My time as a car salesman has come and gone. Over the first 5 months of 2017 I worked for a large Cleveland area Mercedes-Benz dealership. Between new and used cars, the dealership would sell over 200 cars each month. This typically put the dealership at the top of competing Mercedes dealers between Pittsburgh and Denver.
During my short stint I learned alot about the car business from a first class organization. As someone who has purchased two new cars and two used cars before my time with Mercedes, I am going to highlight 5 lessons I learned as a car salesman with respect to my previous experience as a typical car buyer.
#1 The Worst Thing That Can Happen
It's not about price. That's what the managers, the training videos, and even the top salesman told me right out of the gate.
It's not about price.
"Well, sure, but...", I initially thought to myself.
Soon enough I embraced the message after experiencing the sale process time and time again.
What I quickly realized, it's not about price, because the worst thing that can happen is the customer buys the wrong car.
That's right. I'm not selling here. I'm sharing. The worst thing that happen in the car buying process is not paying too much, it's not a dent or a ding on the hood, and it's not leaving free car washes on the negotiating table. The worst thing that can happen is buying the wrong car.
The wrong car can manifest itself in a lot of ways:
Too small, too big, too many seats, even just flat out a purchase that doesn’t make sense.
Be honest with yourself. Who is using this? What will the car be used for? What did you like and not like about your old car AND how will this car you're going to purchase address your interests.
Buying the wrong car hurts at least two ways. The mistake can make the buyer bitter for blowing the opportunity to add value to their life AND the ever present force of depreciation compounds the pain monthly.
A typical customer owns a car for three years. But the average term of car loans in the U.S. just hit 69 months. Be honest with yourself. You have the answers for why you're buying this car. Don't buy the wrong car.
#2 There Are No Master Negotiators
One more thing about price. No one is convincing a car dealership to sell them a car for less than the dealer is comfortable with, regardless of the deep discount off the sticker price.
Every month we'd sell a car or two or three for a loss. Whether or not it's an actual loss to the dealer depends, because there are service loaded expenses buried in used cars where the dealer can profit (certification, detail, and other shop fees). On the new side manufacturer incentives can help offset a big discount on new cars that have hung around too long.
The dealership I worked for was a well-oiled machine. We'd sell used cars for a loss if they didn't move every 60 to 90 days because there is an asset management aspect to the business. Our dealership, and many others, were sitting on millions of dollars of quickly depreciating assets. There's a magic number a car can be set to at any time to sell instantly as needed. That number is referred to as the wholesale price.
Now some customers will negotiate more off than others with respect to the same place and time, but there are no master negotiators.
If your buddy got an incredible deal on such and such a car, it's more likely they got a specific car or configuration that no one in the market wanted, and the dealer needed some capital back for another chance to make money on a different car.
One car I sold for $3,000 below anything on the market went to a kind retired couple who came in two months early. They were too timid for even a test drive because they felt it was beyond their budget. We did end up taking that test drive because I said, "you just never know what this car might sell for."
The car was beautiful, it was a hot color with the right equipment, but it just didn't sell for two months. So on the day we switched it to wholesale price, set to ship off the next day, I called the couple up.
"Hey folks, it's a thousand more than you wanted to spend but this is the cheapest you'll find this car this year with respect to mileage, equipment, and condition. It's at wholesale price today only."
They drove home happy customers, with the deepest discount I gave as a car salesman, and they didn't even negotiate.
The market determines the price, not the negotiator. Mileage, equipment, and condition, with respect to a specific driveable market (think 50 to 200 mile radius) is the basis for the price.
The first car I sold was a one year old Mercedes GLE Coupe with 20,000 miles on the engine. The car sold for $69,000, only $4,000 less than the original brand new sticker price. Yes, the car sold for $4,000 less than the window sticker everyone tells you not to pay AND it had 20,000 miles! But the guy was not ripped off, because it was the only car of its kind for 500 miles. He wasn't a bad negotiator and we didn't make a killing either (I only made a $300 commission on that car).
This side story really ties back into lesson #1, don't buy the wrong car.
I have dealt with some great negotiators. My favorite being a Middle Eastern duo that came in with a printed check for $30,000 before they even picked a van. But that's a long story for another day.
If you want some hard and fast rules for negotiating the lowest price you can get:
1. Come in on a weekday during the last week of the month.
2. Drive it, negotiate your price, and leave (you must leave IF you want to know for sure that the dealer can go lower).
3. Come back a few days later (still before the end of the month) and try to get your price again. The dealer is likely being honest with you.
NOTE: There is always a time variable with the price of a car. If the dealership just got the car last week, these hard and fast rules are not going to get you a great price, because most likely, the dealer will be willing to wait a few more weeks before cutting into the profit.
What you did last month in the car business doesn't count. If you're lucky, the dealer will be short of their monthly unit goal, and you might get a price even lower than what you could get at the beginning of the next month.
#3 The Average Car Payment Does Not Outpace Depreciation
As of July 2017 the average car loan in the U.S. has reached a record high 69.3 months (5 years 9 months!). I noticed early on as a salesman a large percentage of customers were trading in vehicles they owed money on. The trade in value of those vehicles were often less than the remaining balance. Customers are referred to as “under water” when this happens.
This is a vicious cycle. A customer who is underwater on their trade lumps that negative balance into the purchase agreement for the next car. This problem is compounded when car payments stretch out to almost six years. Depending on the mileage, age, and condition of the vehicle and the strength of the secondary market for re-sale, car payments longer than 48 months typically cannot keep up with depreciation. That break point is even sooner when customers were underwater from their previous car.
Picture your car payment over 72 months being $400 per month, but the car you own depreciating at $500 per month. If this is the case, you’re on your way to being “under water” the next time you buy.
Buyers should have a general idea about what they’re going to get for the car they’re about to buy when they sell it in the future. This is easier said than done because many people feel they will hold onto their car longer than the average period of ownership (3 years). Unfortunately, that simply cannot be the case for most people due to the nature of averages.
My advice on gaining a general sense of a car payment relative to the car’s depreciation would be to look at the previous years of the car you’re buying with a critical eye using online listings in your area. The secondary market will likely be strong and dependable for 3 to 10 year old cars that look very similar to the current model run. For example, a 2010 Audi A5 looks mostly unchanged from a new 2017. The same consistency is there for the Jeep Wranglers and Toyota 4Runners over that time span. This strengthens the secondary market and raises the resale price (decreasing depreciation).
The means you can reliably pretend what it would’ve been like to buy a new 2014 three years ago and sell it today. Look at the current prices the dealerships are selling the car for and knock off say $5,000-7,000 (just to shoot from the hip to estimate a realistic trade-in value for a 3 year old car at a dealership). The difference between what you’re paying now and what it might sell for however months later will be your assumption for depreciation.
A critical eye for resale is tough to rely on though as manufacturers can shake up the exterior designs at any moment which could potentially render the car less desirable than anticipated. A 2010 Mercedes C-Class compared to a 2017 is significantly smaller and in my opinion more dated. The same goes for a 2010 Honda Civic compared to a 2017.
Cars like the Mercedes E-Class take a big depreciation hit because, as a top company car lease, the initial supply annually outnumbers those interested in buying a pre-owned version.
To be safe, my two cents is to pay your car off within 48 months, or at least have a good understanding about the negative equity you may be accumulating.
#4 More People Should Be Leasing
Related to #3, more people should be leasing.
You agree to the sale price of the vehicle at the end of your lease up front.
A lease payment is made up of two components:
- Rent Charge
When you lease a car the dealer has a magic book or program that will tell him what the manufacturer estimates the car will be worth so many months and miles later, typically 30,000-45,000 miles and 24-36 months later. As a leasee you are responsible for the difference (depreciation). This is one component of your monthly payment.
The other component of your monthly payment is the rent charge. Let’s say you agree to buy a car for $50,000 and own it until it's worth $30,000, the depreciation component only covers $20,000 of the total cost of the vehicle which someone (not you) had to pay up front. The rent charge is the fee for lending you the other $30,000 over the period of the lease. The cost of the rent charge shows up in the form of a money factor applied over the term of the lease (which theoretically could be negotiated or decreased with refundable deposits).
Rent Charge, per month + Depreciation, per month = Lease Payment, per month
There are other ins and outs to leasing such as only paying taxes on the depreciated portion of the vehicle that are worth exploring on their own merits. And I do not mean to gloss over the reality that mileage excess charges add up if they’re not paid for upfront at discounted rates. Maybe I’ll write about this at another time.
But the simple reason I claim more people should be leasing is it takes the guess work out of what your car is going to be worth in 3 years. I think it forces people to be more aware of the costs associated with their vehicle and hopefully protects a few more folks from finding themselves “under water” with a car they want to get rid up in the future.
#5 The Number One Rule of Selling
Customer: “This costs too much.”
Salesman: “I agree with you this costs too much.”
Customer: “I don’t need that feature.”
Salesman: “I agree you don’t need that feature.”
Salesman: “Based on what you’ve told me here’s what you do need.”
The #1 rule of selling is to agree. Many people have a different #1 rule of selling. And I agree with them. (See what I did there.)
Persuasion is a science.
One way I’ve seen the core elements of sales broken out that I really like (as described in this YouTube video: https://www.youtube.com/watch?v=cFdCzN7RYbw):
- Reciprocity: We are obliged to give if we have been given something.
- Scarcity: If it's scarce, we want it more. Use this by highlighting the Benefits, Uniqueness and Possible Loss.
- Authority: We are more likely to comply with a request if it is coming from a perceived authority/expert.
- Consistency: We want to be consistent with our past commitments, even if the initial commitment is much smaller.
- Liking: We like people who are similar, who give us compliments and who co-operate with us.
- Consensus: If others (especially similar others) are doing it, then we are more likely to do it ourselves.
The ranking of rules of sorts is not important and not my point with this lesson learned. There’s a relevant specific sales process that varies from field to field, and the science of selling is rooted in following those field specific processes consistently from start to finish (just like a lab experiment from hypothesis to conclusion).
My point here is that after reflecting on my discussions with folks over the years, on a variety of topics, in a variety of settings, covering the spectrum of reactions, the ones who I agree with are the ones I feel better about, especially in the moment.
There’s some magic in the presence of agreement, and if you’re a salesman, you need to harness it. If you’re a philosopher (as I’ve been on many nights over the years), agreement is quite literally irrelevant.
Forced agreement does not have to be disingenuous. Ultimately your intelligence or judgement as a salesman is not the determining factor in a sale. Your ability to find the agreement that value exceeds the cost for the customer is a determining factor for the sale. The path to a final agreement is best followed by agreeing, not disagreeing.
Now if I didn’t baffle you out of my article with my bullshit I’ve linked my favorite car sales YouTube video that likely won’t be topped any time soon: