Haggling is traditionally part and parcel of the car sales process, whether car buyers like it or not. And most don’t. A September 2006 study by Kelley Blue Book found that 65 percent of new-car shoppers would rather go to a dealership that offers pre-set pricing over one that negotiates. That number has climbed steadily from 59 percent in 2003.
To improve the car-buying experience, some dealers around the country have moved to a no-haggle approach where vehicles are sold at pre-determined prices. Saturn dealers are well-known purveyors of the concept.
The Gunn Auto Group, with seven dealerships in San Antonio, Texas, became a no-haggle company about eight years ago. The company’s motto is “one simple price.”
“We’re trying to correct the reputation of the car dealer,” says Wes Burke, Gunn Auto Group’s president. “Not only are we selling the fact that we’ll give you a good price right up front, we’re also selling the fact that you can shop with us because we believe our prices are that good — we are not a pressure sales force.”
Gunn Auto has since taken the one-price idea a step further by extending it into the F&I department.
“We followed through with the one-price idea in finance about four years ago because we realized that the customer’s expectations were set by selling the car. So we needed to be consistent in finance,” Burke says.
One Simple Rate Structure?
One aspect of the policy is presenting all the finance products — including extended service contracts, warranty and GAP — with fixed, non-negotiable prices using an electronic menu system. For example, on extended service contracts, Gunn Auto’s margins are set company-wide at $600, $800 and $1,000. These margins are dependent upon three categories of terms and the mileage the contract falls under.
But keeping with the “one simple price” theme to determine rate isn’t as simple.
“Our biggest challenge going forward is to present consistent rate structures to all of our customers,” Burke says. “Obviously everybody has different credit, so that is a big challenge in a one-price scenario.”
But Burke puts a high premium on offering a consistent rate, even if it means leaving money on the table.
“Our goal is not to argue about rate because arguing about rate sells you less product,” Burke explains. His view is that rate is the least stable profit margin because so many customers trade in their cars after a few years.
“We don’t look at rate as a big profit item. Instead we view it as a stepping stone for us to sell the products that support not only sales but service too, like extended warranty, GAP insurance, and wheel and tire,” he says. “So we have a more balanced approach when it comes to responsible profit.”
For now, Gunn Auto Group has imposed rate caps at 2.5 points on average. At Gunn Honda, for example, the cap is two points on 72 months and 2.75 on 60 months. But finance managers are encouraged to stay within one point over the buy rate in order to stay competitive.
“I’m really not interested in making a lot of money on finance reserve,” Burke says. “My main focus is to sell tangible products that people can use over the term of their ownership of the car, and rate really isn’t a tangible thing. Plus it’s the easiest thing to shop.”
Burke believes the best way to present customers with consistent and fair rates is to pass on the lender’s lobby rate for a flat fee. He is working with his lenders to give him flats instead of reserve, especially because of the controversy and regulation surrounding reserve. Eliminating reserve would also help keep employees honest.
“It keeps my people from having the ability to manipulate that item,” Burke explains. “We’re all about trying to be fair to our consumers, and the less wiggle room you have in the item you’re selling, the fairer it is to the customer.”
Fortunately several credit unions in San Antonio offer sizeable flat fees, and the Gunn franchises are making the most of them.
Tim Rivers, finance director at Gunn Honda, says he can get flats of $500 to $800 depending on the amount financed. The Honda store does about 70 percent of its financing with these credit unions, and has seen its F&I dollars rise in the past few years — even with the high number of flats. The store achieved a record $0.5 million in finance in May.
“The flat has been our biggest success at this dealership, because it does tie in with the one-price philosophy,” Rivers says.
One credit union Rivers works with will give him a buy rate of a half point less than the lobby rate, but he can opt to pass on the credit union’s lobby rate for a flat fee.
“It makes more sense for us to give them what they would get at the lobby and take the flat, so there’s no charge back on the flat and no miscommunication on the rate. It’s the same rate the customer would have gotten with the lender,” Rivers says. “The customer has the ease of doing the contract here, the credit union has the loan already put together for them at the higher yield, and I get a larger flat. So it’s a win-win situation.”
Rocky Start, Reputation Boost
Rivers explains how the transition to the one-price policy in finance almost broke the department.
“In the old days when we negotiated, we were aggressive and probably oversold products. This led to chargebacks 60 to 90 days later,” he says. “But you didn’t realize the impact of that because every month you were outrunning it, and it was a cycle. That cycle ended when we went one-price, because everything was laid out to the customer and it was so much cleaner. But it took us some time to get our feet firmly planted, and we were getting charge-backs from doing business the old way. Our regular volume went down and everything suffered.”
But the dealerships stuck with the new way of finance and it took about two years for F&I to start running smoothly, according to Rivers.
It was also a challenge to reprogram employees on the one-price sales method, which eliminates haggling and requires them to quote a price and let the customer walk if necessary. Gunn’s sales force is even trained to teach customers how to buy a car. They are also trained to encourage customers to shop around.
“We had to change some employment, and we had to retrain intensively to get people to understand that customers will come back if you treat them right,” Burke says. Burke does not hire people with car finance or car sales experience, those who have been “entrenched in a system that works for other dealers but not for us,” he says. Instead, the company hires sales professionals from other retail markets.
After the rough transition, Gunn Auto started reaping the benefits of being a one-price dealer. The company’s finance revenue has increased every year since 2000, and it is expected to reach up to $12.5 to $13 million a year.
Though 10 to 15 percent of customers want to haggle, according to Burke, the company lets them walk. The large majority of customers come to Gunn because they don’t want to negotiate; they just want to pay the same price as everyone else and not be taken advantage of. And this is the reputation Gunn Auto has built in the area, judging by the high number of repeat customers.
“These days you can’t advertise enough to get a new customer,” Burke says. “You have to keep the ones you’ve got, because one customer is worth $350,000 over the life of his transportation needs. So our goal is to make money by retaining customers.”