Click here to listen to Part 2 and Part 3 (the recorded car negotiation).
A number of my podcast listeners asked me to record and share an actual negotiation. After giving it some thought, I realized that recording a negotiation with a car dealership would be a great example for two reasons:
- It’s an experience that most of us will have to go through at some point in our lives.
- The tactics I utilize in car negotiations can be utilized in a number of business situations. We’re using this as a medium through which I can demonstrate a number of standard negotiation tactics.
I’m going to systematize the process as much as possible so you can leave with an actionable, step-by-step guide (click here for the free guide). Speaking of a guide, if you want to download the free guide click here. In this scenario, I will be negotiating for a 2017 Ford Explorer.
After I started to write this article/podcast I realized that in order to deliver the most value possible, this post needed to be incredibly thorough. I want this to be the most comprehensive car negotiation article/podcast online. Because of that, I am breaking this up into a three-part series.
- Part One will discuss negotiation preparation and strategy,
- Part Two will discuss tactics, and
- Part Three will be the audio of the actual recorded negotiation with the dealership.
I know some of you are probably asking-what is the difference between strategy and tactics? Good question. Strategy is what happens before the negotiation and tactics are comprised of your actual behavior at the negotiating table. With out further ado, let’s talk strategy!
Success is achieved before the day of competition through diligent preparation, comprehensive investigation, and strategy creation.
The preparation stage of negotiation is, without a doubt, the most important step in the process. Why? Negotiation is an incredibly stressful event. When you are stressed, your body produces the stress hormone called cortisol. Cortisol makes it difficult to think clearly. Because of this, in negotiations, when we need to be incredibly clear minded, we are poisoned by a stress hormone that prevents us from thinking clearly. This is why it is important to pre-think as much of the negotiation as possible.
Competence breeds confidence. You are able to perform at a much higher level when you have a thorough understanding of all of the relevant information. When I prepare for a negotiation, no matter how seemingly insignificant the negotiation may be, my goal is to gather considerably more information than is necessary. I typically only utilize approximately 30% of the information that I’ve gathered in the actual negotiation but I have that other 70% at the back of my mind throughout the conversation ready to go if necessary. The more information you have, the better positioned you are to make competent statements and ask relevant questions.
Go into every negotiation with the legitimate confidence that you know as much as possible on the subject and the requisite humility to learn more from the other side through listening.
Before the negotiation, I gather as much information as possible on the person with whom I am negotiating and the situational context. In your preparation, answer the following questions:
- With whom are you negotiating?
Simply knowing the person’s name is not enough. Here’s my rule of thumb: do as much research on them as you would if you were trying to date them. Look at their LinkedIn profile, social media pages, business reviews, local court filings, and conduct an extensive Google search. Articles they have written and interviews they have given are a gold mine of useful information because they provide you with an opportunity to hear (or read) their voice. This is powerful because people have go-to words and phrases that carry a lot of personal weight. If you mirror those words or phrases back to them, it would make your statements more persuasive. People think highly of themselves. If you sound like them, they will think highly of you.
Here’s a great example, this week I was preparing for a negotiation on behalf of one of my clients. Deep in the Google results I found this person’s name associated with criminal activity. I then searched the local court records and found that he had approximately 15 interactions with the law over the past 15 years (offenses ranging from menacing to burglary). I also had an opportunity to speak to somebody who has done business with him in the past and he had similarly unflattering things to say about this individual. Needless to say, this completely changed my approach to the negotiation.
So how did this change my negotiation strategy in this scenario? I realized that I was negotiating with the wrong person. Talking directly to this person would be fruitless so I decided to write a stern demand letter that would scare him into getting an attorney, then I could negotiate with his attorney instead of dealing directly with him. This allowed me to save time, which ultimately saved my client money.
When you’re negotiating for your car you need to take the time to research the dealership and, if possible, the specific salesperson with whom you were going to negotiate. I would suggest searching for reviews of specific salespeople on staff at the dealership. See if you can get reviews of the individual sales people and choose with whom you would like to negotiate before hand. Find a person with the best reviews and go with them. If you can’t find this information, ask for the most experienced salesperson or the friendliest salesperson when you call the dealership. Negotiation is like a dance. If you have a partner that can’t dance, you both look bad. You want to negotiate with the best.
- What are the numbers?
“You can be bad at negotiating but you’re not allowed to be bad at math.”
~ Anthony Lolli (guest from episode 9)
In order to be a good negotiator you need to have a firm grasp on the numbers. This next section will help you to identify the most important numbers for this car sale.
The Market:
We need to look at this dealer’s competitors and see how the same vehicle is priced at other locations. This is helpful because it gives us an idea of what kind of prices we can actually expect in the market and with whom this particular dealer is competing.
In this case, we are looking at a 2017 Ford Explorer Limited with a V-6 and 4-wheel drive listed at $47,413. Here are the listings of the same car at other Ford Dealerships in the area:
- $43,323
- $46,366
- $46,741
- $45,698
The Fair Market Value:
One of the most valuable pieces of information you can gather is the fair market value (FMV) of whatever it is you’re trying to buy. The power of the FMV comes from objectivity. Your arguments are more persuasive because it’s not you that is saying it should cost this much, it is a neutral, unbiased third-party. When finding the FMV, your goal is to find the value proposed by an individual, entity, or resource that is well respected in the industry.
In the world of cars, the Kelly Blue Book is the gold standard. According to their website, this car should cost between $42,096 – $43,483 in this area. As you can see, the dealerships in the area have built-in a little bit of “fluff” into their price.
You will remember in episode 4 of the podcast (the Secret Competitive Edge for Entrepreneurs) I encouraged you to always try to negotiate deals on purchases because, when it comes to pricing, after you factor in labor and overhead, to a certain extent, people just make up numbers. When you have an understanding of the FMV and the prices of local competitors, you can start to save yourself money by chipping away at the fluff.
The Costs to the Dealer:
Understanding the actual costs to the dealer will help us get a better idea of how low the dealer is willing to go. Here are two key terms that you should know before buying the car:
- Manufacturer’s Suggested Retail Price (MSRP): According to Kelly Blue Book, the MSRP is “actually set by the manufacturer and means just what it implies — a “suggested” price. By law, this price is displayed on every vehicle sold in America.”
One of the most important skills of good negotiators is the ability to hone in on certain key words. The keyword here is “suggested.” Dealers will try to get you to believe that the MSRP is the price they actually paid for the car. They will make it seem like dropping the price to below the MSRP creates a situation where they lose money and they are doing you a favor, because you’re just that special. So with that in mind, how do we accurately estimate the price at which the dealer bought the car and their margins? We need to find the invoice price.
- Invoice Price: According to the Kelly Blue Book, the invoice price “is the dealer’s cost for the vehicle only and doesn’t include any of the dealer’s costs for advertising, selling, preparing, displaying or financing the vehicle.” For obvious reasons, this is an invaluable piece of information; however, as you’ll see below, there is almost always more to the numbers than this.
Manufacturer Incentives:
In some cases, if a dealership hit certain numbers, it will get incentives from the manufacturers (the dealership’s dealer). For example, if a dealership sells five Ford Explorers in a month, it earns $1000 in bonuses for each Explorer sold that month. So in this example, if the dealer gives you $1000 off of the invoice price, he or she still wins overall because they would also make an additional thousand dollars on all the other Explorers they sold during the month.
We can assume that most people won’t be savvy negotiators like you, so the majority of people end up paying at or above MSRP, which, with these incentives, allows the dealer to win big even if it appears as though they are “losing” on a deal with you.
Personal Incentives:
One of the most important parts of the negotiation analysis is an investigation of all of the parties at play. It is easy to overlook the total amount of interested parties in the transaction. Below is a list of the most important part is to consider when negotiating the sale of a car:
- You
- The car dealership
- The dealership’s local competition
- The car manufacturer
- The individual sales person
I want to take a moment and highlight the last of these parties, the salesperson. People often make the mistake of considering the dealership and the sales person as effectively one unit. However, when you take the time to really think about it, they are two distinct players in the car selling game.
Here’s an example of how this comes into play. Sales people often have specific sales goals that they need to hit. Again, let’s hone in on the key words in that previous sentence — sales goals. Sales are very different from margins. Sales deal with the quantity of product going out the door while margins deal with the amount of profit on each product sale.
The dealership as a whole is concerned about margins but the individual sales people are more concerned about getting sales so they can meet their sales goals and bring home a bonus. What does this mean for you? It means that a sales person may be more willing to eat into their margins if they have to hit a sales quota. These sales quotas are often measured at the end of the month and at the end of the year. This means that you will probably have more leverage in the negotiation if you negotiate towards the end of the month or year.
Interest Paid by the Dealership:
Fun fact: Dealerships don’t typically own the cars they are selling you. The car that you buy is most likely owned by a bank or financing company. Why? Dealerships buy cars like normal people; they use loans. When the car is sold, the dealer uses those funds to pay off the loan.
Dealerships have to pay interest on these loans. The longer the car is on the lot, the higher the interest payments. These interest payments could be approximately $300 per month. Dealers typically want to sell the car within 45 days of putting it up for sale. The longer the car sits on the lot, the more pain the dealer feels. In order to alleviate that pain, they need to sell the car. That’s when you come in. (https://www.youtube.com/watch?v=QcunNKSKsUQ) If a car hasn’t been sold close to the three-month mark, the dealer is going to get a little bit antsy. Not only are her interest payments higher, the car is also taking up valuable lot space that could be used to sell more cars.
Not surprisingly, the length of time a car spends on the lot is not well advertised. However, there are two easy ways to find this number:
- Check the paperwork- if you go to the dealership and look at the dates on the car’s paperwork you could reasonably assume that the car arrived on the lot around that time.
- Check the Carfax report- this report shows when the car was listed for sale.
Which of these methods will I be using to get the length of time on the lot? Neither. Why? I want to see if I can get the salesperson to share the number. It will allow me to show you an important negotiation skill — how to get the other side to share damaging information. I’ll talk more about this in Part 2 (tactics).
Final Thoughts on the Numbers:
It is unlikely that you will be able to figure out all of the numbers at play when it comes to particular dealerships. This is instructive because in most negotiations, despite the amount of research you put in, it is impossible to know everything that you want to know going into the negotiation. That’s why it’s important to ask the right questions.
- What don’t you know that you want to know?
The best negotiators ask the best questions.
Would you rather have your foot on the gas or break pedal or have your hand on the steering wheel? I would rather have my hand on the steering wheel because that means that I am controlling where the car is going while the other person can determine the speed. How do we put our hands on the proverbial steering wheel in negotiations? We do this by asking questions.
The most powerful tool in negotiation is the open-ended question or open-ended statement. An open ended question is a question that starts with who, what, where, when, why, or how. These kinds of questions are powerful because their responses require elaboration. Open-ended statements operate the same way but they don’t end in question marks. An example of this is, “tell me more about x.” You will learn significantly more from the responses to open-ended questions than you would from the abbreviated responses you will glean from closed ended questions.
How do we figure out what to ask? You need to do a review of all of the information you have gathered and identify your current gaps in knowledge.
Closed ended questions can be answered with a simple yes or no. Those kinds of questions are ineffective when it comes to getting substantial information. However, there are three main scenarios where closed ended questions have value.
1. Closed ended questions are useful as a lie detector test. To do this, you ask a question to which you already know the answer. This gives you an opportunity to see if the person is going to be truthful. This is handy if you are determining whether or not you can trust someone.
2. The second scenario where closed ended questions are helpful comes into play when you have a very specific, almost rigid, logical path you want the other person to follow. For example, if you want to make the point that this car dealer should lower their price because the market is slow, their price is high relative to the rest of their competitors, and because the salesperson needs the sale to make their quota, you could ask the following set of closed ended questions:
- Earlier in the conversation you mentioned that the market was slow, is that right?
- Compared to the other dealers in the area, your price is higher, right?
- Do you have a specific quota that you would like to meet this month?
- Would making the sale help you make the quota?
A word of warning, before utilizing closed ended questions to get where you want to go, realize that persuasion isn’t always about logic. When it comes to making deals, people want to feel a certain amount of autonomy and control. When you ask closed ended questions, it is clear that you have taken complete control of the conversation and people don’t like feeling manipulated, even if the manipulation leads them to a logical conclusion. Humans are feeling machines that think, not thinking machines that feel. If you look at the line of questions above it should remind you of a courtroom style cross-examination. People don’t like being cross-examined.
Questions like these also encourage people to disagree with you. They know the answer that you want them to give and because they feel like they are being manipulated, they will try to find creative ways to jump off the logical train to protect themselves.
3. A much more effective way to use closed ended questions is by using what is known as the yes set. This is where you ask a series of three non-threatening closed ended questions formulated with the goal of getting them to say yes. This culminates in the last question, the fourth question, which is what you really are interested in. Here’s an example:
- Do you like this particular model of this car?
- Do you think it fits my needs?
- Can I buy it today?
- Can you do $39,900?
The goal with this technique is to generate positive persuasive momentum. You get them into the brief habit of saying yes to what you are saying and they will feel more compelled to say the fourth yes. This is very similar to the more aggressive cross-examination style of questions with one key difference. The lead up questions are non-threatening, which makes the person feel safe answering affirmatively.
Open-ended questions allow you to control the conversation while having the other party feel like they have all the control. How? People typically feel protected from your power to persuade if they are talking. However, this couldn’t be further from the truth. One of your main goals in negotiation should be to get the other party to feel comfortable and get them to talk.
When I negotiate, I try to keep the break down of communication 70/30 in their favor. When they’re talking approximately 70% of the time, I know three things are happening:
- I’m asking good questions
- I’m getting more information from them than they are from me, which gives me more power relative to them
- I am controlling the direction of the conversation.
Another added benefit is that by allowing them to talk and listening intently and demonstrating that you are listening, you build trust. The gap between a deal and no deal is trust. Listening is one of the easiest, and cheapest, ways to build trust.
In this portion of preparation, you should write an exhaustive list of all of the questions you want to ask during the negotiation. Most likely, you will only use a fraction of these questions but you want to have them at the ready if necessary.
- How can I maximize value?
Creativity is the key to maximizing value.
Great negotiators look beyond the obvious to find ways to maximize value for both parties. This is what people mean when they say, “expanding the pie.” Average negotiators look at what is currently on the table and try to figure out away to get as much of it as possible. Great negotiators look at what’s currently on the table and try to figure out ways to get more on the table for both parties. This has the obvious benefit of giving yourself a better chance of getting more of what you want but it also has the strategic benefit of creating more options and bargaining chips to use in the negotiation.
In this situation, we obviously want two main things — we want to get a car and we want to get it at the lowest price possible. But what else could confer value in this situation?
- Warranty
- Upgrades
- Car wash
- Repairs
Final Thoughts on Research and Preparation:
If you get nothing else from this series of posts, please know this — preparation is the most important part of any negotiation. If you take the time to prepare yourself, you will have the upper hand in the negotiation. The beautiful thing about this is that preparation is a choice; you are in complete control of your ability to prepare. Either you take the time to do it or you don’t.
People are often concerned about whether or not the other side will treat them fairly. In my opinion, whether or not you were treated fairly depends completely on you. In negotiations, people will only attempt to take advantage of you if they believe they can successfully take advantage of you. When you come to the negotiation and you can show the other side that you did your homework, you will command respect and deter them from trying to exploit you.
Click here to listen to Part 2 and Part 3 (the recorded car negotiation).
Check out these free negotiation guides:
– List of Negotiable Business and Personal Expenses
– How to Negotiate While Introverted
How to Listen:
