When is a good deal not a good deal?

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Some dealers report that although there is good footfall in their showrooms, customers – probably armed with the latest gloomy new car sales headlines – are asking for the impossible. There has long been the type of customer out there who despite what they are told at every showroom is quite happy to visit dealer after dealer to achieve that ‘deal of a lifetime”. Whilst the industry is in the doldrums and manufacturers and dealers search for solutions, it’s quite right for a buyer to expect that with cash on the hip and the confidence to change their car, they receive the red carpet treatment and negotiate a great deal. The stumbling block seems to be the perception in some quarters that if a car is listing at £11,000 it should come for no more than £7k! Great in theory impossible in practice as there is no point any dealer completely distress selling his stock; it’s a dangerous game to play.

Let’s say for example that a certain dealer works with a total margin of 7% front end and 6% back end. The front end can be quickly and easily reduced to nothing by a customer giving strong buying signals and being prepared to sign up there and then. The back end segment of the dealer’s profit margin however is a different story. It is almost always made up of manufacturer’s standards which dealers must achieve before qualifying for it, such as selling the correct model mix and volume, customer satisfaction scores being above a certain level and so on. The problem is that some dealers will gamble on assuming they will get that money, sometimes allowing salespeople to negotiate some, if not even the entire bonus in their desperation to register another unit. Many dealers are relying on using the vehicle without any profit left to generate profits from other products on offer such as Finance, GAP insurance, paintwork protection systems and many more and sales staff are specifically targeted to ensure that these add-ons are aggressively presented to potential buyers as part of the car buying process.

The theory is that if a dealer cannot expect to make the same margins from his new cars he still needs to achieve the bottom line which is why increasing focus is put on other aspects of his business to ensure the dealership remains in the black and staff keep their jobs.

This of course presents a great opportunity for customers but also raises expectation levels and when buyers are looking firstly for a deal and secondly for the right car it makes the sellers job that much harder.

This is especially so when the customer believes that they should get thousands in discount because all they see in the news is an industry in crisis and airfields full of unsold cars, which is a very powerful image to take with you to a salesman when trying to achieve the best deal possible.

The sellers, by gambling on selling the car for a potential loss but hoping to make up the shortfall by selling other products which are generated from the vehicle, can leave themselves with a problem. If they sign a customer up with full discount on the car but with £1,000 worth of add-on products hurrah!, but what if on the day of collection the customer comes in with cash and decides against his GAP policy and tyre insurance? The dealer could literally end up with a situation where once they have paid a salesperson they will end up in making a loss. Get a few too many of these situations and any business becomes pretty much unsustainable.

Customers are king at present and if salespeople are motivated, patient and professional we believe that those customers will still want to buy a car and if the experience and back up is a pleasure, there is no reason that deals shouldn’t continue to be struck in showrooms up and down the country. If the deals which offer 50% off or buy 1 car get another free really are offered you surely have to ask yourself how much longer will that manufacturer and your local dealer be in existence?

You only have to look at what happened to Rover, almost immediately after they went bust the product became virtually worthless. More recently General Motors boss Rick Wagoner told the press that if his company is allowed to go into Chapter 11, it will end up being a simple liquidation. GM will be torn into pieces and sold off as scrap. He made one good point to support his point of view. If a bankruptcy of the No. 1 U.S. car company drags on for several months, potential auto buyers will purchase vehicles from competitors that they view as being “safe”. No one wants to buy a car that won’t be serviced.

So the best deal may not always be the best deal if the dealer cannot turn a profit and continue providing buyers with a long term service.