Haggling Starts to Go the Way of the Tail Fin

Fixed pricing may be coming to a showroom near you as the Web makes prices more transparent and dealers try to cater to women and Gen Y drivers

It's one of the enduring oddities of American retailing: car dealers haggling over price with their customers. There's history here, of course. People bargained over horses. And since the proud beasts gave way to the horseless carriage, hardball negotiating between buyer and seller has continued on the car lot. The practice allowed salesmen (and most of them were men) to bamboozle naive buyers with a blizzard of negotiating tactics and generate outsize commissions. But dealers paid a price: The car salesman became one of the least trusted people in town.

Now, some dealers are beginning to dump haggling. Lithia Automotive Group (LAD ), the eighth-largest dealer chain in the U.S., said last month that it will turn all its 108 stores into haggle-free zones over the next three years. Toyota's (TM ) Scion youth brand has had a negotiation-free policy since it launched four years ago, prompting some dealers who sell mass-market Toyota cars to roll out the one-price strategy, too. And across the country, independent dealers that carry several brands, foreign and domestic, are retraining their sales forces to sell cars and trucks the way the rest of the retail world does: with a price tag and winning smile.

There's no telling how far this will spread because most dealers still consider fixed prices heresy. But in the coming years, more and more will experiment. They know that anyone can look up the base price of a car online and that consumers are fast losing their patience with the status quo. Besides, when you think about it, haggling is un-American. "Negotiating price isn't in our culture," says Mark Rikess, whose eponymous consultancy is helping Lithia develop a no-haggle sales program. "Some dealers are slowly coming around to the fact that one-price is a better way to do it."

TAKING THE ONLINE ROUTE

Dealers experimented with this before during the 1990s, only to be deluged with complaints from traditionalists who felt they weren't getting a good deal unless they had the satisfaction of seeing a salesman cut the price right before their eyes. Now dealers are responding to a shift in the marketplace. For starters, more women are buying cars these days; they bought half the vehicles sold in the U.S. last year and influenced an additional 20% of purchases.

Consumer psychology is changing, too. According to auto price experts Kelley Blue Book, 65% of car buyers say they'd rather not haggle. As for women, 72% feel that way. One is Michele Goltz, a 39-year-old college researcher from Richmond, Ky., who just bought a 2007 Yukon Denali SUV. She looked up prices on Edmunds.com and e-mailed her offer to several dealers. When one got close, she cut the deal with the lowest bidder. "I don't have enough time to go dealer to dealer and negotiate," she says. "I have a four-year-old that I don't want to bring in tow."

Oh, and by the way, studies show that women prefer to buy cars from other women. So dealerships have two reasons to move to fixed prices: making women customers comfortable and recruiting females who might want to sell to them.

Then there's Gen Y. An impatient bunch, they don't like haggling because it takes too long. Did you know that the average car sale consumes 4 1/2 hours? Who has time for that? That's why Scion, launched to woo Gen Y, doesn't allow its dealers to haggle. The company says it has cut the time it takes to sell a car to 45 minutes. Gen Y buyers also tend to select everything down to the color and options they want online and before they hit the showroom. Even though Scion targets young men, half of the brand's customers are women.

Plenty of dealers have tried no-haggle selling, only to give it up after crosstown rivals beat their prices. But those who stick with it say it saves them money. Since they don't have to advertise the sale of the week, per-car advertising costs typically drop by $300. Plus, dealerships need fewer managers to O.K. a salesman's negotiated price. One-price stores require half as many managers per salesperson. Sales managers make about $150,000 a year, so it adds up to real money.

Salespeople do better, too. Using the Web, buyers can negotiate the lowest price, making it tough for salespeople to earn a living. Lithia will pay not commissions but an hourly wage plus bonuses for selling more cars. Consultant Rikess says salespeople in one-price stores make $50,000 a year, vs. $35,000 for those on commission.

Dealers also say fixed prices tend to make customers more loyal. Paul Walser, who owns 10 stores in Minneapolis selling Honda (HMC ), Toyota (TM ), Nissan (NSANY ), General Motors (GM ), and Chrysler brands, among others, says his dealerships close fewer deals than they did before he started converting to one-price selling. But he has double the number of repeat customers. Plus, 70% of those buyers come back for parts and service, vs. 40% before he converted. "If you're doing it to boost profits on a sale, it's not the right reason," Walser says. "You've got to do it because you think it's the right way to do business."

And yet old habits die hard--especially at those brands, mostly owned by the Big Three, that still have too many stores. Where competition is fierce, dealers are unlikely to go to fixed price unless the guy across town does, too. Then there's the conservatism common to mom-and-pops: Granddad sold cars this way, so I'm going to. When Lithia announced it would start offering "negotiation-free selling," the company expected pushback, says Chairman and CEO Sid DeBoer, so he opted for a gradual rollout. "It's hard to change a culture that's focused on profit and not what the consumer wants," he says. Ultimately, dealers may have no choice.

Links

One way to change the unsavory image of car salesmen.

The car salesman long ago earned a reputation for sleazy tactics. Now, reports Advertising Age, Honda Motor (HMC ) is trying to rehab the image of its frontline workforce: "The tactic: a marketing campaign to prove Southern California Honda dealers are helpful. Light-blue-polo-shirt-clad dealer representatives roam the streets doing good deeds for the public, while TV spots show them visiting consumers and humorously lending a hand with everyday tasks, such as helping blow up a kiddie swimming pool." Honda told Ad Age that the campaign was starting to pay off.

By David Welch

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