Shaking up the pricing model

The nation's biggest auto retailers are experimenting with new pricing models, testing variations of what could be called an updated version of one-price selling.

AutoNation Inc. and other large retailers are launching or refining pricing experiments to reduce or eliminate negotiations. Approaches vary, but the reasons are the same:

-- They want to make transactions more transparent, faster and easier, and seek to build loyalty and repeat business.

-- They can turn inventory quicker -- and save floorplan dollars -- if they stick the right price on a car in the beginning.

-- The Internet, with third-party pricing resources such as Edmunds.com, already has brought asking prices closer to transaction prices. Armed with data specific to their market, customers strike a harder bargain.

-- Manufacturers have lowered the dealer discount, narrowing the spread between dealer cost and sticker price, leaving less room to negotiate.

COO Michael Maroone said AutoNation is trying at least three online tests designed to reduce or eliminate negotiations:

1. Setting a final no-haggle price.

2. Making the online asking price its opening offer, or "pencil" price.

3. Putting out an asking price that lines up with market-specific selling prices.

In the third experiment, AutoNation would include on its Web site a benchmark estimate for a vehicle from a third-party pricing service such as an Edmunds.com.

"The pricing tools are out there, and people can go out and find in general what they have to pay," Maroone said. "People want to haggle, but they really want to know they're paying a fair price."

This year Sonic will expand to the new-car business at its 123 stores a used-car pricing rule that limits the negotiating band, or range. With used cars, Sonic requires that the vehicle's asking price be within $500 of its final selling price. The company is considering reducing that range to $300.

Jeff Dyke, executive vice president of Sonic, says the group makes more money per vehicle by putting a competitive price on the car upfront.

"We want very little wiggle room between the selling price and asking price," Dyke said. "The younger a car is on the lot, the more gross you make. Carrying costs are crazy. You need to sell the car as quickly as possible."

Asbury Automotive Inc. has a pilot dealership in Atlanta testing what executives have called no-hassle selling. The experiment at Nalley Toyota started last August with salaried salespeople and prices aligned with that market.

Asbury executives call it transaction-based pricing rather than no-budge. They would rather meet customer demands by throwing in accessories or a protection package. "Once the management sets a price on the vehicle, there's a very limited band of negotiation," Asbury COO Michael Kearney told Automotive News.

The asking price typically ends up near the vehicle invoice price. Prices will change, probably weekly. Asbury is using a couple of different pricing services that determine retail prices based on actual sales of similar vehicles in a set geographic area.

Even with those services, setting that price is almost an art, Asbury CFO Craig Monaghan said. It must be attractive enough to start a serious conversation; it can't be so rigid to drive customers away. That is the problem with a strict one-price policy.

"It created an excuse for the customer to go to another store," Monaghan said. "If the guy down the street says, 'I'll give it to you for $100 less,' the customer is gone."

Lithia tried to go to a strict one-price, no-haggle model in 2007, but it just didn't work. The company now sets what it considers competitive prices upfront. It trains salespeople and managers to discourage negotiation.

No-haggle failed as a marketing strategy, but the principle is still in force, Lithia CEO Sid DeBoer said. Fewer than half of Lithia's customers negotiate, he said. When they do, the discussion usually involves the trade-in. Up to 60 percent of purchases come from repeat customers.

"We will negotiate if we have to to get below someone else," DeBoer said. "With used cars it's easier" to avoid haggling.

Gordon Stewart, who runs a five-store dealership group, used to be a champion of no-haggle pricing. But Stewart dropped it in Detroit, his last no-haggle market, about a year ago. When the economy crashed, the market just got too price-competitive.

"The one-price selling has no value if you're going to be the highest in the market," Stewart said. "You have to be the lowest in the market to make it work."

Other dealership groups are sticking with the one-price concept.

Lisa Schomp, owner of Ralph Schomp Automotive with Honda, BMW and Mini stores in Denver, said she has done it since 1991. While her stores do adjust prices to stay current with changes in market prices, they won't budge in the middle of a transaction. They don't throw in anything extra, and don't negotiate on the trade.

Morrie's Automotive Group, an eight-store group in Minnetonka, Minn., launched no-haggle just over a year ago. It won't haggle on the purchase or trade-in prices.

Sales and profit margins are rising, Morrie's COO Karl Schmidt said. Sales rose 61 percent in March, compared with 24 percent for the industry.

"The big surprise is we have had less defection than in the past," Schmidt said. "We have had customers paying an extra $400 to $500, and they don't mind. We offer a value package with the car that gives them free oil changes, free car washes and a lifetime powertrain warranty."

On average, grosses are up $389 on every new car and $282 on every used car, he said.

While the door is not closed on one-price selling or traditional negotiations, many big groups are adopting market-based pricing with limited negotiation.

Though it offered no numbers, Edmunds.com said last week that a growing number of dealerships are using its pricing data as a benchmark to show customers the dealership price is fair for the market.

Even though a one-price test is part of AutoNation's wider pricing experiment, AutoNation's Maroone sees the industry moving in the direction of the market-based model.

"We are now pricing all of our used cars in the first 30 days right at market," Maroone said. "And the wiggle room that used to be in the 15 percent range is now in the 5 percent range."

The group won't overhaul its companywide pricing strategy without plenty of evidence to support the winning model. "Everything we pilot is carefully tracked," Maroone said.

So don't expect to learn AutoNation's final pricing strategy until 2011 or later.