One-by-one the modern economy and the Internet are improving the world by picking off age-old business models that put too much power in the hands of one party. One example is how challenge is driving improvement in the process of car sales. A recent article in BusinessWeek reports that more and more dealerships are dumping the haggle process and moving to fixed price sales.
Anyone who has bought a car in the past few years knows how unfair the process of buying a car can be. Simply put, the dealers hold an unfair number of cards in their hands. We spend a few weeks once every 3-5 years thinking about buying a car, a very stressful situation. The dealer (like a blackjack dealer) plays the game 8 hours a day and knows all the buttons to push. They have developed a system that preys on our mindset, distracts our attention, and uses baiting and switching to screw us for a few extra bucks. A few people, like my Dad, love the haggling process, but most people dread it. We know we're going to get screwed and just do what we can to limit the damage.
But the power of the Internet is upsetting the landscape in consumers' favor. We can now look up what a car costs the dealer, get easy access to impartial comparison data, and ask multiple dealers to bid for our business from the comfort of our living rooms - then go pick up the winning vehicle in the color we want.
As a result, an increasing number of car dealerships are skipping the haggling process and moving to fixed pricing. Not only do 65% of consumers prefer this format, but the results are turning out to be a winning proposition for the dealers as well. Benefits include:
- Win with women. They are now making half of all purchases, and can't stand haggling with mostly-male salespeople.
- Saves time. Buying with haggling takes 4.5 hours on average, versus 45 minutes in a fixed price environment. Today's consumer is too busy to wait.
- Fewer sales people needed. The number of managers needed in the back-room are cut in half since they are not needed for the haggling game (described in frightening detail here). At an average salary of $150,000 per year this can add up.
- Lower advertising costs. Those Sunday ads are gone with fixed prices. This can save $300 per car sold.
- Greater loyalty. Haggling creates buyers' remorse and outright anger against the dealership who screwed you for every possible penny. One dealer reports that repeat rate has doubled since moving to fixed prices; and 70% are coming back for (highly profitable) service, up from 40% before.
While new brands like Scion and import leaders like Toyota and Honda seem to be moving faster to fixed prices, you might not be surprised to hear that the domestic Big Three are late to the party. GM, Ford and Chrysler have too many dealerships as is - which means the first local dealer to go fixed price is undercut by neighboring rivals.
I'm not in the market for a new car today, but after reading this article I actually have less dread for when that day arrives. But for now I'll keep squeezing every last mile out of my '99 Honda Accord.