The Art of War on the New Car Lot

Therefore, it is said: If you know your opponent and know yourself, you will have nothing to fear in a hundred battles; If you know yourself but do not know your opponent, for every victory you will suffer a defeat; If you don’t know your opponent and don’t know yourself, you will be defeated in every battle. — Sun Tzu

            There is no more common and no more complex form of negotiations in the United States than buying a car. Every few years we re-enter the buyer’s market. We go to the dealership and begin conducting negotiations with the car sellers. While we do, we make mistakes and end up buying for more than we ought to.

            Why do we make mistakes? Because we’re doing business with specially prepared salespeople who have been trained in how to properly sell automobiles. But nobody’s ever taught us how we ought to properly buy them. That immediately puts us in a tight spot.

Preparing for Negotiations

            Before negotiations begin for buying a car, you need to decide three important questions for yourself:

  • Which car do you want to buy?
  • When is the best time to buy?
  • How much money are you prepared to spend?

Step one: Choosing an automobile and it features

            Everyone chooses the type of car and the package of features that suit them and that they are ready to buy. These choices must take place before purchase negotiations begin without exception.

Step two: Choosing a time to buy an automobile

            When is the best time to buy a car? Is it the moment you want to buy it? No. When you have the money to buy it? No.

            So, how do we determine the right time to buy an automobile? If you want to buy a car at the lowest possible price, you have to make the purchase when (1) the maximum sales discounts are in force and (2) when the salespeople are most eager to make the sale.

  1. When do the maximum sales discounts for automobiles go into effect? When the yearly models change over. For example, sales begin in August for next year’s models. At the same time, dealerships put significant discounts on this year’s models. The discounts increase as year-end approaches and unsold car inventory remains. The discounts appear in August and remain in effect until April or May of the following year.
  2. Why, in some situations, are salespeople more motivated to sell? Because they receive bonuses for their sales performance for the month or quarter. If it’s the last day of the month, for example, and a salesman still hasn’t met his quota, if he’s sold one less car than he was assigned, he’s going to miss out on his bonus. If he meets the quota, though, that big bonus is his. It’s obvious that in selling a car of this importance, the salesman is ready to provide the maximum possible discount.

Step three: Gathering information from various car dealers

            Many dealerships sell the same car at different prices. Some are more expensive, others are cheaper. The internet gives everybody the ability to obtain this information easily.

  1. This information allows you to accurately judge the price of the automobile you have chosen and compare that cost with your budget. If your budget is insufficient, you should choose another car.
  2. This information also allows you to lower dealership prices to those of cheaper competitors. If, at the dealership, you point out information showing that a competitor is selling the same product at a lower price, then, as a rule, any salesperson will agree to reduce to the same price.

Again, if you have properly prepared to begin negotiations, you must know

  • What car you’d like to buy
  • What price it is selling for in nearby dealerships
  • At what times maximum discounts are in effect for that model

Understanding What You Must NOT Do During Negotiations

            All automotive salespeople go through special training. They are taught how to correctly sell cars, what they have to say and what they can’t say to their clients.

            To prove yourself a worthy adversary to a specially trained salesperson, you must closely follow these rules:

  • Never discuss several issues at once with the seller. Discuss only one question: The cost of the automobile with the standard features you have chosen. Do not distract yourself for either non-standard options or financing conditions. You need to deprive the salesperson of the ability to confuse you.
  • Never tell the salesperson how much you are prepared to spend on buying the car. Do not answer direct questions to that effect. Tell them you would first like to receive a price estimate, and only then tell the salesperson whether or not it satisfies you.
  • Never agree to the salesperson’s first price offer on the automobile. Always answer that the price is too high for you and that you’d like a discount.
  • In most cases, you should not agree to the second offer. You need to continue demanding additional discounts. The first sign that you are on the right path is that the salesperson will begin walking back and forth to discuss your questions with the manager.
  • The more successfully you conduct negotiations, the more often the salesperson will justify arguments by referring to the manager’s decisions. When the manager joins in your talks with the salesperson, the most important stage of negotiations has begun. You are now on the right path.

Negotiating Mistakes

            What obvious mistakes do most buyers make when negotiating to buy an automobile?

  1. The first and most important mistake is when the buyer names a price that they believe is fair. For example, they ask if the seller can sell the car they need at the same or lower price as a competitor.

From that point on, the buyer cannot get a lower price, though it is entirely possible to end up at a price well below the one stated by the competition.

  • The second mistake is when the buyer names the price they themselves would prefer. They say, “I want such-and-such a car for such-and-such a price.”

From that point on, the buyer cannot get a lower price, though it is entirely possible for the salesperson to talk you up to a higher price from there.

  • The third mistake is when the buyer has reached a fair price and considers it an excellent result. From that moment on, the buyer has forfeited negotiations, though it was entirely possible to try and get even better financial conditions.

For the Record

            You can be sure that your negotiations to buy a car have not gone well, and you have made a mistake, if:

  • You’ve worked through all the issues with the salesperson without discussing purchase conditions with a manger.
  • You bought the car for what you thought was a “reasonable price.”
  • Your negotiations are coming to an end in less than two hours.
Courtesy: OSX, Wikipedia

A Case from My Own Life

            In August of 2018, I decided to buy a new automobile. Choosing a new car was simple for me. I’ve driven the Lexus GS 460 for the past ten years and have been entirely satisfied. I wanted to buy the exact same model, merely exchanging the old car for a new one.

            I’m an experienced buyer. I’ve bought cars dozens of times, and, over that time, I’ve worked out five simple rules for myself. These included:

  1. Exhaustively preparing for negotiations. Knowing ahead of time the package I wanted and prices among the competitors.
  2. Choosing the right time to initiate negotiations. Initiating negotiations at the moment when there were maximum discounts and salespeople were most motivated.
  3. Initiating negotiations at two or three dealerships simultaneously. Using one dealership’s prices as a lever to decrease prices at the others.
  4. Conducting negotiations with a person who had decision-making authority. That is, negotiating not with the salesperson but with the manager.
  5. Conducting negotiations in such a way that the seller recognizes me as a serious customer.

Beyond this, I have always conducted negotiations in such a way as to

  • Discuss only one question during negotiations: The price.
  • Never state outright my desired purchase price.
  • Never agree to the seller’s first offer and continue demanding additional discounts.
  • Expand the “pie” of negotiations (trade-ins, payment conditions, buying several cars at once).

Why did I decide to buy in August? Because Lexus dealerships had announced a special $5,000 discount for the month of August. I got in touch with the three closest company dealerships to me in Seattle, Bellevue and Kirkland. They all sent me their suggested prices for the GS 460. Kirkland made the cheapest offer at $58,000. The most expensive offer came from Bellevue at $60,000.

I arranged to come in person to two dealerships. The first meeting would take place in Bellevue on Saturday. The meeting at Kirkland was scheduled for the day after.

The Meeting at Bellevue Lexus

            I’ve been a client of Lexus for almost twenty-five years. Over those years, I’ve been to Lexus dealerships in a number of American towns. The one I saw in Bellevue, Washington, was the largest and most luxurious of them all. The personnel were very polite. Everyone was busy with something or other. The salespeople were well-fed and satisfied. Nobody needed anything.

            My son had gone to the same dealership a couple weeks earlier. He occupies a high position at Microsoft, and he looks the part well enough. He ended up sitting in that dealership for half an hour and no one approached him.

            And here I strode into Lexus of Bellevue, a retiree in a t-shirt and shorts. All I had was my expensive watch. Well, and keys to a Lexus in my hand. I asked for the sales manager. He wasn’t there. An ordinary salesman came out to meet me. He asked what I needed. I said I wanted to buy a 2018 Lexus GS 460. We started to chart.

            The salesman typed my information into a computer and saw that I was a client of many years who had bought five Lexus automobiles. He understood I was a serious customer.

            The salesman asked me, “How much are you willing to pay for the car?”

            I answered that I’d like as cheap a price as possible and that I had two offers from other competitors. So, the ball was in his court. If he gave me a better price, I’d buy from him. If not, I’d buy from his competitors.

            The salesman asked me, “How much does the same car cost at the other dealerships?”

            I told him that his competitors had prices a couple thousand dollars lower than at Bellevue.

            The salesman started showing me brochures and lists about cars with all these different features. The selection was huge. It would have been easy to get confused in all of it.

            I said I was interested in basic features at a minimal price. The package absolutely ought to include GPS and a rear-view camera. I didn’t need any of the rest of it.

            Out of all the cars on the lot, I picked out two that looked like what I wanted. We discussed them in more detail. I chose one car. Its sticker price was $58,000.

            I asked the salesman, “What discounts can you offer me?”

            He said that there was a special $5,000 discount in effect for the GS460 over the month of August. Counting that, the car I liked would only cost $53,000.

            I told him that I liked what I was hearing, but it wasn’t enough. There had to be other discounts.

            The salesman went off somewhere. When he came back, he said he had good news. He could offer me another $5,000 discount from the manufacturer. And so, the price of the car fell to $48,000.

            I told him I had a car for trade-in and gave him a printout concerning my old car. According to Kelly Blue Book, a fair price for my car in excellent condition was estimated at $10,000. After ten years of driving, though, excellent condition is unrealistic. So I was counting on $8,000. Naturally, I wasn’t citing any numbers from Kelly at him.

            The salesman handed the keys from my car to another employee to provide an estimate. A short time later, they informed me that my car was valued at $8,000. I objected, saying it was not enough.

            The sales manager joined our conversation. He raised the trade-in value of my car to $8,000. Thus, the price of the new car went down to $38,000.

            What price was I counting on before I went into negotiations? I set a goal for myself of $39,000. That number seemed unreachable for me. But once I’d reached the goal, I couldn’t stop myself and continued to haggle down the price. I objected that $10,000 on the trade-in didn’t suit me. It wasn’t enough.

            The sales manager raised the trade-in offer to $14,000. Thus, the price of the new car went down to $34,000. After that, the manager told me he’d done everything he could do. Now I had to decide: Was I going to buy the car, or not?

            I was left alone with the salesman. I told him the price was just about there. But all the discounts I had received had not been from him. They were manufacturer’s discounts. They were dealership discounts. They were discounts from the Sales Manager. So, I asked, what are you going to give me? While running back-and-forth to the manager over the day, he had managed to look me up on line and read that I was a well-known specialist in negotiations. He looked at me with visible fright. The salesman asked what exactly I had in mind.

            I clarified that the standard package included options I didn’t need. Rubber floor mats, for example, film coverings and what have you. These odds and ends weren’t all that expensive, but they must have added up to almost a thousand dollars.

            The salesman agreed, and had the unnecessary options removed. The car now cost $1,000 less. The final cost came to $33,000. From the suggested retail price, I had received discount of 43 percent. While signing the official documents, the sales manager told me it was the best offer he’d ever made to a client in his life.

            We had negotiated for six hours.

Courtesy: Lexus Japan, Wikipedia

An Expert Opinion

My brother-in-law sold cars for many years, working at Ford, GM and Toyota dealerships. For the last five years, he worked for Lexus. I once tried buying a car from him, but it didn’t lead to anything good. I was too demanding a buyer for him. He preferred clients who were easier to work with.

            He took a look at this case study about buying the Lexus GS 460 and said it was impossible. It just isn’t the sort of thing that happens. We started going over all the numbers.

  • Sure, sometimes you have the $5,000 manufacturer’s discount. He could see that.
  • Yeah, Lexus dealerships have about $9,000 in profit to work within, so a $5,000 discount was technically possible. But that would mean giving up over half of the mark-up, and it was hard for him to believe they’d do it. He wouldn’t have given that much ground.
  • Sure, it was possible to provide $10-12,000 on a trade-in. But he wouldn’t have gone that high.

            After going over all the numbers, he said I had gotten real lucky. I’d achieved an unbelievably good deal. The salespeople at that dealership must not know how to do their jobs, he said. He would have fired them.             Here’s what I have to say to his commentary. It’s funny how life works out. I did indeed make an excellent deal. But the salespeople at that Lexus dealership know perfectly well how to do their jobs and do them successfully, all while selling automobiles to their clients at prices that are none-too-high. But this relative of mine got canned years ago. Maybe he’s the one who couldn’t sell cars.

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