This FAQ was generously donated to The Saab Network by Mark Gonzales. You can find more of Mark's views here.

The Internet is changing the process of buying
a new car, at least in the Silicon Valley. In response,
dealers are changing the way they do business.

Buying a new car sucks.

It's not the actual process of looking at new cars. Or taking them out for a test drive. Or of enjoying the ride of a new purchase and the knowledge that, at least for awhile, your transportation will be trouble free. All of these thing are pleasant to experience.

No, buying a new car sucks because it involves the exchange of what is, for most people, a seriously major amount of money through a process in which it is the goal of the buyer (you) to find out as much information as possible, and the goal of the seller (the dealer) to intentionally hide that information from you.

At least this is the perception. So it was with considerable trepidation that I recently stepped into the stream of auto commerce as do most Americans every five years or so. In the process I learned a lot about auto retailing. To my shock, I found a real-life, money-saving use for the Internet. And I got a chance to find out how the Internet is beginning to reshape one large sector of the real, physical economy.

Since this story isn't really about which car I bought (or in this case, leased), I'll get the purchase suspense over with up front. I'm single, no kids, and currently own a Mazda Miata I love. But I'll admit it, the Miata, while being a great commuter and summer roadster, can't carry any more cargo than a single guy's groceries. And it's hardly the car you'd want in the Sierras hacking through a snow storm on the way to a weekend of snowboarding. I once saw a Miata wearing snow chains and nearly laughed my head off.

The criteria: 4-wheel drive, able to carry four people if needed, able to store snowboards or mountain bikes inside (or optionally on top). Looks like I'm the perfect target for a sports utility vehicle (SUV). The key constraint: the most I wanted to spend was $20,000. Since most SUVs range from $25-35,000, this was the defining limit in my search.

The winner was a Toyota RAV4. The other contenders: the Honda CRV, Subaru Forrester and Kia Sportage. But as I've said, this story isn't about comparing cars.

Finding the Car

When I began my search, I hadn't a clue about which models might fit my criteria. Though I had glanced through a number of car magazines on the racks, I'm afraid I'm one male who doesn't help uphold the stereotype of knowing every detail of the latest auto product line. Working in high-tech, it was pretty much a natural that the first place I'd turn to was the Internet.

Of course, every major car manufacturer has a site on the Internet on which they extoll the benefits of their various models. Toyota, Subaru, Kia and Honda are no exceptions to this. Some of the sites are very complete. Toyota's site even allows you to see your car choice in any of the colors it's offered in. But while these sites are useful for getting a good overview of the product lines, reading them is rather like looking through product brochures - visually interesting but information-light.

More interesting are two sites run by the titans of new and used car information. The first is Kelly Blue Book Online. KBB is the recognized leader in auto pricing. From their site, you can find the manufacturer's suggested retail price for every model and every option. In addition, you'll find additional charges such as freight that might affect the price of the car in your area of the country.

But most importantly, at KBB you'll find the dealer's invoice price for every model and option. In otherwords, before you walk onto the dealer's lot you'll know exactly what the dealer paid for the car. This is a key advantage in getting preferential treatment from auto dealers, as I'll discuss in a bit.

For example, on my Toyota RAV4 I was able to discover that the dealer paid $15,428 for the basic 4 wheel drive, 4 door, manual transmission model, with an additional $420 destination charge. California emissions cost the dealer $29, and air conditioning, alloy wheels, cruise control, power moon roof and other desirable options cost him $3788. In total the RAV4 I eventually bought cost the dealer $19,985, and I knew that the sticker would say the price of the car was $22,505. And I knew all of this before walking onto the lot or seeing the car.

KBB is the authority on pricing, and is the best source for getting details on all the options available on virtually all models. But KBB doesn't provide reviews or comparisons of models. Luckily, this is where the other major player picks up. Edmund's Online provides similar pricing information as KBB, though less complete and organized. Where Edmund's is most useful is in its reviews and comparisons. The various model descriptions provide data on features, safety and performance stats, cargo space, and a variety of other information.

But the reviews and comparisons provided the best information. The evaluations are interesting for the raw data they provide, but I found them more useful in providing a basis for comparison between makes and models competing for my wallet.

Edmund's is also key for one other reason. Unlike KBB, Edmund's provides information on dealer incentives and rebates. These are the hidden benefits dealers may get for selling a particular model. For example, Edmunds told me that on the RAV4, Toyota would give the dealer a 2% holdback - basically a built in profit margin that would be sent to the dealer after the car's sale, and would not appear on the car's invoice. That would mean an additional $450 in profit for the dealer on the car. I also learned that the Kia Sportage had a dealer incentive and customer rebate, which meant the model was much less expensive than other models, and likely that there was no shortage of Sportages, at least this month. This information can tell you how anxious a dealer might be to sell a particular car.

Finding A Dealer: Buyer's Services
Taking a test drive, the final check out of all the specs and comparisons, is intimidating. Not because the drive itself, but because it means finally coming face to face with a car salesperson. Finding a dealer means finding one that can get you the car you want (with the color and options you want) and one that will deliver you the best possible price.

My experience in using the Internet to help in this process was somewhat less successful. There are a wide range of auto buyer referral services on the Internet. A quick search of Yahoo turned up literally hundreds of services. These services take your contact and car choice information, and forwards it onto a member dealer who pays for access to the service. Thus these buyer services will not necessarily give you the best dealer or price. In fact they can't tell you if the dealer even has the car in stock. But it is a place to start, and I wanted to measure how good the dealer responsiveness was using this services. Besides, they're free to the buyer (me).

Picking between them is pretty much a random experience. I chose five services, filled out the forms. Two of the services never responded, three of them sent an almost immediate response back with the contact information for a dealer. Of these, two dealers never got in touch with me. So out of five services, I was successful with only one.

That one was AutoVantage. I got an e-mail response with the name and location of a dealer (Toyota of Palo Alto) and including the exact names of the people I should speak with when I arrived at the dealership. I addition, AutoVantage informed me that a prearranged price of $1000 above invoice would be available from this dealership. Since I had the invoice information, I knew exactly what this quote would be before I stepped onto the lot. The e-mail would also list any rebates or incentives in effect, though in my case, there were none. The next day, I received an e-mail response from Toyota of Palo Alto inviting me down for a test drive and to discuss the exact specifications of the car I was looking for. I was feeling a bit better about my pending purchase at this point.

A friend pointed me towards another Internet service which I tested out. Car Club has been around for awhile, but now has a site on the Internet. They provide a free referral service as well, but another service, the Car Buying Service, goes a step further. Filling out an Internet form with my contact information and precise make and model desires, I received a car the next morning from Car Club. A representative gathered some further information, quizzed me a bit about feature tradeoffs I might make, and asked how far I would be willing to drive to pick up a car. Car Club then locates the car you are looking for (or provides a list of alternatives if the exact car is not in the area) and negotiates a price with the dealer. In otherwords, they do all the work. The service costs $99, and the fee is refundable if they fail to find a car or if you are able to find a lower price on the same car. In my case, they found three potential cars locally, and though I did not end up purchasing the car through the Car Club located dealer, I couldn't beat the price (I did match it however.)

Making the Deal
The research done and the test drives completed, my dread increased - now was when I'd have to deal with the salespeople in their element. In the case of the RAV4 and Toyota of Palo Alto, I showed them the e-mail from AutoVantage as soon as the test drive was complete. What happened next was rather surprising. I was immediately transferred from the lot sales person to Kevin, the fleet manager. It turns out that prearranged deals such as AutoVantage are usually handled as fleet sales (I learned more about this, keep reading.) Kevin opened up his book, confirmed the AutoVantage numbers, and then began flipping through his book to see if there were other, better deals, I could qualify for. Turns out, there was another that saved me an additional several hundred dollars.

Frankly, I was very confused at this point. The dealer has just intentionally found another deal which saved me even more money. While I might expect this to happen on a model not in demand where there were plenty of hidden dealer incentives, the RAV4 didn't qualify in this category. I had to go home to think about this and get over the shock. What was clear, however, is that I had been offered a good deal. I knew it. And the dealer knew it. I bought, or rather leased, the car the next day.

A Discussion with One Dealer
After the paper work was done, I discussed the Internet with several members of the Toyota Palo Alto staff. What I got was a view from the other side of the table at how the Internet is beginning to change the business of a car dealership located in the heart of the Silicon Valley.

First, some basic economics. The "negotiation" that so troubles American car buyers is centered on a surprisingly small percentage of the purchase price of an automobile. On a $20,000 car, if you paid full sticker the dealer would get about 13% assuming a 2% dealer holdback from the manufacturer. This is a total of $2600. Given a dealer's cost of doing business (financing inventory, lots, commissions, etc.) the net negotiating room is about half of this amount, or $1300. Now, $1300 is nothing to sneeze at but it represents 6.5% of the price of a car, and given the amount of information now in the buyers hand, the dealer gives this away more than not. To keep up this farce, Americans and their auto dealers experience considerable angst, over 6.5% that is almost always given away anyway.

Then look at the economics of new car sales. A very good dealer might sell 2000 cars per year. If they make $1300 per car after invoice, this totals to $2.6 million per year. Next time you're in a dealership, look at the showroom, the number of cars in inventory, and the number of people employed. Add up the salesperson's commissions and salaries in your mind and do the math. You'll quickly come to the conclusion that new car sales, while profitable, doesn't support the dealership. What does? Service, support, and parts. Today a dealer's goal is to use new cars to pull new customers into a product and service funnel - from which they gain additional revenues and profits in the next few years. Consultants call this "relationship" selling but in the end it's just plain, cold, hard economics.

Toyota Palo Alto has an Internet site itself, a requirement in the Silicon Valley. They have also subscribed to services like AutoVantage. They admitted to me that the number of e-mails they receive from these services doesn't add up to much yet, and we discussed problems confronting customers such as that list of hundreds of buyer's services.

But to Toyota PA, the customer who enters their dealership with an AutoVantage message, or the invoice numbers in hand, represents a unique opportunity. This runs counter to a buyer's intuition, dealers should hate the loss of power information in the hands of buyers represents. But that very information tells Toyota PA one key thing;

This customer is almost certainly going to purchase a car in the next few days.

There are two types of people who walk onto an auto lot; those who are looking but not likely to buy in the near term, and those who are "in the market" and highly likely to buy some car soon. Like most businesses, dealers can't afford to spend much time on the former. Thus in the initial discussion on the lot is designed to determine what category the potential customer falls into.

Of the customers ready to purchase, there are two types. The first type is the haggler. Generally this person has not done much research other than look at brochures or magazines. Often they are making an emotional purchase decision - they fell in love with a certain car. Handling this negotiation can be time consuming and there are additional waits for credit approval, etc.

The second type is the "researcher" And at the top of this list is the customer with the invoice costs and other information in hand. This customer wouldn't have this information if they weren't a) likely to purchase soon and b) interested in a model on the dealer's lot. The dealer knows that he will win or lose this sale very quickly. And he knows that in general, all the information is known to both parties. The result: the bottom line is arrived at almost immediately. The dealer places the offer on the table, the customer accepts or rejects. End of story.

Further, the whole customer-dealer interaction changes. Instead of attempting to get the most possible from this sale which is futile since the customer knows the invoice and can simply find a dealer willing to make a better deal, the focus becomes capturing the customer's future service and parts business. In otherwords, making sure the customer isn't afraid to bring the car back to this dealership.

These are small but extremely significant steps in the evolution of auto retailing. The presence of the Internet and the information it can provide buyers has the potential to make the process of auto buying much more efficient. In the language of economics, "efficient" means that the margin on each car - the amount of money the dealer receives as distributor on average - is going to fall. At the same time, the uncertainty and angst of buyers is also likely to diminish. We'll be more worried about the reputation and reliability of the new car rather than the possibility of not getting the best price possible from the dealer.

But the news isn't bad for dealers. They'll be able to more easily identify the lookers from the buyers. There may be fewer cases of buyers remorse and ill will. They'll be able to concentrate on hooking customers for the life of the car, rather than simply the up front dollars. They may even find the reputation of their profession improving a bit.

And maybe, just maybe, buying a new car will suck less.

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