There’s one kind of car buying customer that sales people just love. They are “payment buyers.”
A car salesperson’s job is to sell cars — and make maximum profit for his dealership. The way to make maximum profit is by selling at the highest possible prices and including as many “add-on” extra items or services as possible.
Some customers are an easy sale but are difficult to make a big profit from. Others are easy on both counts. The latter of these two types are the kind of customers that car salespeople love.
A salesperson’s dream customer is one who has done little or no research about cars they might be interested in, understands almost nothing about the car buying process, knows little about car pricing, has few negotiating skills, but most of all, wants to negotiate monthly payments, and only monthly payments. These customers are called “payment buyers.”
You might ask why being a payment buyer is bad. If a buyer knows how much car payment they afford each month, why not negotiate and make a buying decision based on that?
It’s not so much that negotiating payments is bad, it’s that many customers who do it don’t know enough about how payments are determined and, therefore have no way to know what is a good deal or a poor deal. If a buyer says he’s looking for a car for, say, $400 a month, a dealer has at least a half dozen different ways to meet that requirement and offer a terrible deal — a deal that a more informed customer could have had for much less. At $400/month the buyer is happy but the dealer has made an undeserved high profit that was based on taking advantage of the customer’s ignorance.
Here’s how it might work.
A customer selects a particular car at a car dealership and tells the salesperson he can afford no more than $400 a month. The salesperson knows immediately that it would be impossible to get that payment for the selected car. It’s simply too expensive — the sticker price is too high — and there would be no way to get to $400/month even with discounts and incentives. The customer hasn’t done any research with online auto loan calculators, so he doesn’t know what vehicle price would create a $400/month payment.
So, the customer selects a lower priced model with fewer features and options. The car salesperson knows he might be able to get to $400/month but he would have to slash the price, use a discounted finance rate, not be able to sell any extras such as extended warranties, and possibly have to offer more for the customer’s trade-in vehicle. There would be little profit in the deal, and he would rather not do it, especially since the customer can be easily manipulated to choose a cheaper car with more profit possibility.
Once again, the customer must select an even lower priced car. Now the salesperson is in his best position to make a good profit. He starts by maximizing the price of the car, adding a couple of points onto the finance interest rate, and offering a low price for the customer’s trade-in. Of course this all occurs on a computer in the sales manager’s office, out of the customer’s sight. The monthly payment comes out to be $500/month. It’s a terrible deal and it exceeds the customer’s budget. The customer balks at the deal. The salesperson knew he would. But he has now established the high-end negotiation starting point. The customer now thinks the actual “value” of the car is $500/month and anything less is a good deal.
The salesperson now says he thinks he can lower the payment after he discusses it with his boss. He comes back and says they can get a $450/month payment. Actually, the deal hasn’t changed. It’s the same deal but the loan term (months) have been extended so that the customer is simply paying longer on the loan — and spending more money on extra finance charges. The salesperson hopes he can get the customer to agree, especially after he tells him that this is the best deal they can offer. The customer balks again, restating that he can’t pay more than $400.
Now, the salesman makes his final play of the game. He slightly lowers the price of the car (it’s still a bad deal), keeps the high interest rate (still a bad deal), and slightly increases the price of the trade-in (still a bad deal), all of which reduces the monthly payment to $400. The customer accepts. He’s happy to have “talked down” the dealer from $500/month and to have gotten the payment he wanted. He doesn’t realize he just accepted a terrible deal.
The dealer is happy because he sold a car that the customer didn’t initially prefer at a price higher than other customers have been paying, at a higher-than-normal interest rate, for a long loan term that brings extra profit, and he got a bargain on the trade-in vehicle as well. What a deal. Another dream customer who only knows to negotiate monthly payment amount.
Actually, the story might not be over. As the customer is about to sign papers to close the deal, the dealer begins to offer “add-on” items and services, such as security systems and extended warranties, that will increase his profit, and increase the customer’s payment by “only” a few dollars each month.