USA TODAY AUTOMOTIVE ROUNDTABLE DISCUSSION
Los Angeles -November 27, 2012
"Are Online Car Shopping and Information Services Believable and Still Relevant In Today's Market?"
DAVID vs. 5 GOLIATHS
The "Showdown" Meeting Between Fighting Chance And The Auto Info Industry's Giants
Here's much of USA TODAY's article in its December 7, 2012 edition: (I have removed the names and corporate titles of the participants.)
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Surprising Tips For New-Car Buying In The Internet Age
No. 1: Don't Trust That Invoice Price
James R. Healey, Chris Woodyard and Fred Meier, USA TODAY
While sharp-minded buyers are likely to feel almost smug nowadays, armed with more inside information than ever, it can be incomplete and misleading.
STORY HIGHLIGHTS
INTERNET CAR SHOPPING ISN'T A MAGIC BULLET FOR DEALS.
CAR-BUYING SITES SAY BUYERS DON'T REALLY WANT LOWEST PRICE.
CONTRARIAN CALLS THAT A BOGUS ATTITUDE.
LOS ANGELES — It's nearly two decades into the age of Internet car shopping, but despite the information explosion, most buyers don't have a clue. In fact, at least one shopping expert argues, neither do some of the online services that a lot of people count on to guide them toward the best price for the new cars they crave.
As the Internet has made car shopping seemingly more transparent, the auto industry has moved to change the process to make the waters even muddier.
And as the Web has let people shop nationwide, freed from the tyranny of often-uncompetitive local prices, it also has let dealerships see what rivals everywhere are offering — effectively leveling prices because no dealer is likely to offer much bigger discounts than the competition.
While sharp-minded buyers are likely to feel almost smug nowadays, armed with more inside information than ever, that information can be incomplete and misleading. Buyers in some ways are as vulnerable as ever to professionals whose livelihoods depend on making the sale.
To probe the secrets of car buying and data available on the Internet, USA TODAY invited representatives of six shopping services to a roundtable discussion at the Los Angeles auto show. They were candid, even blunt, and what they said sometimes was shocking.
One key point: What once was the holy grail of in-the-know deal-seekers — uncovering the dealer's "invoice price" (what the dealer paid) for a new car — now is easy to find on the Net.
But at the same time, the industry is making that "price" increasingly meaningless.
Automakers have fattened dealers' "invoice" or wholesale price so it looks as if they're paying a lot more than they used to — perhaps 95% of the retail sticker price, vs. 85% before Internet car shopping began in the mid-1990s.
But that modern invoice number now is padded enough to let automakers send significant sums back to dealers in hardto-track give-backs and bonuses that make the dealers' real (and well-hidden) wholesale cost for the vehicle well below "invoice."
HOW 'HOLDBACKS' AND OTHER DEALER CASH INCENTIVES ADD UP
Such give-backs are beyond the traditional "holdback" by most automakers that has long inflated the invoice price. The holdback is an amount roughly equal to 2% of the sticker price (it varies by automaker, and a few don't use the practice) that the car companies usually refund to dealers periodically. It also has given automakers leverage over dealers, which are independent franchisees — the car company can withhold the amount if dealers don't meet automakers' requirements.
The hidden dealer cash incentive programs inflating today's invoice come in many variations.
Some are variable amounts based on meeting sales targets set dealer-by-dealer — and are sometimes even retroactive to the previous quarter. These programs can mean that even the dealers might be uncertain of their final cost per car until they sell their final car of the period.
Others are so-called "atta-boy" payments of up to hundreds of thousands of dollars for achieving the highest scores on the customer satisfaction surveys sent to new-car buyers.
A very small number are simply the old-fashioned, direct factory-to-dealer incentives, often unadvertised, that might or might not be passed along to buyers.
WHY ALL THE COMPLICATED GIVE-BACKS?
"It tells me that (automakers) and dealers responded to the publishing of invoice pricing online and said, 'We need to find another way to mask what (dealers) are being paid so that people don't feel like they're getting screwed," said the Cars.com roundtable participant.
Another participant says we shouldn't be surprised. "Consumers still think the dealer invoice price has some magic to it. It doesn't," emphasizes James Bragg, head of Fighting Chance, a small car-buying advice-giver he founded in 1993. "We've let ourselves, over the decades, get conned into believing that a family with a $10 million net worth, of which $5 to $7 million is in their car store, is going to let you and me know what they're paying for their cars. Does that make sense to anybody? That's nuts!"
But perhaps surprisingly, given how often they use "invoice price" as a touchstone, many brand-name online car shopping sites tend to agree with Bragg's dismissal of that price.
Exception: Edmunds’ participant said the invoice, however true or false, is another data point, and "every piece of data you have out there is helpful and can be critical" as a shopping tool.
The other folks at the table were senior managers at TrueCar.com, Kelley Blue Book and Consumer Reports.
BUYERS DON'T WANT A DEAL?
Bragg, a peppery contrarian, considers the big-name shopping sites no friend of buyers, arguing that they don't work hard enough to show the lowest prices.
Kelley Blue Book's participant says that might be so, and — with an attitude likely to stun hard-core horse-traders — explains: "Overwhelmingly, our research shows that consumers ultimately don't want the best price."
"We have data to support exactly what he said," adds the TrueCar executive. "We do post-purchase surveys of 100% of our consumers, and the ones who paid the least for their cars are the most dissatisfied with their cars. The ones who paid average or above average are actually the more satisfied."
How is that possible?
Those who didn't haggle over the last dollar "spent an average of one to two hours less at the dealership. They feel they got treated fairly on the price and on financing and trade-in values,” he says.
Adds Cars,com’s person, from a personal experience, "I went to buy a car and the dealer sat down and said, 'I want $300 over invoice,' and I said, 'Fine with me. Let's do that and cut a deal right away.' It wasn't rock-bottom price. It wasn't even the invoice price. And if I really pushed, maybe I could have spent three more hours of my life arguing with this guy," but it wasn't worth the hassle.
Bragg finds that hard to accept: "I have customers who will drive 120 miles to save a thousand bucks, and there are more of those than you would believe."
The Kelley Blue Book executive does not. "There is a segment who absolutely wants that rock-bottom price and will drive 500 miles to save $50. But overwhelmingly, consumers just want the fair price."
What is the "fair" price? "I don't think anybody in this room can tell you what the fair price is on any vehicle for any specific individual," the KBB exec says. He says a fair price "means that when I tell my neighbor what I paid for the car, I won't be embarrassed."
A LOOK AT SHOPPING SERVICES
To understand the viewpoints, it's helpful to know how the shopping services operate.
Fighting Chance charges customers: $49.95 for help on the first vehicle and $15 for more ordered simultaneously. The price buys advice on "exactly what to do and say each step of the way as you conduct a competitive bidding process from your home or office, without walking into a single car store."
Bragg says consumers should do this: "Ignore all the (price) advice on the Internet. When you decide what you want, call 10 dealers and tell them you're going to buy where you get the best price." In Bragg's view, the best use for the Internet is to help decide what to buy, not how to buy it or how much to pay.
TrueCar.com considers itself a buying site, not a shopping site. It costs nothing to use. But once a user prices a vehicle on the site, he or she is encouraged to submit information to a local dealer listed at the end of the pricing exercise for follow-up sales calls.
The site provides a price curve of prices being paid for a specific vehicle, showing the midpoint price, and stretching out to show the best and worst prices. The site gets money from car ads, and dealers pay TrueCar.com $299 for every referral that leads to a sale.
Consumer Reports charges $14 for a pricing report on one vehicle, $12 for each additional report ordered at the same time. CR provides what it calls a "bottom line price" from which to start negotiating. No advertising is involved, but pricing information is provided by TrueCar.com.
Edmunds.com, KBB.com and Cars.com consider themselves pure shopping sites. They cost nothing to use. They provide "market" or "target" prices that take into account what others paid for similar vehicles as advice for negotiating. Cars.com also offers a list of similar vehicles in stock at dealers within the radius shoppers specify. The sites' money comes from advertising, which automakers hope is targeting people at the perfect moment — when they are seriously shopping for cars.
All the online sites foresee fast changes in their businesses, such as providing real-time help for people as they buy. "I think people are looking for some human touch to tell them this is good, this is bad," the Edmunds rep says. "We just developed something last year where it's live advice. So if people are in the car-shopping process, they can now call. They can do a live chat and they can e-mail, too."
Also emerging: comparison shopping or instant purchasing data via tablet or smartphone. For instance, photograph the vehicle identification number of a car on a dealer lot "and you get a quick quote from that dealer. That is the kind of speed expected, especially by the Millennials and Gen-Y's,” says TrueCar’s participant..
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HERE'S MY "PEPPERY CONTRARIAN'S" TAKE ON THAT MEETING
First, I like what the folks at USA TODAY were able to do with that story. They walked very well the fine line between telling the truth aggressively and alienating five other nice people who participated — people they turn to for information when they're covering other stories. (I'd have no problem alienating them, but I'm that "peppery contrarian.") I believe the essential truth came through quite clearly.
I think these are the key things the meeting revealed:
1. Those companies have been providing consumers with dealer invoice prices for up to 30+ years, but amazingly, none of them seemed to be aware of this blatantly obvious pivotal fact — that since the Internet arrived, the car companies have continuously raised the invoice price more than the MSRP, turning that invoice into a bloated imposter of any vehicle’s cost.
Early in the roundtable discussion, I passed around a 12-page exhibit covering showing exactly how this had been done, systematically and dramatically, year-by-year, and model-by model. I listed that data for 47 popular models of these 23 brands: Acura, Audi, BMW, Buick, Cadillac, Chevrolet, Chrysler, Dodge, Ford, Honda, Hyundai, Infiniti, Jaguar, Jeep, Lexus, Lincoln, Mazda, Mercedes, Nissan, Subaru, Toyota, Volkswagen and Volvo. Every auto brand has done this, and they’ve been doing it every year since 1995.
Here’s one example from that exhibit that illustrates how the difference between the invoice and the sticker price has been cut regularly over the years.
% DIFFERENCE BETWEEN THE ACURA TL SEDAN’S BASE INVOICE AND STICKER PRICES
1994 – 15.2%
1996 – 13.2%
1998 – 10.7%
2000 – 9.8%
2003 – 8.8%
2007 – 8.3%
2008 – 8.1%
2011 – 7.2%
2012 – 6.4%
You could have heard a pin drop as they read it. No one said, "That's old news. We've known that for years." I doubt that any of them ever thought about examining that change! But surely they all took that exhibit back to their pricing geniuses, who seemed to have been asleep at the switch for the over 18 years.
I pointedly asked the Consumer Reports representative why that organization hasn’t discovered this and reported it to consumers long ago. I said, “You’ve been selling invoice prices since 1983. That data has been staring you in the face for almost two decades. Who’s been running your New Car Pricing Service, Rip Van Winkle?” (I may not have been his favorite participant.)
2. The TrueCar exec acknowledged that because of the hidden incentive programs, there are times when dealers might sell a car for thousands less that they’d normally charge in order to reach specific bonus targets. No one disagreed. (Those secret programs are almost always in effect for most brands.)
3. There was common agreement that "consumers don’t want the best price."
The TrueCar and Kelley Blue Book research is correct, because 98% of car shoppers probably think that to get the lowest price they have to walk in and haggle in car store after car store after car store.
This ain’t rocket science, friends and neighbors. Isn’t this what they were really saying? “If you want the lowest cost on the second most expensive purchase you make, don’t expect to get it by using our service. That’s because we get all our revenue from auto companies and their dealers. And if we told you the whole truth and exactly how to best use it to save the most money, we’d be out of business.”
4. TrueCar.com, Edmunds.com and other sites base their recommended "target prices" on "the average of what others have paid in your area.” I challenged them on that, saying, "You’re treating consumers like they're idiots. Why would anyone want to pay that price, when, by definition, it means that about half the people got a better price — maybe a much better price?" Their answer: "We're showing consumers what a 'fair deal' is. Our research shows that price isn't everything. They want a hassle-free experience, one they can feel good about. That's what our dealers give them."
If you’re sitting there now, hoping you’ll pay something close to what others have paid, those are the sites you should use. But I haven’t heard that from even one of Fighting Chance’s 143,000+ customers.
5. Those that use the phony sticker price as the basis for their claims of consumers’ “dollar savings” using their service actually defended that misleading practice by stating that “the states won’t let us make any other comparison.” I had some fun with that response, saying, “So it’s the states that require you to mislead consumers with those numbers. You’re saying ‘the Devil made you do it,’ right? That straw man is loaded with more hay than Ray Bolger had as the scarecrow in 'The Wizard of Oz' movie!”
There was no response. Obviously, they like using that inflated savings number. It makes them look like bigger heroes. Sadly, there are consumers who don't see through that bogus claim.
In net, little David was the only true consumer advocate at that table. I probably had more fun than the other participants, but they were all relatively cordial. I think they viewed me as a harmless ant on an elephant’s back. Clearly, that was a big mistake.