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Summary
- Some dealerships stick to the MSRP price to prioritize customer experience and build long-term relationships through good customer service.
- Selling above MSRP can hurt the brand over time and make cars uncompetitive in the market, limiting potential sales.
- Regional pricing differences play a significant role in determining dealership markups, with some areas willing to pay more due to high demand or rarity of certain models.
Amidst the peak of the COVID-19 pandemic, the launch of the C8 Corvette created a frenzy in the automotive market and taught many consumers a crash course lesson in economics. Just as everyone was learning to bake sourdough and cut their own hair at home, Chevy decided to drop their first mid-engine marvel. Consumers scrambled to get their hands on the Corvette, and quickly discovered that the $60,000 price point had suddenly inflated faster than a balloon at a clown convention, reaching a dizzying $100,000.
Many consumers started to ask themselves why some dealerships adhered to the MSRP as if it were sacred text, while others inflated their prices for higher profits. And at first glance, it may seem counterintuitive for dealerships to pass up the opportunity for increased profits, but there are, several advantages to this pricing strategy for both dealerships and consumers.
Benefits of Sticking to MSRP for Dealerships
To find out what’s really going on, we spoke with an industry insider who has worked for over a decade alongside major automakers. Due to the sensitive nature of sharing insider perspectives on pricing strategies, he provided exclusive details only on condition of anonymity. He was able to shed valuable insights into the key factors driving the adoption of MSRP versus markups across different dealers.
When asked about the rationale behind sticking to MSRP pricing compared to adding dealer markups, he explained it comes down to focus: Either prioritizing customer experience by not inflating the price; or short-term profit margins. As the insider explained, certain pricing models such as having a set price can be a part of the consumer experience. By charging MSRP, dealerships can focus on “build[ing] relationships over time” through good customer service. He argued that selling above MSRP “limits the appeal to potential buyers who are looking for vehicles at a lower price point.” When markups go too high, “it hurts the brand” over time by accumulating negative impressions and limiting sales potential.
As an example, they explained how price gouging helped tank demand for the new Hummer EV: “Unfortunately, everybody’s got a bad taste in their mouth because the people who paid over aren’t super impressed with the car. And they didn’t get enough of them into the market to profit from it. Continuing to sell above MSRP can also “make cars uncompetitive in the market” compared to rival brands without markups. The source notes how Toyota and Honda are already being impacted as options to avoid due to widespread dealer markups: “It’s hurt Toyota and Honda overall because people will consider them less often because of the stuff they’ve had to go through.”
The source outlined differing profit-focused mentalities between dealerships. Some dealers employ aggressive sales tactics, charging well over MSRP expecting to make high margins, knowing they can then give discounts down closer to the sticker price.
If I started 10 grand over and I end up at $1,000 over, I still do better than the guy across town who started at MSRP.
Even MSRP Dealerships Sometimes Have Markups
Other dealers play a longer game, foregoing maximum short-term profit to instead focus on customer loyalty. These dealers take the option to either sell at MSRP or slightly below to build goodwill and relationships over time. However, even customer-focused dealers may charge markups on exceptionally rare inventory when the market supports it, knowing enthusiasts will pay more regardless.
They say to themselves, this is the one time we’re going to ask over
The source notes, “You may have a dealership that sold at MSRP forever, and then they get a rare car, and they say to themselves, this is the one time we’re going to ask over.” Some dealers also leverage limited availability to justify markups on common cars. But in general, dealers asking substantially over MSRP on plentiful models are signaling, “We love money more than we love making customers happy.” As inventory normalizes, dealers who stick to inflated pricing risk driving customers towards competitors operating with greater pricing transparency.
Regional Pricing Differences Matter
In New York City, some people will pay $10,000 over just to get access to certain cars, because there are so many people competing for some of the same cars, and they don’t care, it’s part of their culture to pay more money. But, if you travel to New England, that’s definitely not their culture. And they’re definitely not going to do that.
Ultimately, “A car is only worth what the customer is going to pay for it.” As such, dealers will price based on what their local market can bear. For a car such as the Dodge Hellcat, this leads to dramatic differences nationwide. While “a fully loaded Hellcat in Miami is a taxicab,” the source notes that, “A dealer in South Dakota and North Dakota that gets a Hellcat allocation can probably ask $50,000 or $100,000 over” due to rarity there. He explains that, “Miami’s market is a market that will bear it. South Dakota is a rarity market, they’re not frequent.” Even for a mainstream crossover like the Ford Bronco Sport that has ample supply, the source argues you could still see varying markups between dealerships across town.
Regional demographics and local inventory levels create different levels of rarity that determine pricing leverage. Essentially, dealers set prices at the maximum that their area’s blend of demand intensity and product availability enables. While some dealers take advantage of limited supply and high demand to charge large premiums, others focus more on “build[ing] relationships over time” by pricing closer to MSRP.
Why Consumers Like No-Haggle Pricing
For consumers, uniform MSRP pricing brings several advantages. The elimination of the need for haggling simplifies the buying process, making it more transparent and less stressful. It also saves time, as customers no longer need to shop around extensively to ensure they are getting a fair deal. This transparency in pricing helps build trust, as buyers feel they are being treated fairly, without the fear of overpaying. Additionally, with a fixed price, consumers can focus more on choosing the vehicle that best meets their preferences and needs, rather than being preoccupied with negotiating the best price.
A direct sales approach can help provide a set price that everybody likes because they can understand it. As the source notes, if manufacturers “controlled all their stores, they could control pricing.” However, a major downside is that “customers don’t want it, they need to go touch, smell, experience cars, they like that aspect.” A purely online purchase prevents buyers from getting hands-on with vehicles before buying: “All-out direct sales like Tesla tried to start initially won’t work.” There are clear advantages to “retail space, Rivian, Lucid, Tesla now has a whole bunch of physical locations” where people can still interact with cars.
So the future may end up being somewhere in between, where it’s a set price determined by automakers, while maintaining dealer showrooms. This could provide pricing consistency people appreciate while retaining an ability to “go touch, smell, experience cars” that online-only fails to offer.
The Ethical Dilemma Dealers Face
Our source raises an ethical dilemma faced by dealerships: If a dealer markup strategy results in selling every vehicle, is that ultimately good or bad? From a business perspective, high profits would suggest the approach is working. However, by failing to serve customers’ best interests with fair pricing, it violates ethical norms. As the source notes, “If I’m a dealership, and I asked for $10,000 over on every single car I sell, and I sell every single car, have I done a good job or a bad job?”
Ultimately, the source believes manufacturers should set reasonable MSRPs which dealerships mostly follow, predicting “that’s going to become the norm as long as people stop buying cars over stickers.” However, market distortions driven by wealth disparity will likely persist, as rich people are always going to want access first to new models, enabling some dealers to keep charging large markups.
The Shift Towards MSRP Pricing
With the threat of direct-to-consumer sales, many dealerships are adapting to new ways of doing business, such as delivering the car straight to your door. One of the key players in this transformation is Tesla, which has successfully implemented a fixed-priced point and direct-to-consumer sales model. However, Tesla’s model has not been without its challenges, facing resistance from regulatory hurdles along the way. Carvana, another company at the forefront of this change, has also encountered similar issues.
As the industry continues to evolve, dealerships must adapt to stay competitive. A strong focus on customer service and adaptability may be crucial for their success. Especially since today’s customers are armed with more information than the Library of Congress. The trends towards MSRP pricing and direct sales models are likely to shape the future of auto sales, presenting both challenges and opportunities for everyone involved.
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