This is practically verbatim copied from "The Millionaire Next Door". Additionally it really has nothing to do with Game Theory, just common sense negotiating. And you can improve on their play by A LOT.
What power does the salesman have? None. He has cars, he wants to sell them. You have the money. You have the power.
He postures that he has the power but really, you can walk out at any time. There are other dealers, there are other kinds of cars, there are other sales guys at that dealer, and you can come back another day. Used cars maybe you don't see great deals all that much but on a new car, there will always be another car.
As a buyer, I want the seller to know two things to make a deal.
1) I'm serious about buying, and have the money/financing to buy TODAY. I can make a deal if he makes a deal. I don't HAVE to buy today, but I CAN. That makes a big difference. No one wants to quote a price that they can never match again, often times there are specific reasons why they can get a price at that moment but can't in general.
2) I'm not interested in the fine particulars. I want the best price. I will look at his lot and his competitors lot, and buy the car that is closest to what I want FOR THE BEST PRICE. Often they have inventory they are desperate to get rid of and will do it with 0 margin or at a loss just to get rid of the car.
An example, my last car was supposed to be $328 a month, but I paid $208 because I got the car in a dark gunmetal gray instead of the black I wanted, even though all the other features were the same no one wanted that color. I eventually grew to like it. I bounced between 3 dealers and they knew I had the cash, they knew I had the credit, and they knew I was flexible. Their initial offer was $250, I squeezed them down from there. If I had just faxed them like this article says I would have gotten nothing because it says I want black, and they didn't have the car in black. If you say you want the car in any color they aren't going to give you a good price because you sound flimsy.
Also as a note, never show one dealer another dealers quote. Tell him the number but NEVER show him the quote. You can cause serious problems for the original dealer and lose your deal. Often times you get these deals with things like the dealer getting a manufacturer rebate that you don't really qualify for but they can fudge some how. You play nice with the dealer, they will play nice for you.
It's interesting that you mentioned your prices in monthly payments, rather than the pre-financed total. What precisely were you negotiating?
This article has a fascinating discussion of the "4 square sheet" that dealers use to fudge negotiations. Two of the squares are price and financing (included in your monthly amount), and the others are trade in and warranty. People generally get a better deal if they're negotiating solely on price:
It certainly is a game. It's an attempt to construct a game of 20 participants bidding on a scarce resource (you, the buyer) with specific rules. And would likely work, unless say, a few buddies happened to chat over beers and the subject of 'that crazy guy on the phone' comes up. The element of scarce information will then break some of the 'rules', negating much if any of hoped for strategy.
I like your approach much better, going in with maximum knowledge is key.
The one I've read about and wish I had the nerve is to get a few thousand in hundreds and right off spread it out on the table in front of the salesman, say this can but yours today, just hit my price.
A nice theory, but has it been tested? It assumes rational behavior on the part of the salesperson, not to mention assumes that the writer understands the motivations of the salesperson.
I once found a car salesman who was asking way too much for a used car on his lot. He refused to budge on price. I couldn't believe both that it was priced so high above market rates or that he wouldn't come down on the price at all. I kept asking, don't you need to go talk to your manager?
I decided that eventually he would come around and called him every day for two weeks with a low ball offer. Eventually the car sold to someone else for $100 above my offer. If rational behavior is to maximize the sale price, then this was not rational behavior. A simple counter offer would have closed the deal with me and netted an additional $500 for the dealer.
After that experience I've often wondered if there are other incentives for car salespeople beyond money. Maybe there's an opportunity cost of selling to a good negotiator when a bad (i.e. normal) negotiator might walk into the dealership. Maybe car salespeople just don't like being on the wrong side of a deal. Maybe they get harassed by coworkers when they strike a bad deal.
If the method works, I'd still be suspicious of the reasons. Maybe calling for 20 prices is a good idea just because one of them, independent of the others, really wants to get rid of the car.
I worked at a dealership for a while so I got to see how things work from the inside. There are tons of different factors. On new cars the auto makers offer various incentives or specials to dealers that might allow the sales person to go lower on Thursday than they would on Monday. It also helps if you're flexible. If you don't mind waiting a week to pickup the car or can take it in a different color you're making the sales person's life easier and they'll usually give you a break. If you're really picky and demanding they really don't care if you go to another dealership so they won't offer you much of a deal.
For used cars the dealers are making money on trade-ins even if they let it go far below the posted price. Any used car they sell off the lot is going to be a bigger profit than cars going to auction. A lot of times you can simply look at the dealer's lot and see how crowded it is. If it's packed with lots of used cars there's a great chance you can walk in and say I will pay $X and get the car. They just want to get it off the lot to make room for better inventory.
My advice, if you're looking for a used car, is to find a dealer that doesn't deal with a huge volume of used cars. They're often selling their trade-ins at a good value because they don't have the volume to make the auction process work in their favor. They'd much rather just sell them off the lot.
I've bought our last two vehicles using a similar method. Most dealers have "internet sales managers" who are salespeople trusted enough by management to quote prices without first asking their bosses. It's not that hard. What was interesting was that one dealer's price was so low that competing salespeople said, "You should go buy that!" Something must have been different about that dealer's incentives -- perhaps they were under pressure from their lender to reduce inventories or something. I'll never know, but the vehicle was about $1K less than anyone else's offer.
I always find these things funny, because there is a belief that all dealerships are the same (that is, the variable is simply the price of the car.) It turns out that dealership location is a HUGE variable driving both pricing and decision to buy. Some people need a car sooner than others; the dealership with inventory is more attractive. The one close to your house or work allows you to get service and still get driven to your destination; buying from a dealership 100 miles away, even with the best price, may not help if you need service that only the dealer can provide (either free or something a local shop can't do).
No question, there is much one can do to shift the power. But there is a reason why no one has yet gotten the car purchase process totally online: the dealers do indeed have some power. They control the distribution of the car to you, and they have location-based impact that, for some people, is important. At the end of the day, you are buying from one of the dealers, and if they are all above your price but you want the car, well, you either pay more than you think you should, or change your car choice.
If you don't care about the "free oil change" services or other post-sales issues involving the dealer, and have the time to deal with multiple dealers and a potentially extended process... then go for it. If you are in an area with few dealers for the car you want, however, you may find the negotiation requires a different approach than merely a PDG assuming multiple equal competitors.
I bought my car from a local dealer for a price that allowed them some profit not because I care deeply about "free oil changes", etc., but because I care about them staying in business.
If my local dealership goes out of business, the next closest one is approximately 50 miles away. That'd be so incredibly inconvenient that I'd almost assuredly end up selling the car and buying a different marque that was locally serviceable.
Auto dealerships add value for me, and as such I will pay a small premium over the marginal cost to help make sure they're incentivized to still be there in 5 or 10 years.
Regarding the advice on buying a car, it seems like a condensed version from the Motley Fool's Guide to buying a car, in the section titled "The Art of the Deal":
One of the things I remember from taking game theory at college was that getting a good deal on a used car is near impossible.
The seller has perfect information (knows all the flaws) and the buyer has imperfect information (only knows what information can be gathered from a test drive and superficial inspection).
getting a good deal on a used car is near impossible
Theoretically, and as predicted by a classic paper by Economics Nobel-winner George Akerlof, yes.
But practically, no. For various reasons the used-car market does not behave like the theory of asymmetric information predicts. Carried to its logical conclusion, the theory suggests the market won't exist at all -- and yet clearly it does! See the Wikipedia article for some discussion:
From personal experience: I've bought a couple used cars -- and always gotten great value. My sister and other members of my family have had success as well.
And plenty of personal-finance gurus will tell you that you should never buy a new car -- the premium over a reliable used-car is rarely justifiable, except on emotional/fashionable grounds.
It's quite easy to get a professionally accredited car inspection for used cars in the UK. It doesn't cost a lot, and it means the buyer regains complete bargaining power.
Of course, it isn't economical to do this for very old cars, or for a lot of cars.
I was buing computer a few years ago (was a student then, so money/time coefficient was a lot bigger :)) , and tried to make it likewise - I've choosed components and went to trip over all computer shops near my flat.
But every single shop I've been didn't have a few components that I've choosen, so I couldn't simplify decision to only one variable.
I've even thought that they may do it so I can't compare prices.
The author mentions South Korea and its foreign policy several times. I would prefer to know more about (and attempt to predict) the foreign policy of North Korea over South, because of its closed-off nature.
Did anyone else think that the author meant North Korea?
Well - south korea does make and export an awful lot of cars.
"The South Korean automobile industry is today the fifth largest in the world in terms of production volume and the sixth largest in terms of export volume."
I think game theory is about coming from a disadvantage (the dealer knows everything about cars and getting the maximum from you) and getting a fair deal in the end, or having the advantage and getting the maximum possible. But the shown solution here, just changes the situation about information and leverage. Yes, everytime you have a disadvantage and put energy in changing to an advantageous situation, then you are in a better situation and get more out of a deal...
No, I am not worried about learning nothing out of this post. I am worried about the author. He just so much does not get the point. When I use mathematics to deal with the car dealer, my intention is NOT to get the information, NOT to gain leverage through dealing skills. I want to use my logical knowledge and skills to change the game from "best dealer wins" to "most logical wins".
It is really good to learn something about leverage. That is very nessesary for everybodies life, especially for us geeks, who are not naturally gifted in this area. But mathematics, too, is a strong tool, with different rules and different advantages. Please look deeper in this matter, too. There could be a real advantage for you over car dealers, who have mostly no scientific background.
Figure out the lowest price they can sell at, add $100 to that, walk out if they say no.
If you really want the car, add another $100. Still no, stand up and walk out. Really, you can live without the SUV.
Tell them you will discuss financing LATER. You have the total amount in cash [right?] so you can decide whether the financing deal they offer is better than a CD or T-bills.
If you don't have cash [stupid] get financing BEFORE you negotiate - talk to your credit union or LOCAL bank first.
How many times does this simple info have to be shared?
Please elaborate.... How could you possibly know this? Do you have insight into the dealer's cost of capital from his lender? If the dealer sells a bunch of Trailblazer SUV's, does he get allocation of 2010 Cameros that he can sell for $5K above sticker?
Always buy rustproofing, if you bought a car crappy enough that the paint job doesn't include anti-rust elements, especially if you live in a location with lots of water-based weather or near the coast.
Why are you adding money to the lowest price they can sell at? That is your target price -- the lowest price they can sell will always be the lowest price that includes a profit (or the smallest loss, for brands like Chevy). Besides, most of the profit comes from the optional packages, which are marked up 200-500%.
[+] [-] krschultz|16 years ago|reply
What power does the salesman have? None. He has cars, he wants to sell them. You have the money. You have the power.
He postures that he has the power but really, you can walk out at any time. There are other dealers, there are other kinds of cars, there are other sales guys at that dealer, and you can come back another day. Used cars maybe you don't see great deals all that much but on a new car, there will always be another car.
As a buyer, I want the seller to know two things to make a deal.
1) I'm serious about buying, and have the money/financing to buy TODAY. I can make a deal if he makes a deal. I don't HAVE to buy today, but I CAN. That makes a big difference. No one wants to quote a price that they can never match again, often times there are specific reasons why they can get a price at that moment but can't in general.
2) I'm not interested in the fine particulars. I want the best price. I will look at his lot and his competitors lot, and buy the car that is closest to what I want FOR THE BEST PRICE. Often they have inventory they are desperate to get rid of and will do it with 0 margin or at a loss just to get rid of the car.
An example, my last car was supposed to be $328 a month, but I paid $208 because I got the car in a dark gunmetal gray instead of the black I wanted, even though all the other features were the same no one wanted that color. I eventually grew to like it. I bounced between 3 dealers and they knew I had the cash, they knew I had the credit, and they knew I was flexible. Their initial offer was $250, I squeezed them down from there. If I had just faxed them like this article says I would have gotten nothing because it says I want black, and they didn't have the car in black. If you say you want the car in any color they aren't going to give you a good price because you sound flimsy.
Also as a note, never show one dealer another dealers quote. Tell him the number but NEVER show him the quote. You can cause serious problems for the original dealer and lose your deal. Often times you get these deals with things like the dealer getting a manufacturer rebate that you don't really qualify for but they can fudge some how. You play nice with the dealer, they will play nice for you.
[+] [-] mrkurt|16 years ago|reply
This article has a fascinating discussion of the "4 square sheet" that dealers use to fudge negotiations. Two of the squares are price and financing (included in your monthly amount), and the others are trade in and warranty. People generally get a better deal if they're negotiating solely on price:
http://www.edmunds.com/advice/buying/articles/42962/article....
[+] [-] sammyo|16 years ago|reply
I like your approach much better, going in with maximum knowledge is key.
The one I've read about and wish I had the nerve is to get a few thousand in hundreds and right off spread it out on the table in front of the salesman, say this can but yours today, just hit my price.
[+] [-] unknown|16 years ago|reply
[deleted]
[+] [-] tonystubblebine|16 years ago|reply
I once found a car salesman who was asking way too much for a used car on his lot. He refused to budge on price. I couldn't believe both that it was priced so high above market rates or that he wouldn't come down on the price at all. I kept asking, don't you need to go talk to your manager?
I decided that eventually he would come around and called him every day for two weeks with a low ball offer. Eventually the car sold to someone else for $100 above my offer. If rational behavior is to maximize the sale price, then this was not rational behavior. A simple counter offer would have closed the deal with me and netted an additional $500 for the dealer.
After that experience I've often wondered if there are other incentives for car salespeople beyond money. Maybe there's an opportunity cost of selling to a good negotiator when a bad (i.e. normal) negotiator might walk into the dealership. Maybe car salespeople just don't like being on the wrong side of a deal. Maybe they get harassed by coworkers when they strike a bad deal.
If the method works, I'd still be suspicious of the reasons. Maybe calling for 20 prices is a good idea just because one of them, independent of the others, really wants to get rid of the car.
[+] [-] jsz0|16 years ago|reply
For used cars the dealers are making money on trade-ins even if they let it go far below the posted price. Any used car they sell off the lot is going to be a bigger profit than cars going to auction. A lot of times you can simply look at the dealer's lot and see how crowded it is. If it's packed with lots of used cars there's a great chance you can walk in and say I will pay $X and get the car. They just want to get it off the lot to make room for better inventory.
My advice, if you're looking for a used car, is to find a dealer that doesn't deal with a huge volume of used cars. They're often selling their trade-ins at a good value because they don't have the volume to make the auction process work in their favor. They'd much rather just sell them off the lot.
[+] [-] ShabbyDoo|16 years ago|reply
[+] [-] edw519|16 years ago|reply
Yes, for 30 years. It's simple supply and demand.
I doubt if this would work well for a 2010 Camaro, but there are probably lots of models it work work well for.
[+] [-] mwexler|16 years ago|reply
No question, there is much one can do to shift the power. But there is a reason why no one has yet gotten the car purchase process totally online: the dealers do indeed have some power. They control the distribution of the car to you, and they have location-based impact that, for some people, is important. At the end of the day, you are buying from one of the dealers, and if they are all above your price but you want the car, well, you either pay more than you think you should, or change your car choice.
If you don't care about the "free oil change" services or other post-sales issues involving the dealer, and have the time to deal with multiple dealers and a potentially extended process... then go for it. If you are in an area with few dealers for the car you want, however, you may find the negotiation requires a different approach than merely a PDG assuming multiple equal competitors.
[+] [-] kdw|16 years ago|reply
If my local dealership goes out of business, the next closest one is approximately 50 miles away. That'd be so incredibly inconvenient that I'd almost assuredly end up selling the car and buying a different marque that was locally serviceable.
Auto dealerships add value for me, and as such I will pay a small premium over the marginal cost to help make sure they're incentivized to still be there in 5 or 10 years.
[+] [-] felideon|16 years ago|reply
http://www.fool.com/car/car12.htm
[+] [-] steve19|16 years ago|reply
The seller has perfect information (knows all the flaws) and the buyer has imperfect information (only knows what information can be gathered from a test drive and superficial inspection).
[+] [-] gojomo|16 years ago|reply
Theoretically, and as predicted by a classic paper by Economics Nobel-winner George Akerlof, yes.
But practically, no. For various reasons the used-car market does not behave like the theory of asymmetric information predicts. Carried to its logical conclusion, the theory suggests the market won't exist at all -- and yet clearly it does! See the Wikipedia article for some discussion:
http://en.wikipedia.org/wiki/The_Market_for_Lemons
From personal experience: I've bought a couple used cars -- and always gotten great value. My sister and other members of my family have had success as well.
And plenty of personal-finance gurus will tell you that you should never buy a new car -- the premium over a reliable used-car is rarely justifiable, except on emotional/fashionable grounds.
[+] [-] mattcottingham|16 years ago|reply
It's quite easy to get a professionally accredited car inspection for used cars in the UK. It doesn't cost a lot, and it means the buyer regains complete bargaining power.
Of course, it isn't economical to do this for very old cars, or for a lot of cars.
[+] [-] ajuc|16 years ago|reply
But every single shop I've been didn't have a few components that I've choosen, so I couldn't simplify decision to only one variable.
I've even thought that they may do it so I can't compare prices.
[+] [-] superjared|16 years ago|reply
Did anyone else think that the author meant North Korea?
[+] [-] whatusername|16 years ago|reply
"The South Korean automobile industry is today the fifth largest in the world in terms of production volume and the sixth largest in terms of export volume."
But the author may well have meant North.
[+] [-] baddox|16 years ago|reply
[+] [-] unknown|16 years ago|reply
[deleted]
[+] [-] unknown|16 years ago|reply
[deleted]
[+] [-] dkokelley|16 years ago|reply
[+] [-] edw519|16 years ago|reply
Corollary #1: Do the same thing, but everything in writing.
Corollary #2: Set up a leasing company and put Corollary #1 on your letterhead.
[+] [-] brooksbp|16 years ago|reply
[+] [-] erikb85|16 years ago|reply
[+] [-] BobCat|16 years ago|reply
Figure out the lowest price they can sell at, add $100 to that, walk out if they say no.
If you really want the car, add another $100. Still no, stand up and walk out. Really, you can live without the SUV.
Tell them you will discuss financing LATER. You have the total amount in cash [right?] so you can decide whether the financing deal they offer is better than a CD or T-bills.
If you don't have cash [stupid] get financing BEFORE you negotiate - talk to your credit union or LOCAL bank first.
How many times does this simple info have to be shared?
Oh, new Internet twist: do it all online.
Do not buy the floor mats and rustproofing.
[+] [-] ShabbyDoo|16 years ago|reply
Please elaborate.... How could you possibly know this? Do you have insight into the dealer's cost of capital from his lender? If the dealer sells a bunch of Trailblazer SUV's, does he get allocation of 2010 Cameros that he can sell for $5K above sticker?
[+] [-] unalone|16 years ago|reply
[+] [-] fatdog789|16 years ago|reply
Why are you adding money to the lowest price they can sell at? That is your target price -- the lowest price they can sell will always be the lowest price that includes a profit (or the smallest loss, for brands like Chevy). Besides, most of the profit comes from the optional packages, which are marked up 200-500%.