A 3-Step Plan To Prepare For The Sales Model of The Future

June 19, 2014

I’ve been getting more inquiries lately from dealers asking about the merits of a one-price sales environment at their dealerships.

The dealers have seen reports in automotive trade press about groups like Sonic Automotive adopting this non-traditional approach to provide a more efficient, cost-effective and customer-friendly process for selling new and used vehicles.

In some cases, the dealers are simply curious; in others, the dealers are looking to differentiate their dealerships fromvintage-and-classic-cars-29a the competition, and they wonder if a “haggle-free” environment might be better than the traditional negotiation-based sales process they currently employ.

I’m quick to tell these dealers that while I believe one-price sales environments will become the industry norm over time, I will not encourage them not to rush to adopt this more efficient, customer-friendly way of selling vehicles.

My reasoning: It takes an absolute commitment from management, 100 percent buy-in from sales teams, and a complete change of culture and compensation to make the one-price process really work. The first exception, whether it occurs with the price of a vehicle or trade-in offer, always leads to the failure of the entire system. For many dealers, the learning curve is too steep and the risks too great for me to recommending they implement a one-price model.

But I will strongly recommend that dealers explore limiting negotiations to lay the foundation for the day when a one-price sales environment will become a necessary way of doing business. I outline three steps that many dealers have already undertaken:

Step 1: Market-based pricing. In most markets, dealers have come to understand that consumers can easily spot, and ignore, used vehicles that are priced “out of the market.” As a result, many dealers now apply more market-rational pricing decisions as a matter of necessity. These dealers may still negotiate when customers come to the dealership, but their used vehicle asking prices are a lot more transaction-realistic than they used to be.

This same dynamic is more nascent in new vehicles, but it’s a growing trend as dealers embrace technology and tools that allow them to view competing pricing data and combine incentives into their pricing and promotion strategies.

Step 2: Documentation as negotiation. This step often closely follows the adoption of market-based pricing in used vehicles. The idea: Sales associates explain the dealership’s market-based pricing strategy with each customer, and then offer comparative prices of competing cars to validate why the asking price represents a fair price for a vehicle. In addition, the discussion highlights how the dealership uses the vehicle’s unique attributes—color, condition, equipment, mileage and ownership history—to determine its asking price.

Step 3: Tracking discounts. Sonic’s effort to adopt a group-wide, one-price sales process follows the launch of its True Price model last year. Under the model, Sonic dealers would determine the lowest acceptable transaction price for each new and used vehicle, and set an asking price with $300 of “wiggle room” to negotiate with customers. This approach is similar to efforts by other dealers who track the variance between the asking and transaction prices of used vehicles in an effort to minimize discounts and “hold gross.” The thinking: With market-based pricing, there’s even less margin available on a vehicle so why give it away if you don’t have to?

When dealers employ this level of accountability, their average discount will drop from $400 to $500 to $250 or less. (Note: These dealers also incorporate the discount data into the volume-based pay plans they offer sales associates, providing greater rewards for those who give up the least amount of gross margin.)

As I explain these steps to dealers, some begin to understand that the decision by Sonic and other dealers to fully adopt a one-price model and eliminate negotiations altogether represents the next logical step to give customers the level of transaction transparency that they’ve always wanted. A smaller number of dealers will start doing the math and recognize the bottom-line benefits a one-price model can create through lower variable expenses and fewer “closers” on the showroom floor.

Most dealers, however, aren’t quite ready to embrace the trend toward limiting or eliminating negotiations on the price of a vehicle. It’s an understandable reaction given the level of investment and past success they’ve achieved with traditional negotiation-based sales models.

But I believe the handwriting’s on the wall when it comes to one-price selling.

In the not-too-distant future, customers will increasingly expect dealers to deliver the kind of experience they can get from other retailers—where the price you see is the price you pay, and you don’t have to spend an entire afternoon in a dealership to purchase the vehicle you want.