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RPM Blog

The RPM Auto Wholesale Blog provides tips for buying and selling vehicles, humorous stories and narratives from the underbelly of the automotive industry.

How Dealers Price your Car

The drumbeat of progress in the business world has always been about disruption, and displacement.  Out with the old and in with the new.  It is unstoppable.  The introduction of the low priced, mass produced, Model T Ford in 1908 is a classic example.  It disrupted the transportation market and displaced the horse drawn carriage as the primary mode of transportation.

Recently, the internet has been the catalyst of disruption in most markets, displacing old methods of commerce with newer, more efficient and transparent business models. The retail automobile market is no exception to this trend.  The manner by which a dealer now markets automobiles to the consumer has been changed forever.

Today, anybody with a smart phone is able to learn the cost and current selling price of any car in less than 30 minutes. Before ever stepping foot on the dealer's lot, the savvy customer can know, exactly how much of her hard earned cash she will need to part with to own the car of her dreams.  But what about the trade in vehicle?  Is there anything this same consumer can do before visiting the showroom to prepare herself for a smooth and fair transaction with a trade?  There certainly is!  And knowing the trade-in value alone is not enough.  You'll need to know a thing or two about dealer negotiation strategies too.  Armed with this knowledge, you will be able to successfully navigate the transaction so that it works for both you and the dealer.

You have most likely heard, more than once, that the purchase of a new car and the sale of your old car (the trade-in) are really two transactions and should remain separate from one another. But what does that mean exactly?  It means that these are the two items that you should discuss with the dealer individually, before you have any discussions about financing the new vehicle or purchasing an extended warranty.  But that method of negotiation works against the dealer because he is forced to lay all of his cards on the table up front and he will try to resist doing so.  If you forget this, the dealer will control the flow of the negotiation process and the trade-in price you receive for your old car will be cloaked in the mystery of the transaction itself. The dealer will attempt to find a way to shift the conversation away from the purchase price of the new car and the price of the trade and gravitate toward a monthly payment for the new vehicle.  By negotiating in this manner, the dealer is often times able to pay less than market value for the trade and increase his profit on the transaction.  If you stay focused, you will be able to stop this tactic in its' tracks

The Four Square

All car dealers use a standard work order or sales sheet to negotiate a vehicle purchase.  It is know as the four square or by many other names.  In reality, it is simply a worksheet that contains all 4 of the primary elements of an automobile purchase. The four main elements (hence the name) are; the selling price of the new vehicle, the value paid for the trade in, the down payment for the purchase of the new vehicle and the monthly payments of the new vehicle. While all 4 squares or elements are important, ultimately for many consumers the monthly payment is the most important square closely followed by the down payment (the dealer knows this).  By moving the focus of the negotiation to the payment square, the customer loses focus on the trade and pays the greatest amount of attention to the monthly payment.  This can be a very expensive mistake on the part of the customer since it allows the dealer to focus on the payment amount while ignoring the value of the trade!

The Difference Price

As a consumer, you will want to change the focus of the discussion to what is known in the industry as the difference price; or the cash payment required for the new car when the trade in has been subtracted from the price of the new vehicle.  It is a rather straight forward and simple mathematical equation.  You do your homework before you visit the dealer so you know the purchase price for the car of your dreams. Then, ask the salesperson to give you an out the door (OTD) price for the new vehicle which includes tax license and registration fees.  Once this number is plainly in sight, you then ask the salesperson to buy your vehicle from you.  The salesperson has been trained to learn if there is a trade in before you ever get to this point.  It is up to you to let the salesperson know in no uncertain terms that you might want to keep your old car and are simply interested at this point in learning the total cost of the new car.  You then negotiate and reach an agreeable amount for your trade in and then subtract that amount from the OTD price of the new car. In some states the trade is subtracted from the price of the new car before tax and license fees are calculated.  If that is the case in your state, work with a difference price without tax and license included or you will end up getting less for the trade in as the tax was originally calculated on the higher selling price rather than the lower difference price!  

The salesperson has been trained to move your focus away from the difference price and back to the monthly payment by pointing out that the monthly payment is the most important number to you if you are financing the new vehicle.  He will tell you that difference price negotiations are reserved for cash buyers.  Be prepared to walk out and find another dealer to work with if your salesperson insists on discussing only monthly payments with you.  

Every square of the four square worksheet can be negotiated independently and the monthly payment is the final square for you to attend to after purchase price, trade price and down payment. Keep in mind that you do not have to actually write a check for the difference to be able to negotiate from this vantage point although the salesperson will try very hard to convince you otherwise and move you to the negotiating strategy that is better for him.

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