Wednesday, July 11, 2007

The Anatomy of Haggling

We had been doing our due diligence for quite some time. We had compared models side by side on Kelly Blue Book's website and even ordered the extensive reports off of Consumer Report's website. This past Saturday however, we were merely going to go window-shopping and perhaps test-drive a couple vehicles and instead we came home with a new Honda Odyssey minivan.

After we had dropped off Little Abbey with a friend, we headed to the Dodge dealer which happened to be the nearest. It had been wiped out by a tornado earlier this year and had evidently not quite recovered. While they had plenty of vehicles on the lot, the office consisted of a trailer and nobody was there. Odd for a Saturday. So we looked at the stickers, compared options and left.

Our next stop was the local Toyota dealer. Amazingly we made it onto the lot unseen and for a while looked through their selection of vehicles. Neither of us are were really interested in spending extra money for such features as power lift gates, navigational equipment, etc. and all the minivans there were fully loaded. They were so loaded that their prices were almost $10,000 more than the base model, which they apparently didn't have in stock. To check we walked inside where we were quickly ambushed by Troy who confirmed our question and then proceeded to convince us to stay and "talk" for a while. We declined saying that we might come back if we didn't find a base model we liked elsewhere.

I had wanted to look at Chrysler Town and Country's since there seems to be many of them on the roads these days but oddly there wasn't a Chrysler dealer in town so we headed to Honda instead. Honda had been our choice for both features and looks so when Jen quickly came out the door and ambushed us before we made it to the minivan section of the lot, we meekly let her take charge. She opened up an LX model and gave us an in depth tour of its features. I must say that I was impressed with what came standard on the Odyssey but required the deluxe touring packages on others.

One of the big reasons I like Honda is that they don't have packages. They put the basics standard and then between models, more are added. So when you look at a certain model such as the LX, all are identical in what they contain and anything extra is considered an accessory and must be added by the consumer one at a time according to a price list. Most American cars have different packages and like models on the lots will have different packages so that no two are the same. It makes it very confusing to do the price haggling, which I explain soon.

We test drove the minivan and returned to the dealership. Now the fun began. Jen invited us inside to her desk where we could "talk" but first asked us if we wanted a drink. Neither of us did but we both said yes just so we could get a minute to ourselves. I quickly confirmed with my wife that she loved the vehicle and that we should make an offer. When Jen came back, she showed us the sticker price that we already had read on the window earlier. I asked he what their lowest price was not really expecting an answer because normally they make the consumer make the first bid. She went off again and while gone my wife and I discussed our first offer. Jen came back and had a price $2000 less than the sticker price on the car.

Having done due diligence, I new exactly what the dealer had paid for the car. This information can be obtained easily through numerous websites. Taking the dealer invoice price, which is considerably less than the sticker price, you can add the destination charge and other charges like gas-guzzler charges if they apply and come up with a number. This isn't the price the dealer pays to the manufacturer until you add in the dealer holdback. A dealer holdback is a percentage of the manufacturers suggested retail price or MSRP. It benefits the dealer in three ways. Dealers borrow money based upon the higher invoiced amount so the dealer can borrow more. Sales personnel are paid commissions on gross profit of each sale so more money means more commissions and most importantly, it allows dealerships to advertise "invoice price" sales and still sell their vehicles making hundreds of dollars on each transaction. So knowing what the dealer holdback was, I could determine the lowest price in which a dealer would make zero dollars.

Now the dealer deserves a profit as we all do, so I usually start at the bottom range of typical profits that range up to 8% depending on market and demand and offer 4% over the zero dollar point. However, this time I was taken back by having Jen give us $2000 off without even trying and more so that her offer was only $500 more than what I had planned to offer. I told her to take another thousand dollars off and she had a deal. It was now manager time.

The manager approves all transactions on each vehicle that is below some value that only they know. Since we were below that value with our offer, Val the manager needed to be briefed. When Jen came back, she countered offer and took another $400 off her previous offer, now just $100 over what would have been my initial offer. We haggled a bit on various options and gave her another offer $300 less than her last offer. This time Val himself came back and after briefing us on their VIP service which was basically detailing the car and putting a full tank of gas in it which is standard for any new car purchase, he said they couldn't go any lower.

At this point we only had two choices, to accept or walk away. The hope is that if you get up and start to walk away, they will maybe throw out another offer but as we chose to walk away, another offer never came. So we left the dealership and went out for a late lunch. During lunch, I decided it was time to get serious and pulled out the Consumer Reports report on the very minivan we had been haggling on. I highlighted the dealer invoice price, added to it the destination charge, subtracted the dealer holdback and wrote that figure on the back. I then created a scale from 4% to 6% profit on the back and put their last offer in at just over 5.5%. I intentionally left off 7 and 8% so as to give them the impression that they were already at the upper end of the scale when they were not.

After lunch we drove back and Jen again met us out in the parking lot and walked us into her desk. I pulled out my report and showed her, pointing out what Val had paid for that vehicle and stating that he was entitled to a fair 4% profit and I didn't begrudge him of that fact. I made an offer that was $50 more than my last offer and still $250 less than theirs. Once again Jen disappeared to consult with Val and Val came back again going off on a long winded tangent about the VIP service and how we got a free oil change and tank of gas with the van before saying he just couldn't go any lower. At this point I knew that he wouldn't.

We had reached the point where he would rather keep it and sell it tomorrow to someone else willing to pay more than to sell it to us. But call it a manly ego thing, I just couldn't walk back into the dealership and accept the same offer that we had before we had left for lunch. So I said that my wife said that we couldn't accept the offer unless they threw in a cargo net. Val had already gone back to his office so Jen left once again. This time they both came back with smiles and congratulations amid handshakes. We had a deal.

Since we had diligently saved up our money and were going to pay cash, discussing financing was very quick. My insurance company isn't open on Saturdays and since I only have liability on our other two vehicles, driving it home wasn't an option until we had it fully insured. So we made plans to pick it up today. But after getting the insurance straightened out yesterday, we decided to just get it done with and get the vehicle home. So last night after work, we drove up and completed the paperwork and I wrote the biggest check in my life by a few dollars. (The house down payment was just slightly less.) After getting another tour of the features we drove home, me in the new Honda Odyssey.

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