Understanding the Car Deal: Sales Tactics and Realities
Dealer profits on sales of new cars are small; dealers make their profits from financing, insurance, service contracts, added charges and options, repairs, and the sale of used cars. In other words, there is enormous financial incentive to make profits on these items to offset the dealer's inability to make profits off the sale of the car itself.
A used car sale offer all the same potential for abuse as a new car sale, plus the added fact that the buyer doe not really know what he or she is buying. The used car's history is easily misrepresented or kept hidden, and consumers often do not know a used car's real value.
The actual negotiation for the sale of an automobile is one of many ways dealerships and Web sites have of fleecing you, says Remar Sutton, consultant, on-air authority, author in his book "Don't Get Taken Every Time". He says to think of your friendly salesperson as playing a game with your pocketbook. "Lurking around every dealership corner, waiting for you behind pop-ups on your computer screen, is some item or service that will grab a little more money. Most of these extra profit sources are not even presented to you at dealerships until the contract is presented to you for signing...sometimes you aren't even aware that you purchased them. Understanding the anatomy of a car deal may help to prevent parting with more of your hard-earned money than necessary.
Anatomy of a Car Deal
Step 1: Dealer Prep
After buying a car at the auction or taking it in on trade, the Dealer usually sends the car to the service department to have a safety inspection done, including checking the brakes, changing the fluid, etc. Before buying a car, many customers will pull the oil or transmission dipsticks to check the fluid. If the fluid has a peculiar smell or is discolored, it can tip the customer off to vehicle problems that are easily concealed by merely changing the fluid. Of course, the car is cleaned out, usually including the warranty booklet and any other documents that can reveal the prior owner's name and address, which makes it difficult for the customer to call the prior owner up and find out more information about the vehicle and its price. If the car is a former rental vehicle, the dealer usually will remove all rental company stickers, since most customers would avoid such a car or insist on an additional discount. Many franchised dealers are "CarFax Certified Dealers" and will run a CarFax before the used car is put out on the lot for retail, in order to see what info may be publicly available on the car. CarFax has a list of dealers on its web site. A quick wash and maybe a wax, and the car is moved out onto the lot.
Step 2: Sales Meetings at Dealership
Before the customer ever steps foot on the lot, the dealership management has been conducting their periodic sales meeting. Designed to "push" the sales staff to sell, topics include targeting of specific vehicles that are "stale", drilling inventory knowledge (you can't sell it if you don't know you've got it on the lot), "spiff's" offered the sales staff on particular units. Dealer and consumer rebates/incentives may be discussed, as well as current or special interest rates from particular lenders. Leading sales persons are recognized in front of the group and "slow" sales persons may also be pointed out, for obvious reasons. One of the primary purposes is to give the sales staff a "pep" talk and to "push, pull or drag" the staff into an air of sales excitement.
Step 3: Meet and Greet the Customer
The sales routine always starts out the same way: greet the customer. The sales person can not sell until he greets the customer, preferably in a warm and friendly way. A warm handshake, and establishing eye contact, is the first step to getting a customer's trust. The second is to begin looking for that "common ground" between the sales person and the customer. Something they have in common, like children, grandchildren, sports, hobbies, church, membership in social organizations (the VFW Post, Masonic Lodge, etc.), or anything else - without being obvious about it. That's why in many sales person's offices you will find a picture of the family on the desk or an award or plaque on the wall. A lapel pin or Lodge ring, etc., can establish a connection without ever saying a word.
Step 4: Stealing the Trade-in During the Appraisal
Many customers have a trade in that they want the dealer to buy. Everyone knows that dealers buy at wholesale and sell at retail, but there are many things that the dealer can do to make the trade in look like it's worth much less than it really is. First of all, an amazing number of people really have no realistic idea what their car is worth. The appraisal is usually done by someone other than the sales person who is working the deal. Two benefits to the Dealer occur. First, when the number comes back, the sales person can blame the low-balled number on someone else while he/she builds more rapport with the customer (it's me and you against "them"). Second, since the appraiser is referred to as an "appraiser", there is an instant (and often undeserved) credibility given to the resulting number. Of course, anything and everything that could possibly be wrong with the car, even if only suspected, is presumed by the Dealer to need an expensive repair. Also, no matter what the trade in is, you can always count on the Dealer saying that this car just isn't a hot seller that'll be easy for the Dealer to retail or unload.
Step 5: Qualify the Customer
Sooner or later the cost issue comes up. To take the "sting" out of the discussion, many dealers will focus on monthly payments and avoid all price discussions. When asked what it costs, many times the answer will be another question like "what kind of monthly payment were you looking for?" This switch to payments is best when it's done very smoothly, so the customer never realizes they left the cost issue entirely and may never get back to it. Oftentimes, the sales person will leave it up to the Closer or the Finance Manager to handle the price issue and try to stick to the payment topic alone. This has the advantage of keeping the less experienced sales person from costing the dealership money that the Closer or Finance Manager can make for the house (i.e., the Dealer).
Step 6: Land the Customer on a Car
Next, you have to land the customer on a car. If you don't find out what they want, and "land" them on it, the customer will wander around the lot, poking their head into every car, test driving who knows what, until hours have gone by and nothing has been accomplished. The dealer wants to avoid all of that by asking the customer what kind of car they are looking for, sedan, mini van, sports car, pickup truck, or whatever. Next, find out if the customer likes a particular make, Ford, Chevy, Chrysler, whatever. Figure out what color the customer likes. Surprisingly, many customers buy by color and style first and make and model second.
With used cars, many dealers want to have the sales person take the customer on a test drive, rather than let the customer drive it off the lot, ostensibly "for insurance purposes". In reality, if the car acts up during the test drive, the sales person can feign the malfunction on their own lack of product knowledge, if they can't conceal the malfunction completely. Test drives are usually done on an established route that the sales person is familiar with. That can help avoid road and traffic issues that can bring out a car's problems. Bad shocks can be harder to detect if you avoid certain road surfaces. If a warning light lights up on the dash, or the fan doesn't work on high speed, the sales person is trained to quickly point out that it will be fixed before the customer takes delivery.
Step 7: Work the Deal and the Customer (puts the customer in ether)
The sales person emphasizes all the attributes of the new(er) car and all the negative aspects of the old(er) car while working the deal. All the usual factors are in play: mileage, age, options, equipment, plus the usual personal factors that are customer-specific. The idea is to get the customer so wrapped up in the idea of getting the new car, and how much it will improve their life, the envy of others, family harmony, their peer reputation, etc., that they lose track of the numbers in the deal. This is called putting the customer in the ether. The deeper the ether, the higher the gross profit on the deal. The objective at this stage is to get the customer firmly committed to the deal. That is why getting the customer to say "yes" is so important at this stage of the sales process. Part of that "yes" psychology is getting the customer to sign their name to a worksheet or other form of early commitment. Something, almost anything, has to be signed by the customer before the Turnover takes place. Committed to the deal, the customer will be less suspicious, more trusting, and easier to deceive when he/she is "t.o.'ed" to "F & I".
This also means that some sort of payment amount must be agreed to before the Turnover. It often starts with the sales person presenting three numbers written on the worksheet. It often looks something like this:
700/-0- down 600/1k down 500/5k down
The numbers don't necessarily have anything to do with reality. What the sales person often says when presenting the numbers is something like "with no down payment, your monthly payment is going to be about $700. If you put $1,000 down, I can get your payment down to $600. But if you really want to pay less each month, then I have to have $5,000 down on the financing." The psychological motive is, obviously, to "scare up" as much down payment money as possible by putting a huge monthly payment right in the customer's face.
Notice that the sales person may have said nothing at all about how long the loan will be for. The customer doesn't know if they are talking about a 3 year loan, a 4 year loan, or a 5 year loan. The absence of that information gives the F & I department more flexibility to determine what they interest rate and price will end up being, and just how much of the "soft add-on's" they can pack into the deal's numbers. Of course, this high monthly payment shock is where the customer often has their first stroke. Soft add-on's are things like credit life insurance, disability insurance, Gap insurance, rust-proofing, fabric protection, paint protection, etc. The idea is that the sales person creates the room in the monthly payment for these things to be packed into the deal by the F & I department after the Turnover.
Of course, the sales person often has no real intention of ending up with a $700 monthly payment, but they know that if they start out with a "500 - 400 - 300" set of numbers, there will be less chance of landing the customer on a higher number in the first place. By presenting the "700 - 600 - 500" numbers, the sales person has already conditioned the customer to expect that the monthly payment is going to be much higher than they thought. Having accepted that as the reality of the situation (after all, the sales person deals with these numbers every day so they must be right), the Dealer now has more room (and leverage) to actually end up with a higher number.
Once a payment number has been agreed to (usually with the customer initialing or signing the worksheet number that they go along with), the customer is ready for the Turnover.
Step 8: The Turnover
At the height of the ether, the customer is "t.o.'ed" (turned over to the Dealership Finance Manager). This person's job is to close the deal and maximize the profit in the process. If done really well, the customer will never know how bad it really is.
Much like passing the baton in a relay race, the smoother that the Turnover is executed, the less likely it is that the customer will expect what is about to happen next. At this point, the customer actually thinks the hard part is over with and that all they have to do is sign some papers. After all, that's what the sales person said they were going to do next. Actually, the selling process is still going on. The customer has just arrived at "part two".
The F & I Manager can also be called a "Business Manager" or something similar. The reality, however, is that they are just another sales person in the chain. Their job is two-fold: first, to get all the paperwork signed; second, to sell (or pack) soft add-on's into the deal. This is where knowing the customer's background can be extremely useful. If the customer is married, credit life and disability insurance become much easier to sell ("gosh, you wouldn't want the bank to come and take your car and leave your wife/husband stranded if something suddenly happens to you, would you?" is a question that is most effective when asked right in front of the other spouse). If the customer had a trade in with "negative equity" (a phrase invented by the car sales business), it is easy to convince them that they really do need Gap insurance.
Step 9: F&I Smokes the Paperwork
Of course, some dealerships just "pack" it into the deal without making the customer fully aware of the additional cost for these items by using the "just sign here, and here, and here" approach to the closing process, with the documents all stacked up one on top of another and the friendly Business Manager holding the stack still with one hand while turning the pages one at a time with the other hand and pointing to the signature line (often marked ahead of time with an "x"). "I'll give you a copy of all this paperwork right after I process it" is a good line to trivialize the event in the customer's mind. This kind of "five finger close", when done nonchalantly and smoothly, can generate hundreds or even thousands of extra dollars in profit. In fact, a "successful" dealership will make more money in F & I sales than on the sale of the vehicle itself. Ward's Auto Online is a great source for such information on the 500 biggest car dealers in the country.
"Smoking the paperwork" is a phrase that means the paperwork slides by the customer so fast that the friction of it sliding across the table, so to speak, makes it "smoke". At the end of the process, the F & I person will usually tear out the customer copies of the papers, line up the corners in the stack, staple them together, fold them all up, and put them in an envelope. Then the envelope is usually given to the customer with the admonition that the papers are important and they should put them in a safe place and keep them. Of course, doing all of that discourages the customer from looking closely at the papers on the way home. Putting them into a safe place at home also discourages the customer from looking too closely at the papers, or for too long, at home. This way, the customer is less likely to discover anything that is not quite what they expected until weeks or months later.
Step 10: Delivery of the Iron
"It ain't sold, until they drive over the curb."
At this point the sales person will return and escort the customer to their newly purchased car. With all the paperwork signed, the Dealer doesn't want the customer to linger (they might take the time to read what they just signed). This is the emotional "high" of the transaction for the customer. They think they have just "beat the house" on their hard-won deal and they are ready to strut out of the dealership and drive off into the sunset. The Dealer wants to encourage that. There is a psychological aspect to putting the car over the curb and the Dealer knows that if the customer figures out what happened to them and refuses to take delivery, the odds are that they will have to "unwind" the deal sooner or later (i.e., "back out the deal", cancel it, rescind it). That's the last thing the Dealer wants to do. In fact in California there's a "no cooling off" period so the sooner the Dealer gets you to drive off with car, the better.
The Dealer's staff have just worked for 3 or 4 hours to package the deal and get it signed, sealed, and delivered. They made no small amount of money in the process. To unwind the deal would mean having to start all over again with some other customer and lose the profit that they just "earned". That's a nightmare for any car dealer. They'd rather work the next deal on the next customer than have to work this deal all over again.
To avoid that problem, the customer is encouraged to get in their car and drive off by having the sales person or the F & I person shake their hand, smiling all the while, and congratulate them on their new purchase, as they walk them out the showroom door, to the car, open the front door, let the customer get in, close the door, stand there and waive as the customer drives off the lot. Once the customer drives over that curb, "it's a done deal", as they say in the business. At that point the customer has psychologically purchased the vehicle. It's their car. They "own" the deal.
Step 11: Selling the Paper
Now, the Dealer has to sell "the paper". That means the Dealer has to get the Bank or some other lender to buy the retail instalment sales contract or the lease agreement, if they haven't already. Most of the time, the Dealer has gotten a tentative (or even final) loan approval on the deal before the car is actually delivered to the customer.
One thing also to be aware of when you finance the purchase of a car through a dealer is that dealers receive a kickback from the lenders for the privilege of faxing your credit application to the lender. The dealer and lender share in an undisclosed "yield spread premium" as it's called in the industry. Yield spread premiums are a dirty little secret, the auto lending industry has not owned up to. Car dealers do not do the actual money lending, but they send the buyer's application to lenders, who tell them what interest rate the buyer would qualify for. That rate is called the "buy rate". However, if the dealer already got the buyer to sign onto a loan with a higher interest rate, the dealer and lender split this extra "yield spread premium" which can result in thousand to several hundred dollars difference.
In those cases where financed has not yet been approved, the car is "spot delivered" to the customer. In California, a dealer has 10 days to get the financing approved. The forms Dealers use in California state that the customer agrees to either get their own financing or to bring the car back if the Dealer is unable to assign the loan within 10 days of the contract. The Dealer is required to refund any down payment or the trade in vehicle's allowance, less some small charge for the customer's use of the vehicle, often based on mileage driven.
Step 12: Purging the File
After the deal has been bought, and closed, the Dealer often has an employee whose job is to "clean up" the Deal File. This person usually has a checklist, real or mental, which they go by in order to be certain that nothing is missed. They look to see that every required form is signed and in the file, that all blanks on the forms have been filled in where necessary, that extra forms (often signed in blank at the F & I closing) are discarded. In other words, their job is to "purge" the file and make the file reflect a "clean" deal with nothing unusual and nothing unaccounted for. This may happen in an accounting office of the Dealer which is physically located on a different floor or in a different building from the sales floor, in order to isolate the people from the sales process itself (thereby lending an air of legitimacy to their work).
Step 13: Preparing for Litigation
After receiving a lawsuit, the Dealer will often investigate what happened by talking to each of the people involved in the sale. These interviews can be video recorded, tape recorded, or other notes made. It is not unusual for the employees to be asked to write down everything they can recall about the deal, step by step, in as much detail as possible, in order to aid in the defense of the lawsuit. Sales persons, and F & I people, may actually keep a diary of their deals and potential customers, too.