Freebee’s are almost never Free!
Dealerships and salesman love “throwing in free stuff” during the negotiation process.What does this really do to the overall sale or savings to the consumer?It changes the perspective of value for the buyer more significantly than it changes the profit level for the seller.
The markup on most new cars is around 10% between MSRP and Invoice. The markup on dealer accessories, parts, and services, warranties, and maintenance programs is typically as much as 50%. Obviously the markup will differ depending on the item, but the markup is almost always significantly higher than the car itself. So when negotiations get tight on the real dollar amount of the car, turning to “freebees” can be a great way to convince the buyer to sign without giving up more profit.
The reason this is so successful is a strange thing to me. The buyer in a car negotiation always seems to perceive the value of the car deal based on their knowledge of the markup available on the car. But for some reason when items that are not included in the sticker on the car (non factory installed options) are brought into the process customers always seem to perceive the value of that addition based on the MSRP. They just seem to forget about markup on that item.
As I type this, I am thinking that my point may be difficult to understand, so I’ll give a real world example…
John Doe walks into a dealership and finds for example a new 2008 Nissan Rogue that he would like to buy. He’s already read this thread and is very well educated and has a price in mind that he’d like to reach in his negotiations. Let’s say the MSRP of this fictitious Rogue is $25,000 with the invoice at $23,200. Mr. Doe is prepared to buy the vehicle for $23,500. The two parties push back and forth and just don’t appear to be able to give anymore. The dealer is still offering a price of $24,350, but Mr. Doe won’t agree to it. Suddenly the salesman has an idea. He goes and talks to the manager and comes back with a new offer. He says, “Mr Doe, I really want to see you drive away in this new Rogue today, so I’ve got an offer that I think your going to love. Here’s what we’ll do for you. The price of the Rogue will be $24,300, but we’ll throw in a 2 year maintenance plan worth $450 and window tinting worth $300 and wait… even better.. a set of all weather floor mats value at $125 for FREE!!!”
Mr. Doe, thinks to himself.. “Hmm.. so i’d be getting a price of $24300 with a 2 year maintenance plan worth (a fictitious value) of $450 and a window tinting worth $300 and a set of floor mats worth $125. So I’d really be getting a value equal to $24300 – 450 – 300 – 125 = $23,425. That’s $75 less than the $23500 target that I set. I’ll take it!!!” Mr. Doe drives away a happy new Rogue owner.
The dealership is thinking.. Alright, so were at $24300 which is a profit of $1100 over our invoice of $23200. To make this deal happen we had to give up a maintenance plan that our service department will invoice us $250, plus a window tint that we have an outside contractor do for us at a cost of $200, and a set of floor mats that our parts invoice price is $60 on. So, not including other dealership profit centers such as holdback and finance department income, our sales department earned a profit of $590 on the vehicle which would be comparable to a straight sales price of $23,790.
Mr. Doe perceived a value of $23,425 or $225 over invoice, while the Dealership earned a profit equal to $590 which is comparable to $23,790.
Again, what happens is that the buyer’s perception of value when dealing on the car only is based on a perception of wholesale costs, but when new items are introduced, the always seem to view the retail value of those new items.
Moral of the story after 30 minutes of rambling on my part is: Freebees are never free! Always consider the wholesale value of an extra item and continue to press the dealer for a lower price!!! *But remember, a fair deal leaves the dealership with some profit because they wouldn’t be in business long if they lost money.
Article By:Seth Blackman, NICOclub.com techie and Nissan Enthusiast