Beside the cool factor, Apple and Tesla share the concept of company owned stores and fixed prices. In the world of new cars, that model is revolutionary and is often cited as a coming trend. One question that comes to mind is whether consumers are better off or worse off in that environment. The answer may surprise you.
I’m ignoring service and convenience, and focusing on price. Since automobile ownership represents such a large portion of the average person’s income, anything that affects the price paid for new vehicles has a major economic impact on consumers.
If the average price paid for any given vehicle is higher in a fixed price scenario than in the current negotiated price scenario, then of course that scenario is worse for consumers. But what about when/if the fixed price is less than the average negotiated price?
It is plausible that a fixed price would be lower than the average negotiated price. If a manufacturer owns the retail outlets, certain distribution efficiencies will occur. For instance, manufacturers will continue to advertise their cars but will not have to spend to advertise where to buy a car. Today, advertising by new car dealers totals $7.6B in the US, contributing hundreds of dollars to the cost of a new car. There may be additional savings in inventory management, sales training and commissions, and more.
It’s possible that manufacturers keep the efficiencies for themselves, but let’s assume that at least some of these efficiencies get passed on to the consumer – we’ll use $200 in this analysis. The question remains – are consumers better off? Maybe a better question is “which consumers are better off?”
For any given car model in any given market, there are a range of prices paid for identically equipped vehicles. Sometimes the range looks like a classic “bell curve” and sometimes not – but in all cases some consumers pay the average price, some pay more than average, and some pay less.
The figure below is a sample graph from TrueCar, showing actual prices paid for a Honda Accord. You see the wide range of prices, with $23,376 being the average.
Now let’s superimpose a lower, fixed price on the graph, and we can compare the two scenarios.
In the fixed price scenario, everyone pays $23,176 – a $200 savings over the negotiated average. In the negotiated price scenario, just over half of consumers pay more than $23,176 and just under half pay less.
So who is better off and who is worse off?
A recent study showed that about 50% of car buyers either somewhat or fully enjoyed negotiating the price of their car, while a similar number (and probably the same group) took some time to prepare for the purchase by doing product and price research. Intuitively we can conclude that those are the buyers who paid less than the average price, while the people who didn’t prepare are the ones who paid more.
The answer is now clear – in today’s negotiated price environment, buyers who prepare end up paying less and are better off than are unprepared buyers, and better off than they would be in a fixed price environment. In the chart above, look at the number of sales made to the left of the fixed price line – all of these people will pay more in the fixed price environment. Conversely, unprepared buyers are better off in a fixed price environment – and the difference can be hundreds and even thousands of dollars. In the case of the Honda Accord, as much as $2,000.
The vehicle market is just about the only product category where a little preparation can make a vast economic difference.
So whether you are better off in a “Tesla-ized” world depends on the kind of buyer you are. If you’ve read all the way to this point, odds are you are better off in today’s environment.