New cars online much cheaper than at dealerships, a surprise?

Autohaus24 de rabatt display ad“New cars online much cheaper than at dealerships”, that is the heading of today’s main article in the leading Dutch magazine and website for online business, marketing and media, Emerce.
They quote a research by the German ADAC, who compared 12 consumer portals, where Germans can buy a car online. The researchers collected offers to buy a Fiat, Opel, VW, BMW and a Nissan. At online portals the average discount was 16% compared to the MSRP. At the dealerships the potential buyers just received around 11% discount.
If there is on average 16% discount on the websites, there must be a brand offering even higher discounts. If you dig into the research report, you can read that offered € 10520 or 31.3% discount on a Nissan Qashqai and 24.5% or € 4221 on an Opel Corsa.
Of course there should be a profit on cars, but is it this big at Nissan, that a discount of 31.3% can be offered and that the portal, the import company and the factory can still make a healthy margin? Or is there another explanation? First of all, in most cases cars presented on car trading websites are the ones that come from overstock or that are from a past model year. Let’s refrain from the discounts offered on these cars as they are applicable on just selected and limited number of cars. Then, the answer to the question above can be found in one of the remarks in the report. “The discount is mostly dependent on the features of the car. This means that the discount may change with each new step of the configuration.”
The answer to the question if at 31.3% discount there still is a healthy profit, lies in the fact that car manufacturers do not apply a constant margin on cars, options and accessories. A model range of cars has 1) an entry level model, 2) some mid-range models of which product management expects that they will be sold most frequently and 3) some high end models which have features that can attract special target groups or can offset the brands image. An example of the last category is a high performance GTI version in a family hatchback. To have a competitive pricing the entry level models tend to have a lower margin, while the high end models aimed at selected customer groups bring in relatively more margin.
One of the best examples in the industry of how additional features offer margin is what brands charge as an MSRP markup for metallic paint. Fully depending on what brand, model range, country etc. the MSRP markup for some “special” colors can vary from € 300 to amounts even as high as € 2750. For a factory there is no different process to spray paint a solid color than a metallic. In some cases the metallic paint itself is cheaper for the factory because they buy it in in high quantities, while the volumes of solid colors are lower resulting in a higher purchase price from the paint supplier. The markup on metallic paint brings in higher margin at no or just little extra cost.
When a customer orders a metallic paint at € 2750, then giving a couple hundred euros discount does not make it a scraper deal to the car brand. At some car brands the list of options seems endlessly long. Now you know why.
The ADAC research found that consumers got better deals on the internet than at the dealerships. Although the outcome seems remarkable, it is not that remarkable at second sight. The discount on the websites is a result of a set of automated business rules in which step by step the margin first gathered by the selected options is “given back” to the consumer. This process is done regardless of the person operating the website.
In the practice of the dealership the discount is a process of the “business rules” of the dealership and human interaction between the sales representative and the consumer.
Professor in Economics at the University of Chicago, John List researches on behavioral economics and has focused on testing theories like gift exchange, social preferences, and prospect theory. He is renowned for his series of experiments about trading. In one of his studies he found that market experience does eliminate anomalies in the outcome of a buying process. In other words, naïve consumers, first time buyers had significantly different bids in the real live market place experiments of Professor List.
Regarding the ADAC research I assume the sample of transactions analyzed is a mix of both experienced and inexperienced buyers. It would be interesting to find out if you could distinguish between these groups. It might be the case that experienced buyers are still better off buying a car at a dealership than through a website. That conclusion by itself is one that raises the question if a little transparency is needed when cars are sold at independent dealerships.

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