B.W. Asked: “The last time I bought a car the salesperson went through a whole sob story about how the amount of money I was offering them wasn’t fair and didn’t allow them enough profit. I’m afraid I fell for it and paid too much. I need to buy another car now and I want to know how to handle the ‘fair’ argument. What is a fair profit for the dealership on a new car?”
The whole fairness thing mixes up psychology and business. Basically statements like: “We have to make a profit too, you know.” “I have a mortgage to pay just like you do.” “You are really being very unfair to us.” “Do you really think that anybody could stay in business at the level of profit you’re offering us?” are guilt trips. They are simply part of the dealership’s psychological warfare plan.
Do you imagine, even for a minute, that they are interested in fairness to you? On those rare occasions when a car is very popular and in short supply, they have no hesitation whatsoever in charging above the sticker price for the car. If you said to them, “that’s not fair,” their response would be “too bad. If you want a car, that’s the price.”
The real issue is the dealer’s bottom-line and understanding the economic factors that go into creating that bottom-line. Most dealers will, reluctantly, sell you a car that has a 3% profit margin for them. And for most cars, that 3% will come from the Holdback.
Why? Why will they accept a 3% profit? The reason is that most of the dealer’s costs are fixed overhead costs. They don’t change whether or not they sell you a car. The only cost the dealer incurs when the cars sold is the salesperson’s commission which, on a 3% profit sale, will usually be in the neighborhood of plus or minus $100.
3% on a $25,000 car is $750. When the dealer becomes convinced that you really won’t pay more than that and that you are about to head off to their competitor to buy that car, the light bulb goes off and they decide they would really have rather have that $650 net profit ($750 minus the $100 salespersons commission) instead of letting you take it to their competition.
Now this point you might be saying, “But $750 is still not a lot of money.” There are two answers to that. First, it’s important to understand that new cars are almost a loss leader for dealerships. Dealer profit primarily comes from four sources. These are: new car sales, back-end sales such as financing and extended warranties, used car transactions, and service. Generally, the profit on new car sales makes up the smallest segment of total dealer profit.
Second, the only people who really can decide what is fair and what is enough is the dealership. If it’s not fair and if it’s not enough, they won’t do the deal, even if you walk out. However, we know from experience that in most cases they will accept a 3% profit, so by definition, it must be enough, otherwise they just wouldn’t do it.
So don’t engage or argue about fairness. Just refocus the discussion back to the price of the car. You can say things like “I understand what you’re saying but we really need to focus on the issue at hand here,” or “I understand fully, but it is your car and you will make the final decision as to whether or not to sell it to me.” And then just wait them out. Remember Schatzki’s First Law of Negotiation, “Don’t just do something, sit there.”
For a complete roadmap on how to negotiate when buying a new car and links to all the information that you need to calculate the dealers bottom-line, go to the New Car Negotiating Page. There you’ll also find a compendium of all the strategies, tactics and techniques that you will need to negotiate a great price on that new car.
If you have any car negotiating questions, I would love to hear from you.