How to Win
Every Time When You Negotiate a Car Price
Backed by SCIENCE!
by: Peter Levy, Carjojo CEO
10 OF THE BEST WAYS TO NEGOTIATE A CAR PRICE
(LIKE A SUPERHERO)
If you walked up to a cashier at your local Starbucks and said, “The drip coffee has been sitting there for 30 minutes and you’re going to throw it out soon. I’ll give you $.50 for a Tall,” you’d be going home thirsty. But walk into a car dealership, and you’re expected to negotiate a car price with the salesperson.
Pay sticker, and you’re giving the dealer hundreds or—very often—thousands of dollars in additional profit.
If you’re like me, you love new cars (and that new car smell). However, we hate shopping for them, right?
What’s the big stumbling block?
Haggling with dealers, of course.
A car shopper may negotiate a car price only once every five years. On average, consumers buy just 9 cars throughout their lifetime according to auto research firm Polk. A dealer negotiates every day—multiple times a day. Not to mention, s/he has attended classes to become a better negotiator.
Despite your best efforts, dealers have the upper-hand in negotiations. You may feel that you lack the knowledge and experience to get a great deal, or even recognize when a deal is great.
Until now! We put together a number of tips to help you gain the edge when buying a new car. Or, at the very least we provide a few insider tips to provide that boost of confidence you need when facing a salesperson.
A car shopper negotiates a car price once every five years and on average buys 9 cars throughout their lifetime
10 of the Best Negotiation Tips Your Dad Never Told You
With preparation—and a few tricks of the trade—virtually anyone can confidently negotiate a car price and win with even the most seasoned dealer.
Know Your Facts
Educate yourself about your car choice, including a fair price. Go into a dealership with data and information about the make and model you prefer, your necessary add-ons, and with a price in mind that’s good for you and realistic for the dealer.
Terms you may hear when you negotiate a car price
Invoice Price is the manufacturer’s initial charge to the dealer. This usually is higher than the dealer’s final cost because dealers receive rebates, allowances, discounts, and incentive awards. Generally, the invoice price should include freight (also known as destination and delivery). If you’re buying a car based on the invoice price (for example, “at invoice,” “$100 below invoice,” “two percent above invoice”) and if freight is already included, make sure freight isn’t added again to the sales contract.
Base Price is the cost of the car without options, but includes standard equipment and factory warranty. This price is printed on the Monroney sticker.
Manufacturer’s Suggested Retail Price (MSRP) shows the base price, the manufacturer’s installed options with the manufacturer’s suggested retail price, the manufacturer’s transportation charge, and the fuel economy (mileage), crash test ratings, and some other items. The label affixed to the car window, is required by federal law, and may be removed only by the purchaser.
Dealer Sticker Price, which when present is on a supplemental sticker, is the Monroney sticker price plus the suggested retail price of dealer-installed options, such as additional dealer markup (ADM) or additional dealer profit (ADP), dealer preparation, and undercoating.
Don't Get Duped
In the book, Letting The Cat Out Of The Bag: How The Auto Industry “Redesigned” The Dealer Invoice Price When The Internet Arrived, John Bragg discovered how dealers have been manipulating prices on cars since the internet has made it easier to share and discover the insider pricing.
In response to this threat, the auto industry launched a secret program to transfer beaucoup bucks from the sticker price to the invoice price, a process that has continued for almost two decades.
What Bragg uncovered was a clear trend to lower the perceived profit margin (what the dealer is willing to sell it for vs. what the manufacturer suggests they sell it for). Bragg’s findings are illustrated in the chart.
They’ve done this by steadily raising the invoice price by more than they raised the MSRP, thereby disguising a big cache of available dealer-incentive dollars as dealer-cost dollars.
Fighting Chance confirms Bragg’s research. Fighting Chance examined the ratio of Factory Invoice to MSRP over a twenty year span from 1993 to 2013. What they found was that in the early 1990s, Factory Invoice was roughly 86% of the MSRP – dealers made a 14% profit if they sold at MSRP. By 2013 the ratio was about 94%, leaving dealers with only a 6% profit.
A reason the invoice price slowly creeped closer to the MSRP was so the dealer could say he isn’t making any money on the car. The perception is you have less room to negotiate a car price favorable to you.
Bragg argues that a single-digit profit margin is “wacko.”
They chose this approach because car shoppers have been conditioned for decades to believe the invoice price is a real cost number. And they did it slowly and deliberately, year after year, so that we wouldn’t notice a sudden substantial change.
Applying Bragg’s logic, no dealership could make a profit selling new cars if the invoice price was only 6% off from the MSRP. They would lose money on every new car sale.
Every dealer has the right to make a profit. However, knowing the insider pricing will prepare you with the best possible savings when you negotiate a car price.
Don't Fall for the Four Square Trick
Another insider tip is to understand the dealer’s four-square technique. Every car sales person knows that you will not feel satisfied with the sales process unless you believe that you won the negotiation process. The four square system allows a salesman to make it appear as if you win. A system that complicated is meant to confuse you. We’ll save this for another blog post.
Here’s a sneak peak of the four-square technique from Car and Driver,
Most car salesmen use a worksheet called a 'foursquare' to map out the major factors of your deal: purchase price, down payment, monthly payment, and trade-in value. Some will try to juggle the elements of this sheet, forfeiting a little to you on down payment but inflating your monthly payments while you bask in the glow of victory, or giving you a good deal on your trade-in but negating that with an inflated new-car price.
Know Your Fees
Account for all fees upfront: Dealer prep or doc fees are just two of the often legitimate fees that can add hundreds or thousands onto a vehicle’s final price. Ask the dealer to spell out all the fees you’ll pay on the vehicle at the outset, and include them in your first offer.
This handy chart from Consumer Reports provides all the possible fees when you negotiate a car price:
|Fee||What it’s about|
|Documentation fee or conveyance charge||A charge of $150-$300 for processing documents that establish your title and registration is reasonable. Question any charges that are higher than $300.|
|Guaranteed Auto Protection (GAP) insurance||A must for leased vehicles. It covers the difference between your payments over the life of the lease and the residual value of the vehicle in case it is stolen or totaled in an accident.|
|Title and registration||Let the dealership handle the formalities of establishing you as the new owner of the vehicle and obtaining temporary tags.|
|Sales tax||Some states calculate tax on the full price of the car, but most figure tax on the difference between the price of the new car and the trade-in, if appropriate.|
|Destination charge||A standard charge that covers shipment of the vehicle. Question any secondary “delivery fee” that’s listed on the contract.|
|Advertising charge||Increasingly common, regional dealer cooperatives assess fees to support promotional efforts. If this charge shows up only at the closing, contest it. But you may end up having to pay.|
|Extended warranty||Extra coverage for major repairs that may be needed after the manufacturer’s warranty expires.|
|Additional dealer markup||Sometimes added to hot-selling models for additional profit. You can contest this, but if the model is in high demand, the dealer may not have any incentive to work with you.|
Know Your Rebates
It’s reasonable to think that if a rebate lowers the price of the car, it would also lower the tax. This is the not necessarily the case. Taxfoundation.org says, “It is sensible to think a rebate that lowers prices would also lower the sales tax paid by consumers, but apparently this would be a false assertion.”
George E. Hoffer, professor of economics at Virginia Commonwealth University explains:
Under the laws of the District and most states, including Maryland and Virginia, a rebate is treated “as a form of cash payment [to the seller] so it doesn’t affect the transaction price."
Know Your Limits
Dealers will often try to tack on extras to the purchase or upsell. Rust proofing and fabric protection are just two examples. Tell the dealer your must-have add-on’s and build them into your offer. Be very skeptical of additional ones a dealer suggests.
|Dealer preparation fee||Most manufacturers pay dealers to remove the coatings and coverings that protect the vehicle during shipment and to clean up the car for you. There is no justification for you to pay the dealer again for this service.|
|Credit life insurance||Your survivors will be able to pay off the vehicle if you die before your payments end. Term life insurance is cheaper, but make sure it’s enough to cover loan payments.|
|Disability insurance||Covers your car payments if you are unable to work because of a disabling accident or extended illness. You may already have disability coverage through your employer; if not, you can purchase it more cheaply elsewhere.|
|Pinstriping||Expensive tape that a detailing shop can put on for you at a lower price than the dealer can.|
|Rustproofing/undercoating||Today’s vehicles are manufactured to withstand corrosive weather and road conditions, so you will not need to pay for additional treatment by the dealership.|
|Fabric protection||This is just expensive Scotchgard. Just say no.|
|Paint sealant||It is little more than a vastly overpriced liquid wax you can easily purchase from an auto-supply shop for $10 or less.|
|Security/anti-theft system||An alarm or theft-recovery device can reduce your car insurance premium. But the high price you pay for a dealer-installed system will likely negate any such discount.|
|VIN etching||This is an anti-theft measure in which the vehicle identification number (VIN) is etched into the glass. Some states require that dealers offer it to you, but none require that you buy it. It can be done less expensively elsewhere or even by yourself with a $25 kit.|
Know Your Data
A dealer’s usually more motivated to sell a car that’s been on their lot six months. Dealers need to turn over inventory quickly. Once you negotiate a car price, ask the dealer if they will apply the price to the newer, identical car on the lot. Carjojo tells you how long any particular car’s been on a dealer lot.
Know Your Price
A dealer may meet your monthly payment requirements but on a loan that lasts a long time with a high interest rate. This ends up ultimately costing you more money. Rule of thumb: you’ll do better if you haggle over the total price.
Gregg Fiden of Real Car Tips explains,
If you're only focused on the monthly payment, the dealer can adjust the purchase price, the interest, terms on the financing, and the trade-in allowance to get you the exact monthly payment you're looking for.
Know Your Finances
Even if you think you’ll pay cash, consider all your options. You may get a better deal if you take a dealer’s financing proposal.
JD Powers explains,
Car dealers have access to a broader array of financing institutions and options than the typical car buyer does, and it is possible the car dealer may find the consumer a loan with a lower interest rate and a lower payment.
However, keep an open mind. I recommend to not state how you’re going to finance up front (unless you know you will do dealer financing). The reason is that dealers make a lot on financing and will often be more flexible on the price if they believe they have a chance at the financing.
Know Your Strength
Haggling over the phone or via email gives you a psychological “home field advantage.” This method often makes it easier to turn down bad offers.
Researchers from Columbia and Harvard found that body language associated with low power (e.g., shorter chair) altered two hormones that generate the feeling of power: testosterone and cortisol.
Ever sit across from the salesperson in a dealership and notice you sit lower than they do?
There’s a reason for that. A short chair decreases your levels of testosterone and cortisol. Those biological changes, in turn, reduce your feeling of power — which gives the salesperson a more favorable deal in when they negotiate a car price.
Know Your Bottom Line
Stick to your bottom line. Walking away when you can’t make a good deal is part of the negotiation process. Do it confidently.
When you negotiate a car price, displaying a positive mood can help at the beginning (when you’re establishing rapport). However, research by VanVan Kleef, De Dreu, & Manstead suggest when you start discussing the terms of the agreement, visual signs of disappointment or worry can cause your counterpart to make larger concessions.
Mind Your Manners
When you negotiate a car price, remember it’s a two-way street. When a dealer meets your requirements on the car you want, be ready to buy right away. That dealer has earned your business.
3 Proven Psychological Tricks to Help You Negotiate a New Car Price
Generally speaking the dealer has the upper hand when negotiating – purely based on experience and frequency. However, there are a few ‘mind games’ you can try that will balance the power.
Show Me The Money
Go to a bank or a credit union and get a cashier’s check or money order for this exact amount, payable to the dealer. When you go to the dealer, show him this check and hand him a photocopy. Let him know that you will of course pay taxes and registration fees. However, be clear that this is the check that buys the vehicle. There is no deal at a higher price.
Old school thinking was to never reveal your offer first. Researchers believed it was more effective to withhold that information. However, new research has uncovered the opposite to be true. You could get a better deal by being the first to offer a price. Disclosing information triggers a need for your counterpart to become more honest as well.
According to a recent study by Harvard, people place more value on precise numbers than on round numbers. A car dealer may think your offer of “$27,000” reflects that you’re just taking a guess to a fair price. An offer of “$27,140” indicates that you are more certain that this is the right price—or at least that this is what you can afford and no more.
Close With Silence
Silence can be your best technique when you negotiate a car price. If the dealer counters your offer pause before responding – even if you think it is reasonable. Silence can make the salesperson feel uncomfortable. In some cases, your counterpart might interject to adjust the offer:
- Salesperson: We can sell the car at $24,500.
- You: [pause for 5-7 seconds]
- Salesperson: If $24,5000 is too high, we can go as low as $24,000.
The “concession timing effect” or the pause first explained by researchers at Carnegie Mellon University indicates to the dealer you might think the price is too high and the potential to walk away from the deal has increased because of their counteroffer.
Over to You
What was your favorite tip? Have a story about your experience negotiating with a dealer? I’d love to hear your best tips to negotiate a car price. Share them in the comments below.