THE CAR-BUYING EXPERIENCE
Industry observers generally agreed that the auto industry’s push-oriented system of production and distribution (by which manufacturers pumped product into the distribution channel based on imperfect measures of demand), coupled with an oversupply of dealers, created the high-pressure sales environment loathed by virtually all car buyers. While high-demand vehicles sold quickly, less-popular models required greater sales and promotional effort. Because dealers had to pay interest and insurance on vehicles each day they remained on the lot, they were highly motivated to move their inventory as quickly as possible. In turn, dealers often motivated their salespeople to sell lower-demand vehicles by offering higher commissions on sales of those models.
Wishing to maximize their profit per vehicle, dealers sought to extract the highest price a customer was willing to pay. Dealers knew that individual car buyers differed in their price sensitivity, in their knowledge about dealers’ willingness to reduce prices, and in their ability to negotiate a price. Hence, dealerships faced systemic reasons to model their operations based on strong sales and negotiation skills. This situation created the uncomfortable sales environment that typified most dealerships.
Voluminous anecdotal accounts of poor car-buying experiences were corroborated by consumer survey results. A 1999 Gallup poll, for example, asked people to rank the honesty of various professions: car dealers scored lowest.36 Gallup also found that only 42% of consumers had a “positive experience” in buying a new car.37 And car dealerships were the subjects of more complaints to Better Business Bureaus than any other industry.38 Female consumers generally reported a greater degree of dissatisfaction with the car-buying process than males. Interestingly, while women accounted for more than half of all salespeople across all industries, they comprised only 7.3% of all new-car salespeople. (A notable exception was Saturn, which heavily targeted women buyers: about 25% of Saturn “sales consultants” were female.39)
Consumers’ distaste for the car-buying experience was reflected in dealers’ poor customer loyalty performance. While manufacturers enjoyed moderate rates of customer loyalty—averaging 56.9% repeat business for the industry overall40—dealers saw only 20% of their customers return to buy a car.41 Dealers fared somewhat better on service: as the manufacturers’ exclusive providers of authorized service, dealers as a whole captured virtually all warranty-covered business. But in-warranty cars accounted for only 20-25% of the 205 million vehicles on U.S. roads (the median age of which was about 8 years); dealers had only 15% of the market for nonwarranty service.42 Overall, the average dealership saw fewer than 50% of its buyers ever return, whether for service or to purchase another vehicle.43
