Why Price Transparency Matters

About a year ago, the McKinsey report came out, Innovating Auto Retail. It looked at how traditional dealerships will fare in a world dominated by online shopping, and how the business model needs to change. McKinsey has some good ideas, which they tested using a simulated dealer network. In the simulation, one dealer in six had to close.

For online shoppers, the primary motives are convenience, the expectation of lower prices, and avoiding certain unpleasant elements of the sales experience at dealerships, such as “haggling over the price” – McKinsey

Recently, Auto Trader conducted a survey of modern buyer behavior. It is more dealer friendly, but it reaches some of the same conclusions. The core function of a dealership is to provide expert assistance in choosing a vehicle, and to do test drives.

What does not belong in a dealership is the hour-long F&I ordeal. Customers, according to the survey, are ready to leave after ninety minutes. Spending sixty of them in the box is a non-starter. The more of this process that can be completed online, the better.

Vroom No Haggle

One finding in the Auto Trader survey that differs from McKinsey is the assertion that customers actually prefer to haggle over price. I see an editorial like this about once a week, and I just don’t buy it. It’s obviously self-serving for expert sales people to insist that customers enjoy the process – even as they argue against price transparency.

My purpose here is not to make a moral point about Sales, but a practical one about F&I. Pricing is the key obstacle to completing virtually all of the transaction online. You have all of this time consuming activity around financing and products – backed up, waiting for the price.

I would suggest that the opportunity to play games with the sale price is not worth what it costs F&I in lost profits and efficiency. Someone is going to figure this out. Here are a few possibilities:

  • Use no-haggle pricing, like Vroom.
  • Use transaction prices, like TrueCar.
  • Do the haggling online, like MakeMyDeal.
  • Use some hybrid approach, like AutoNation.

AutoNation recently had a falling out with TrueCar, but they have always been a leader in trying to solve the pricing problem, probably because they are aware of the efficiency issue (and the CSI issue). I understand that many sales people still consider haggling to be an important part of their job. Times change.

Author: Mark Virag

Management consultant specializing in software solutions for the auto finance industry.

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