Brands in the News

Buying a New Car: Observations and Learnings

20 Feb 2012  

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 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.

Two observations.

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.

11 Responses

  1. Alfonzo says:

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  2. Van Devara says:

    Used cars are really nice since they offer a lower price alternative compared to brand new cars. :..;,

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  3. Y. Shaban (Entrepreneur & Kellogg MBA Fall 2012 applicant) says:

    I agree that it’s difficult to compare used cars and that sometimes it’s easier to just buy new (especially with great financing deals). However, if you’re purchasing from a private party, then you can usually negotiate a good deal.

    Yes, there’s major information asymmetry, you don’t know what that car has gone through. But with a CarFax check, a good, thorough dealer inspection (who is probably inclined to find flaws so that you purchase through them), a review of the maintenance records, and if you’re a decent negotiator to begin with, you can probably do well.

    I usually look for used cars that check out on all those points and also are under the original warranty, that way I know that even if something does come up, I’m covered.

    But the internet does make new car shopping much easier. I like, it actually gives you the prices buyers have recently paid for the car you want to buy and charts them. Very nice tool.

  4. Buying a Used Car in New Hampshire…

    Buying a used car is a very smart decision that you can make if you want to buy a car without spending too much money. Used cars are in fact the same with new cars, except that they are pre-owned and they are cheaper. If you are smart enough in your pu…

  5. Dhun Mehta says:

    I have to disagree about the used car part. The websites that allow you to comparison shop new cars also have a used car section. I have found that for the same general description of the car, the price is about the same so it is up to your bargaining prowess and how much you are willing to compromise on color and a few minor frills. Being of Asian origin is a big advantage here. Sorry for the racist comment. Once you have nailed down a price you can shop private parties on sites or news paper. But try finding a good used Honda or Toyota from a private individual. Opportunities are rare.

  6. Kevin C - EMP78 says:

    Hi Tim. When you say “for consumers it is now much better to buy a new car than a used car” I think that makes some assumption that lack of margin for buyer = value. I think most people will find having someone else bear the burden of a very steep depreciation curve, at the expense of the hubris of that new car smell, will realize far more value. As an extreme example, look at the depreciation curve on recreational vehicles, which approaches 30% in first year alone. Nothing personal but I think its nuts to buy new.

  7. Prash Cherukuri says:

    interesting timing for me, personally. We bought a new car in Texas last week, and we did exactly that – pitted one dealer against the other. Finally we were literally a minute away from signing when a dealer 30 miles away offered to beat it by $500. We just went ahead and signed anyway. It is a brutal business. And I couldn’t agree more on the used car part. They have no incentive to match other dealers.

    • Tim Calkins says:

      Prash—Congratulations on the purchase. The economy must be getting better if we are all off buying new cars.

      Interesting that you went ahead despite the $500. Of course, we ended up with some unnecessary mud flaps for a similar amount.

  8. The internet makes it particularly easy, since all it requires is a series of emails.
    –> I don’t think it is only the problem of car dealers but of pretty much everyone selling something (also appartments, books, electronics…) – the beaty and curse of Internet

  9. rasputin7 says:

    HI Tim,

    Congrats on the new car. We recently went through nearly the exact same buying strategy as you outlined (but for a Nissan). Big, big difference being able to gain a remarkable amount of information prior to the purchase–including from sites like Edmunds and Consumer Reports…which you can even use from your smartphone during negotiations at the dealer. By the time I entered the shop, I knew the stopping distance at 50mph on wet and dry surfaces, etc., etc. All from doing the research. It’s indeed a whole new world out there. In fact, the transaction was SO matter-of-fact, that I kept looking for any areas where hidden margin could be, just to ensure we didn’t get snookered. Like you, I don’t mind paying the appropriate amount so that everyone comes out a winner. Just let’s keep the margin reasonable. And that’s exactly what the power of the Web let’s you do. Information asymmetry, while perhaps not entirely gone, is certainly much diminished today. Best, Matt

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