The dealership has the ability to “hold” those points and contract the customer at the “sell rate.” Most lending institutions “cap” the total points that the dealership may hold. Usually, it’s around 2 points.
Here’s an example of how reserve creates profit. A loan of $20,000 with the dealership holding 2 points would equal about $800. Some lending institutions pay a “flat,” like $150 to the dealership for sending them the deal. Remember, most dealerships have about 70 lenders at their disposal. It’s competitive out there, and the lending institutions all want the dealership’s business.
I’d like you to look at the amount of profit that was just generated in the last three examples. $1000 in warranty profit plus, let’s just say only $350 profit in GAP, and the reserve of $800, equals $2150 in back end profit in just about 20 minutes. And there’s more. Remember the “cost money” for the warranty and the GAP?
The dealer takes that money and invests it what is called “reinsurance.” The cost money is placed in a trust that is invested, creating more profit. Warranty and GAP claims are paid out of the trust, and as more warranties and GAP policies are sold, the reinsurance trust grows. Are you starting to see “why” it may appear that a dealer will “lose” money on a car and sell it thousand’s below cost!
I’m not going to spend much time on the other products and services that might be offered. They consist of paint and fabric protection, identity theft protection, etching, and an array of other items to part the customer from their money. Their names are somewhat self-explanatory.
In my career, I never liked them and saw very little value to the customer. There are people who buy them, mainly because of the selling system that is employed. I’ll discuss this in the chapter on “Selling Systems.”
In the next chapter I will explain the various selling systems dealerships employ to sell a customer a car. They have been around for years, and they’re not going away. Your comprehension of how these selling systems function will put you “light years” ahead of uneducated customers when entering into the negotiation process.
Understanding The Selling System
In this chapter, I’ll explain how the selling systems work that dealerships use to sell you a car. Before we start, I’d like to share some thoughts with you. If I could educate you on one ideal, it would be this statement; “don’t try to reinvent the wheel.” Dealerships have employed various selling systems and they have been in use for many years.
The advice you may have received from friends, family, or other books on this subject, usually tend to start you off on the wrong foot. Usually, the advice that is given is negative, such as; “this is what they’re gonna do to screw you and here’s how you put them in their place.”
Your knowledge of car buying is now no longer based off of fact, of what’s really happening. It’s based off of fear, the anticipation of negative. Believe me, if you walk into a dealership, anticipating negative, you will create it, and you will create a real life experience from the bad advice you received.
I happened to be reading an article the other day that was full of advice that I can’t put any other way than “Pure Stupid”! It stated that if you wanted to get the best price on a car, to go into the dealership and “ask” them for a car that you know they don’t have? Then, you pretend to not be interested in the car they show you.
The article further stated that the dealership will drop the price of the car you are pretending not to want? Only the “Mayor of the Village Idiots” would attempt that type of an approach! And by the way, It Won’t Work! It’s interesting to note, this advice came from someone supposedly in the car business!
In all my years of experience, I watched things like this happen over and over. People coming in with attitude, and telling the dealership how to sell them a car, telling the dealership that they knew how many thousands of dollars of profit were in the car, and if they didn’t do it “their way,” they were “gonna walk!”
Do you know what the dealerships attitude was in most cases? “OK walk!” What did that lack of education, combined with bad advice and attitude accomplish besides nothing? What would happen if you were able to understand the selling systems and use their process to your advantage? What if you combined that knowledge with a positive attitude?
There are basically two selling systems that dealerships use. The first one is referred to as “Pure Pricing.” The second one is “Negotiation.” Pure Pricing has been around since the early 1990’s. It’s been called by many other names. The only difference between the two selling systems is Pure Pricing does not negotiate on the selling price of the vehicle.
The concept behind Pure Pricing is this; people do not like negotiating the price of a vehicle. The dealership “pre-discounts” the selling price of the vehicle. That pre- discounted selling price was determined by market data on all similar makes and models of the same vehicles previously sold. The selling prices were then “averaged” to make it fair for everyone. The concept sounds interesting, but what is to stop you from going down the street and beating that price by $500 with a dealer that will negotiate?
I began my career in the car business at a Pure Pricing Dealership, and I was extremely successful, however, I was very customer service oriented, even after the sale. I made it a practice of retaining my customers by booking their service appointments long after they purchased their car.
I became their “point of contact” for anything they needed at the dealership, and in turn, it created a very loyal customer base. I wasn’t taught this, I just believed this was the way I would want someone to treat me.
In today’s market, I view Pure Pricing a little differently. Most dealerships have drastically lowered the Sales Person’s compensation. Many of the professionals have left the business. Those professionals knew how to hold gross profit.
In my opinion, most of the dealerships that employ the “Pure Pricing” system in today’s market have weak sales forces, so the dealership will hold gross profit for them. The Sales Person now becomes an order taker, not a Sales Person.
In addition, some of those Pure Pricing Dealers do “quietly negotiate.” How would that make you feel if you bought in to that system, only to find your neighbor got a better price?
The second selling system is negotiation. The selling process is the same for both selling systems, except you negotiate your price with the dealership. There are 10 steps to the selling system in this order.
1) Meet and Greet. The sales person approaches you and introduces themselves and begins to gather information.
2) Identify your vehicle interests or “land you on a unit.”
3) Perform a “walk around” of that unit pointing out its features and benefits. It’s exactly that, walking around the vehicle. The purpose of this is to attempt to build value and introduce “emotion factor.”
4) Trial close and test drive. A trial close is something like this; “well, I’m sure we can get the numbers right, but why don’t we go for a test drive first before we crunch those numbers.” The objective of the sales person is to gather subtle commitments. It’s been a long standing phrase in the car business, “45 yes’s in 45 minutes equals a car deal.”
5) Trial close after the test drive and begin the negotiation process. More information gathering by the sales person, such as, if there is a trade in, financing or paying cash etc. and usually a question like this; “if we can get the numbers right, you’d probably take this home today, right?”
6) Basic negotiation paperwork, credit application, and the offer you want to make on the unit. The way this system is designed, the price of the unit will be talked about in terms of monthly payments. It’s much easier to “bump” or increase the monthly payment of a customer than to see the total purchase price of the unit.
A paper referred to as a “four square” sheet is used for the negotiation.