little room to negotiate and still have an acceptable profit. The negotiation with the consumer and sales representative is the self-motivated shopper and the negotiating sales representative engaged in silent collusion against the interest of the dealership. It is easy to understand the motivations of the consumer, but those of the sales representative are more subtle and less understood.
Automobile salespeople have been conditioned and trained over decades to satisfy the shopper’s expectations of price with negotiation. Today’s sales representatives have very few strategies or skills designed to hold the line on price objections. Although their sales compensation programs incentivise them to hold gross, the greater expectations of management relate to unit production. The desire of the salesperson to deliver vehicles first, and hold for gross as a secondary objective, along with the shopper’s insistence on a further discount creates the perfect situation for poor profitability.
Documentation Replaces Negotiation
Without fail, every prospect who is interested in purchasing a vehicle from a dealer asks “how much discount.” This is the initial process known as negotiation. It is a process that results in further price concession and often emotional contention.
Predictably, shoppers regale sales representatives with stories about other vehicles that can be purchased for less money. Sometimes these vehicles don’t exist and/or often lack sufficient similarity in condition, mileage or equipment. In almost all cases, the existence of such vehicles is accepted and results in further discount.
If the customer’s behavior of insisting on further discounts based on the assumed existence of competition is predictable, is there anything that a dealership can do to level the playing field and maintain its gross profit? Fortunately, the answer is “yes.”
Instead of waiting for the customer to ask for a discount and then whipsawing the salesperson with questionable competition, the sales representative should open the conversation with the statement, “Let me show you what our dealership has done for you.” Rather than assuming the defensive role, the sales representative is taking the offense and changing the dynamics of the discussion that will follow. Consider the following alternative exchange between salesperson and customer:
SP: Now that you’ve decided that this vehicle is right for you, let me show you what our dealership has done for you. As you can see, this is a list of identical vehicles market (present copy of competitive set).
SP: That’s right, you can see that our dealership has very sophisticated tools that allows us to know the identity and description of every similar competing vehicle. Further, you can see here that while our vehicle is not the lowest priced; it is the fourth-lowest price out of the total set of 14. Would you like to see more about the lower priced competing vehicles?
SP: Great, you’ll see here that the No. 1-lowest priced vehicle has 60,000 more miles on the odometer than ours does. In an effort to save money, would you consider a vehicle with more mileage?
C: No, probably not.
SP: OK…You’ll notice that the next vehicle is yellow in color and 83 miles away. Would you consider a yellow vehicle, or one that is different than the silver or gray that you’ve requested?
SP: OK, then, let’s take a look at the third-lowest price, the one right below our price. You can see that this one is being offered by an independent dealer and doesn’t have an available vehicle history report. Would you be willing to buy a vehicle from an independent dealer without the security of a vehicle history report or the assurances of a well-established dealer such as ourselves?
C: Well, I’d rather buy the car from you.
SP: I appreciate that. Can you appreciate the fact that ours is just slightly higher than the one offered by an independent dealer and it comes with all of our assurances? Based on this analysis, can we earn your business today?
Regardless of whether the customer says “OK,” or asks for a further discount, can you see the benefit by having changed the dynamic of the conversation? And can you imagine the power of a product such as RealDeal.com, the first objective pre-owned price check product for dealers, which is specifically designed to aid the salesperson by providing the necessary documentation?
What the dialog above demonstrates is the fact that using documentation in place of negotiation removes the shopper’s ability to tell fictional or exaggerated stories to justify their insistence on an additional discount. This levels the playing field and allows the dealership to “justify” and the customer to “validate” the price in a collaborative non-confrontational manner. Information is powerful and it is a shame if the dealership possesses such information for the purpose of pricing the vehicle properly, but can’t leverage it properly to allow sellers and buyers to mutually arrive at a fair selling price.