A couple of weeks ago my wife and I bought a new car: a 2012 Honda CRV. The entire experience was remarkable, and it highlights the core marketing challenge we all face.
Earlier this month we visited our local Honda dealer, Fletcher-Jones. We use Fletcher-Jones for service. We did a test drive on a new CRV and liked it. Our old CRV was 13 years old, so it was about time for an upgrade. We asked Fletcher-Jones for a price on the new CRV EXL, all wheel drive. They gave us a price of $29,105.
So I got on http://www.cars.com and asked three other dealers for bids. About fifteen minutes later I received a price of $26,306 for the same car from another dealer we like. Then a few minutes later another email arrived in with a price of $27,325. And then the next offer came in at a price of $25,765.
I then contacted Fletcher-Jones and asked them to match the low offer. They said that was simply impossible. So I contacted the other dealer we liked and asked them to match the price. And they did.
So we then visited the dealer and bought the car, for $25,765. To get the color we liked we ended up buying some mud flaps at a price of $400. I’m sure this feature helped the dealer’s margin fairly substantially; the flaps probably cost $10 to produce, providing lots of margin for both Honda and the dealer to enjoy. But we ended up with the car at what seems like a good price.
First, selling new cars is a brutal business. It is now very easy for shoppers to negotiate a price by pitting one dealer against the next. This drives down the margin on new car sales. The internet makes it particularly easy, since all it requires is a series of emails. I suspect we would have paid quite a bit more for the car, but it was just too easy to ask for (and receive) lower prices.
Anyone selling a product that lacks differentiation faces the same issue. Customers can and will price shop and drive down margins.
If I ran a car dealership I would work very hard to develop a point of difference or focus on volume and low prices.
Second, for consumers it is now much better to buy a new car than a used car. The problem with buying a used car is that it is impossible to price shop a used car in a similarly aggressive fashion. Every used car is unique, with a certain amount of wear and tear and a certain amount of mileage. This means the only way to figure out the price is through negotiation with the dealer; the on-line sites provide some information but not the final price. People who sell cars are good at negotiating and do it all day long, so you can be pretty confident that you won’t be getting the better of the deal.