Why is it so Painful to Buy a New Car?

By Sean Silverthorne
Consumers routinely list buying a car as the worst shopping experience imaginable. So it may be comforting to learn that even world-renowned professors at Harvard Business School have as much pain shopping for a new car as the rest of us.

For Jill Avery, a senior lecturer in the Marketing Unit, one experience included being ignored by a salesman, who turned repeatedly to her husband to talk business. “It’s her car,” the husband answered, to little effect. Another time she told the dealer she wanted a car with a manual drive. “No you don’t,” the salesman snapped. Says Avery, “I felt disrespected.”

Professor Leonard Schlesinger, who wrote a case study in 1989 about service in the auto industry, Ford Motor Co.: Dealer Sales and Service, puts it best: “Nothing much has changed over 25 years. The experience is still generally awful.”

Sure, there have been pockets of customer-service experiments over the years, such as now defunct Saturn’s move to fixed prices. And high-end dealerships can make car buying feel like a trip to the spa. But overall, little has changed in the high-pressure business of selling vehicles. So what should the industry be doing to make customers feel better about spending tens of thousands of dollars on a product that loses half its value the moment it is driven off the lot?

In a recent roundtable interview at HBS, Avery and Schlesinger joined Ryan Buell, an assistant professor in the Technology and Operations Management Unit, to discuss what’s wrong with the auto distribution industry—and to offer potential ways to fix it. Avery is an expert on customer relationships and brand management. Schlesinger, the Baker Foundation Professor in the General Management Unit, has co-written several books on service management. Buell studies service operations and how transparency can build strong bonds between a business and its customers.

Stories from the trenches

Schlesinger recalled accompanying a relative who wanted to buy a car. After a lengthy sharp-elbows negotiation with the salesperson, the hopeful buyers marched out of the showroom when the dealer wouldn’t meet what Schlesinger, after much research, determined was a price fair to both sides. A few miles down the road, another dealer agreed to the price almost immediately.

For his own recent buying adventure, Buell saw his price offer accepted during a follow-up call after the dealer initially turned him down. Then he had to wait hours while his new car was prepped, bank check accepted, documents signed, registration obtained and the other thousand details that make buying a car feel like a belly-crawl under enemy fire to complete the mission.

“There was room for improvement” in the process, Buell says. “I’m happy with the car, but it was a roller coaster of emotions going through the experience.”

What’s the problem here?

The professors agree that the industry has a structural problem: the deep divide between car manufacturers and dealerships. Simply put, says Avery, incentives are not in alignment. Manufacturers are focused on the long-term mission of building brands and customer loyalty, while dealers just want to sell cars today.

To illustrate this clash of cultures, Schlesinger points to the current faceoff between Lexus and some of its dealers.

Lexus wants to experiment with Saturn-like “no-haggle” pricing, responding to complaints, especially from younger-generation buyers, that negotiation is frustrating, time consuming, and not at all transparent. Dealers, meanwhile, like things the way they are. They argue that American consumers expect to deal, to feel like they are getting the best price possible. “The dealers argue that they set the price, that Lexus is just the manufacturer,” Schlesinger says.

In reality, in the current arrangement, dealers enjoy an information asymmetry advantage over the consumer, so what’s the incentive to add more transparency on things like invoice markups and service costs?

Myriad consumer websites help car buyers overcome that asymmetry with information on what dealers pay for cars, vehicle quality stats, and maintenance costs, but Schlesinger finds much of that information inaccurate and unverifiable. As an experiment for this article, he used several of those resources to find the true cost of a car at a dealership. The prices delivered by the consumer sites didn’t match. “I can’t trust the data,” he says.

Can this industry be fixed?

In a recent trip to the Middle East, Avery may have caught a glimpse of the future of car buying, in, of all places, a rug bazaar, where a vendor offered her tea and food, and started a discussion about what she wanted in a rug. As additional wish-list details emerged, more rug samples were revealed—along with an education in the qualities of each product—until the ideal rug emerged. It was only then that the price negotiation began—“price changes the discussion,” says Avery.

Imagine if cars were sold this way. This would help dealers build loyalty and trust, Avery says. And that opens the door, adds Schlesinger, to the notion of lifetime customer value, where the dealer benefits from many years of sales and service to the same customer. No longer would the current transaction have to be a fight to the death between buyer, sales rep, and the unseen manager in the backroom.

Avery longs for such a relationship with the reps at her car seller. She has bought a multitude of products from them, but is convinced they have no idea who she is, how much she has spent, or her preferences. It’s as if no record of her previous purchases exist.

Reflecting his study on operational transparency, Buell believes that the wall (or in some cases bright yellow line) keeping patrons out of the service garage needs to come down, at least metaphorically. How about a guided tour in which the service manager walks you through the technical design of the car, explains the benefits of the options you ordered, and offers maintenance tips you won’t find in the owner’s manual—all to increase your appreciation of your $40,000 investment and create a bond.

Is there anything car buyers can do in the current landscape? Avery, Schlesinger, and Buell agree that homework and willingness to walk out of a dealership can be effective tools, although sales staffs also know the walk-away tactic and sometimes even encourage it to put a deal in play. Experts also suggest buyers hunt down dealerships that are moving away from sales commissions based on the selling price.

Or you could do what Schlesinger does when buying a new car: Forget the dealerships altogether. Instead, he works with an out-of-state online auto broker who offers a fair price, good selection, and delivers the car to his driveway.

Tesla Motors, for one, has hit on an innovative way to sell cars. As of late April, the electric car maker had booked 400,000 pre-orders for its Model 3 sedan—a $35,000 vehicle that won’t even go into production until 2017. None of those sales were made through franchised dealerships; Tesla uses only direct-to-consumer sales.

Meanwhile, car sellers have been experimenting with customer-facing technology here and there, but a Luddite mentality still dominates the industry. When a dealership hit on the idea of using texting to keep customers up to date on work being done in the service department, the “innovation” was reported in an industry newsletter as if Edison had been reincarnated.

Motivation for change: Who needs a car, anyway?

Societal shifts and technology improvements may well force dealers to change their selling models, the professors say. That’s because the way people view transportation is changing and, at least in cities, cars are not the must-haves they once were. Innovative upstarts like Uber and Zipcar are making it easier (and less expensive) to find alternatives to car ownership.

Self-driving cars, which will one day become part of the rental/cab fleet, will be another impetus to put old Betsy up on the rack once and for all. Need a ride to the grocery store? Pull out your smartphone and summon a driverless car to take you.

And that leaves room for a new, disruptive financial model.

Buell envisions the possibility that cars could be sold by the mile, like the usage model of a cloud computing application. Instead of a big ticket purchase price, you might pay monthly fees or a deeply discounted full price determined by how much you actually drive the vehicle. The dealership would maintain it (motivating dealers to be proactive about maintenance and manufacturers to build in high quality), but the customer would own and insure it (motivating safe driving). In that case, the incentives of all the major players—people who love cars but don’t want the expense, people who don’t covet car ownership but want the flexibility, car makers and car dealers—could be aligned.

With all the car-buying hassles out of the way, Buell says, “buying a car could be a beautiful experience.”

(Published with permission from Harvard Gazette.)