Tuesday, January 12, 2016

Earl Stewart’s Business Ethical Dilemma

An ethical dilemma is a complex situation that involves a mental conflict between moral imperatives, in which to obey one would result in transgressing another. One was recently forced upon me by Toyota Motor Sales, TMS, for whom I’m franchised to sell new Toyotas.

Most auto manufacturers have rules preventing their dealers from illegal and unethical advertising; however most manufacturers do not enforce these rules very strictly. When dealers violate them they merely get a slap on the wrist. Honda was the exception to the rule. For many years Honda had a unique rule for their dealers. They were strictly prohibited from advertising a price below dealer invoice. Mazda copied this rule a few years ago. This month, January 2016, Toyota added this rule.

The reason these three manufacturers wanted to restrict their dealers from advertising prices below dealer invoice was to prevent “bait and switch” advertisements. The manufacturers know what their dealers sell their cars for (transaction price) and they can monitor the advertised prices. They learned that the advertised prices were hundreds, even thousands of dollars lower than the prices they were actually selling their cars for. By putting a floor on the price that dealers could advertise, they hoped to bring the transaction prices close to the advertised prices.

You might be wondering why establishing the “invoice” as the minimum, or floor price would make any difference. Many car buyers believe that the dealer invoice is the true cost of the car; it is not. In reality, the invoice a car dealer receives from the manufacturer can include thousands of dollars in profit to the dealer. This extra profit is made up by several rebates or kickbacks that are remitted to the dealer by the manufacturer after the invoice is paid. Some of these "holdbacks" that are refunded to the dealers amount to 2%, 3%, or even 4% of MSRP. Requiring their dealers to raise their advertised price to the car’s invoice substantially raises the average advertised price.

As you know, dealers advertise a lot, probably more than just about any other retailer. A Ford dealer’s biggest competitors are the other Ford dealers in his market. They are all selling the exact same vehicles and the main thing that they have to differentiate themselves to Ford buyers is the lowest price. When a Ford dealer advertises on the Internet, TV, radio, or newspaper, it has to show you its lowest price otherwise you will buy from the Ford dealer that does. This is why the prices that Ford dealers really sell their cars for is much higher than their advertised prices. You probably have personally experienced this phenomenon. Can you recall ever buying a new car for the advertised price? Or did pay a dealer fee, doc fee, and pay for dealer installed accessories that were added to the advertised price? Maybe the car they advertised was “just sold” and they had only one available at that price. Or maybe, you feel like they gave you far less for your trade-in than you felt it was worth.

Because of this you can understand why the auto manufacturers are becoming concerned: the dealers who represent their brands are giving them a bad name! Gallup has published an annual poll entitled “Honest and Ethics in Professions” for over 30 years and car salesmen have ranked at or near the bottom of that poll each and every year. The auto franchise system is “broken” but state franchise laws force the auto manufacturers to use car dealers to sell their vehicles. These laws were lobbied into effect by car dealers and their associations over the last 50 years. Furthermore, even if the state laws could be overturned, GM, Ford, Chrysler, Toyota, Honda and the others are not prepared, equipped, or inclined to sell their cars direct. Tesla is already selling cars directly without a dealer network. Apple and Google are talking about selling cars directly too. These forward-thinking companies are keenly attuned to what consumers want. Additionally, companies like TrueCar are helping to sell cars online by offering honest, low prices with total transparency. With public sentiment so negative against car dealers, the manufacturers are afraid that they may be put in the position of having to sell cars direct whether they like it or not. They believe that the better course of action is to change the unfair and deceptive advertising and sales practices of their dealers.

This brings me to my “ethical dilemma”. I’m one of the very few “one-price” car dealers. This means that I post my lowest price on every new and used car I sell. My car dealership is just like the Apple Store, Amazon, or Publix. We post our lowest prices on all of our products. We post these prices online on our website - our virtual showroom - just like we post prices on the cars in our “brick and mortar” showroom. Unlike most other dealers I don’t advertise prices lower than I will sell the car for. I don’t make my customers negotiate with me before they can get my lowest price any more than Apple would make you haggle with them before you could get their lowest price on a MacBook computer or an iPhone.

Toyota, like Honda and Mazda, is now telling their dealers that they cannot post a price on the cars displayed in their virtual, online showrooms if it is below the car’s invoice. They define it as advertising and I disagree with that. Because approximately one-third of cars that I sell are sold below invoice, this gives me only two choices. I can raise those prices several hundreds of dollars or I can show no price at all. If I raise my prices, I would be charging my customers more than I think is fair. If I don't display a price, I am not fulfilling the promise I made to my customers when I became a one-price dealer - to provide simple, honest up-front pricing.

Toyota, Mazda, and Honda’s rule on “no advertising of prices below dealer invoice” is well intended, but I don’t think they understood the unintended consequences of their actions. This rule is a serious blow to the small but growing number of legitimate one-price dealers like me. Retailers posting prices on their product is standard for nearly every product except for automobiles. The car dealer practice of haggling with customers is a relic and it's reminiscent of horse-trading in the 19th century. This well intended rule will discourage car dealers from moving into the 21st century where retailers tell their customers their lowest prices upfront without the haggle and hassle.

So there you have it. If I refuse to follow Toyota’s rules, I will be subjected to huge financial penalties which could put me out of business. If I obey Toyota’s rules I’m not being honest and transparent in my commitment to my customers about putting my lowest price on every car I sell.

I’m looking for advice and guidance from my customers on my dilemma. You can text or call me on my cell phone at 561 358-1474. You can email me at earl@earloncars.com.

1 comment:

  1. Have a look at what this Boston area Honda dealer does...it doesn't deal directly with your "under invoice price" dilemma, but it's an interesting approach nonetheless! You need to "sign in" for pricing.



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