First appeared in New York Times
When it comes to negotiating a price on a new car, the
script has not really changed much over the years: The dealer’s salesman writes
down a price, you counter and then he walks to the back of the showroom to talk
with the manager to “see what we can do.”
At least consumers no longer have to enter the process
blind. Prospective buyers can educate themselves on Web sites like Edmunds and
Kelley Blue Book and get suggested retail prices and find out how much their
trade-ins are really worth.
Still, the auto industry has not embraced the digital age in
the way other businesses, like real estate or travel, have. In part, that is
because the auto dealers’ business practices are protected by state franchise
laws.
But then, a company called TrueCar.com came onto the scene
and tried to shake things up. It started running television commercials late
last year, which attracted a lot of attention, and the industry immediately
pushed back — hard. Here’s why: Besides showing what other car buyers paid for
a particular car, TrueCar also gave an estimate of the dealer’s true cost. But
what really alarmed the industry was TrueCar’s promise to deliver a guaranteed
price from several dealers, essentially eliminating the need for any haggling.
The auto industry worried, perhaps rightly, that all this
would squeeze their already thin profit margins on new cars. So, after several
dealers’ associations complained that TrueCar was violating various laws,
regulators from several states told TrueCar that they questioned the site’s
business practices. Honda Motor Company also protested loudly, threatening to
cut off marketing dollars to dealers that did not follow its guidelines when
promoting its brands on TrueCar’s site.
“There is a fear that TrueCar might work too well,” said
Scott Painter, the company’s chief executive, a serial entrepreneur who also
started many other auto-related sites, including CarsDirect.com.
So how long can the car industry continue to operate the way
it did when your grandfather walked into the showroom? And does TrueCar really
provide the best model for consumers who want a fair price without the hassle?
Clearly, at least some dealers fear that showing their hand
will drive them out of business. “Dealers are afraid if they give customers
their best price, they will just take that price and go to another dealership
and see if they can beat it,” said Jeremy Anwyl, vice chairman at Edmunds, an
auto research Web site.
And even Mr. Painter acknowledged that though most of the
dealers that his site works with have managed to hold their profit margins
steady, dealers in some markets became so incredibly competitive that their
business would not be sustainable over the long run. “We have always said it is
not a race to the bottom,” Mr. Painter said, adding that for his service to
succeed, dealers need to succeed. “But there is no question that dealers’
natural tendency to compete with one another has resulted in extremely low
prices.”
To comply with regulators and their patchwork of different
state laws, TrueCar initially stopped operating in a handful of states while it
tweaked its business. It has resumed operating in those states except for
Colorado and Louisiana (it doesn’t operate in Alaska).
Now, the guaranteed prices will be delivered directly from
the dealers instead of appearing on TrueCar’s Web site. And depending on where
you live, the pricing promises may be called an “upfront price,” which is a
guaranteed price that the dealer is willing to sell at. Or in places where
upfront pricing is not allowed — because of the possibility it could lead to a
bait-and-switch situation — consumers will receive a promise of “guaranteed
savings,” say $2,000 off the manufacturer’s suggested retail price. Those changes will be introduced over the
next few months, Mr. Painter said, though they are still a work in progress.
Besides watering down the way it presents some of its
pricing, the company was also forced to change the way it charged dealers for
the sales leads it provided. In most cases, it will continue to charge dealers
a fee — $299 for new cars, $399 for used — if TrueCar’s introduction to a
consumer leads to a sale. But in places where it is illegal to receive a fee
for the sale, dealers will pay via a subscription. The company also turned off
its commercials — which promoted its haggle-free, guaranteed pricing — while it
creates new ads that focus on things like dealer proximity and service. “The
realities of the franchise system and the protection it has at the state level
means you have to work with the dealers,” Mr. Anwyl said. “You can’t work
around them.”
TrueCar’s critics say its model solves only part of the
problem. The site may be able to ensure a fair, haggle-free price, but if that
drives dealers to compete too fiercely with one another, they will be forced to
find other places to turn a profit. So they may lure you into the dealership
with a low price, but then make up for it by giving you a poor deal on your
trade-in or on the financing. After all, profit margins on the car itself are
not as big as consumers may think. If a dealer can make $1,000 on a $30,000
car, some experts say, they’ve done well.
Others, including Honda, have argued that TrueCar could open
the door to unscrupulous dealers trying to sell a more expensive car or more
options once they get the customers in the door — which Honda said reflected
poorly on the brand. Honda also threatened to cut off marketing dollars to
dealers who promoted its cars on the site below the invoice price, a price that
is supposed to represent something close to the dealer’s cost (though dealers
usually make more money on other manufacturer incentives and programs).
TrueCar said it keeps a close eye on the prices its dealers
— the site currently works with about 4,100 of them — present to consumers to
be sure they are not below cost.
No matter where you weigh in, TrueCar has certainly nudged
the industry forward. It claims that its data is even more granular and
accurate than many of its competitors’ because it is pulled from 30 different
sources; the site collects its pricing information from lenders, insurers, the
state registration office and tax records, among other sources.
Regardless of where the data comes from, the prices I found
when searching for a standard-issue 2012 Toyota Camry LE in Brooklyn came
pretty close to the ones on the Edmunds and Kelley Blue Book sites. Both
Edmunds and Kelley Blue Book listed the manufacturer’s suggested retail price
as $23,260 and the dealer invoice price as $21,348. TrueCar had the same
M.S.R.P, but its invoice price was $379 higher, at $21,727.
Of course, what consumers really care about is getting a
good price. Kelley Blue Book calculated a “fair purchase price” — defined as
the price people are paying dealers based on transaction data — of $21,676. The
equivalent price at Edmunds, called the “true market value” — or an analysis of
what is being sold adjusted for incentives to dealers — was nearly $300 more,
at $21,959.
TrueCar provided a “target price” — which it defines as a
good price — of $21,927. The site suggests starting negotiations at a “great
price,” or the factory invoice of $21,727, but to expect to receive something
closer to the “good price.” (It also said there were no customer incentives
available, though Kelley mentioned a $1,000 rebate for new college graduates.)
Within seconds of filling out the “contact dealers” form
with my information, I received an e-mail from Glen Toyota of Fair Lawn, N.J.,
with a link to my first quote from a dealer. It came in just between the “good”
and “great” prices: $21,848, and was valid for three days. The e-mail offer
also included a financing special that would require a $4,995 down payment and
cost $311 a month; it carried a 3.99 percent annual percentage rate for 60
months. The dealers are contractually obliged to honor those prices, and if
they don’t, they risk being kicked out of the network. And if consumers find
they did not get what they were promised, Mr. Painter said, TrueCar will write
them a check for the difference.
Even if the idea of a no-haggle seems appealing, experts
said you shouldn’t limit your search to any one site, but to survey several.
Both Edmunds and Kelley Blue Book have more detailed
information about the cars themselves and their overall longer-term costs (and
what if there is a nearby dealer who isn’t in the TrueCar network but is
willing to make a better deal?).
You may also be able to save yourself some time by e-mailing
the dealership’s Internet sales department. “You can have a deal lined up
before you even go into the dealer,” said Alec Gutierrez, senior automotive
market analyst, at Kelley Blue Book. “That is a channel that a lot of consumers
miss out on.”
