Surprising Tips for Car Shopping in Internet Age

It's nearly two decades into the age of Internet car shopping, but despite the information explosion, most buyers don't have a clue.

In fact, at least one shopping expert argues, neither do some of the online services that a lot of people count on to guide them toward the best price for the new cars they crave.

As the Internet has made car shopping seemingly more transparent, the auto industry has moved to change the process to make the waters even muddier.

And as the Web has let people shop nationwide, freed from the tyranny of often-uncompetitive local prices, it also has let dealerships see what rivals everywhere are offering — effectively leveling prices because no dealer is likely to offer much bigger discounts than the competition.

While sharp-minded buyers are likely to feel almost smug nowadays, armed with more inside information than ever, it can be incomplete and misleading. Buyers in some ways are as vulnerable as ever to professionals whose livelihoods depend on making the sale.

To probe the secrets of car buying and data available on the Internet, USA TODAY invited representatives of six shopping services to a roundtable discussion at the Los Angeles auto show. They were candid, even blunt, and what they said sometimes was shocking.

One key point: What once was the holy grail of in-the-know deal-seekers — uncovering the dealer's "invoice price" (what the dealer paid) for a new car — now is easy to find on the Net.

But at the same time, the industry is making that "price" increasingly meaningless.

Automakers have fattened dealers' "invoice" or wholesale price so it looks as if they're paying a lot more than they used to — perhaps 95% of the retail sticker price, vs. 85% before Internet car shopping began in the mid-1990s.

But that modern invoice number now is padded enough to let automakers send significant sums back to dealers in hard-to-track give-backs and bonuses that make the dealers' real (and well-hidden) wholesale cost for the vehicle well below "invoice."

How 'holdbacks' add up

Such give-backs are beyond the traditional "holdback" by most automakers that has long inflated the invoice price. The holdback is an amount roughly equal to 2% of the sticker price (it varies by automaker, and a few don't use the practice) that the car companies usually refund to dealers periodically. It also has given automakers leverage over dealers, which are independent franchisees — the car company can withhold the amount if dealers don't meet automakers' requirements.

The dealer rebates inflating today's invoice prices, beyond holdbacks, vary.

• Some rebates to the dealer are variable amounts based on meeting sales quotas — and are sometimes even retroactive to the previous quarter. The quota rebates can mean that even the dealers might be uncertain of their final cost per car until they sell their final car of the period.

• Some rebates are so-called "atta-boy" payments of up to hundreds of thousands of dollars for high scores on the customer satisfaction surveys sent to new-car buyers.

• Some are simply the old-fashioned, direct factory-to-dealer incentives, often unadvertised, that might or might not be passed along to buyers.

Why all the complicated give-backs?

"It tells me that (automakers) and dealers responded to the publishing of invoice pricing online and said, 'We need to find another way to mask what (dealers) are being paid so that people don't feel like they're getting screwed,' " says Patrick Olsen, editor-in-chief of Cars.com and a roundtable participant.

Another participant says we shouldn't be surprised. "The fact is that consumers still think the dealer invoice price has some magic to it. It doesn't," emphasizes James Bragg, head of Fighting Chance, a small car-buying advice-giver he founded in 1993. "We let ourselves, over the decades, get conned into believing that a family with a $10 million net worth, of which $7 million is in car stores, is going to let you and me know what they're paying for their cars. Does that make sense to anybody? That's nuts."

But perhaps surprisingly, given how often they use "invoice price" as a touchstone, many brand-name online car shopping sites tend to agree with Bragg's dismissal of that price.

Exception: Jessica Caldwell, Edmunds.com's director of pricing and industry analysis. She says the invoice, however true or false, is another data point, and "every piece of data you have out there is helpful and can be critical" as a shopping tool.

In addition to Caldwell, Bragg and Olsen, at the table were: Larry Dominique, executive vice president at TrueCar.com; Jared Rowe, president of AutoTrader.com, which acquired Kelley Blue Book and its KBB.com in 2010; Jake Fisher, head of auto testing forConsumer Reports, who is involved with the magazine's pricing data and who buys from dealers the cars the publication tests.

Buyers don't want a deal?

Bragg, a peppery contrarian, considers the big-name shopping sites no friend of buyers, arguing that they don't work hard enough to show the lowest prices.

Rowe says that might be so, and — with an attitude likely to stun hard-core horse-traders — explains: "Overwhelmingly, our research shows that consumers ultimately don't want the best price."

"We have data to support exactly what he said," adds Dominique. "We do post-purchase surveys of 100% of our consumers, and the ones who paid the least for their cars are the most dissatisfied with their cars. The ones who paid average or above average are actually the more satisfied."

How is that possible?

Those who didn't haggle over the last dollar "spent an average of one to two hours less at the dealership. They feel they got treated fairly on the price, they feel they got treated fairly on" financing and trade-in values, Dominique says.

Adds Olsen, from a personal experience, "I went to buy a car and the dealer sat down and said, 'I want $300 over invoice,' and I said, 'Fine with me. Let's do that and cut a deal right away.' It wasn't rock-bottom price. It wasn't even the invoice price. And if I really pushed, maybe I could have spent three more hours of my life arguing with this guy," but it wasn't worth the hassle.

Bragg finds that hard to accept: "I have customers who will drive 120 miles to save a thousand bucks, and there are more of those than you would believe."

Rowe does not. "There is a segment who absolutely wants that rock-bottom price and will drive 500 miles to save $50. But overwhelmingly, consumers just want the fair price."

What is the "fair" price? "I don't think anybody in this room can tell you what the fair price is on any vehicle for any specific individual," Rowe says. He says a fair price "means that when I tell my neighbor what I paid for the car, I won't be embarrassed."

A look at shopping services

To understand the viewpoints, it's helpful to know how the shopping services operate.

• Fighting Chance charges customers: $39.95 for help on the first vehicle and $15 for more ordered simultaneously. The price buys advice on "exactly what to do and say each step of the way as you conduct a competitive bidding process from your home or office, without walking into a single car store."

Bragg says it winds up like this: "Ignore all the (price) advice you find on the Internet. When you decide what you want, get on the phone and call 10 dealers and tell them you're going to buy where you get the best price."

In Bragg's view, the best use for the Internet is to help decide what to buy, not how to buy it or how much to pay.

• TrueCar.com considers itself a buying site, not a shopping site. It costs nothing to use. But once a user prices a vehicle on the site, he or she is encouraged to submit information to the local dealer listed at the end of the pricing exercise for follow-up sales calls.

The site provides a price curve of prices being paid for a specific vehicle, showing the midpoint price, and stretching out to show the best and worst prices.

The site makes money from car ads, and auto dealers pay TrueCar.com $299 for every referral that leads to a sale.

• Consumer Reports charges $14 for a pricing report on one vehicle, $12 for each additional report ordered at the same time.

CR provides what it calls a "bottom line price" from which to start negotiating. No advertising is involved, but pricing information is provided by TrueCar.com.

• Edmunds.com, KBB.com and Cars.com consider themselves pure shopping sites. They cost nothing to use.

They provide "market" or "target" prices that take into account what others paid for similar vehicles as advice for negotiating.

Cars.com also offers a list of similar vehicles in stock at dealers within the radius shoppers specify.

The sites' money comes from advertising, which automakers hope is targeting people at the perfect moment — when they are seriously shopping for cars.

All the online sites foresee fast changes in their businesses, such as providing real-time help for people as they buy, for example.

"I think people are looking for some human touch to tell them this is good, this is bad," Caldwell says. "We just developed something last year where it's live advice. So if people are in the car-shopping process, they can now call. They can do a live chat and they can e-mail, too."

Also emerging: comparison shopping or instant purchasing data via tablet or smartphone. For instance, photograph the vehicle identification number of a car on a dealer lot "and you get a quote from that dealer while you're standing there. That is the kind of speed expected, especially by the Millennials and Gen-Y's," Dominique says.

Some do's and don'ts

Though they disagree on some important points, the panelists have been in the car-shopping business long enough to have valuable insights. Some of their advice:

• Don't fixate on price. Dealerships make what they need to, or they won't sell the vehicle. If the price is extraordinarily low, the dealer financing will be at high interest, or you won't get much for your trade-in, or you'll pay more for that extended warranty.

You can arrange your own financing in advance, to skip the dealer loan. You can sell your car instead of trading it, to make the new-car deal simpler and thus the true price easier to understand.

• Take a test drive. No matter how much research you've done, it won't tell you everything.

Olsen: "You don't know how you fit; you don't know the ergonomics; you don't know if you got the car that went through a bad day on the line, a lemon. Make sure you take a test drive to make sure that things are working."

• Don't shop and buy the same day. Fisher: "When you go into the dealership the first time, which you're going to do, just swear to yourself this is not the time to buy. Separate the purchase part of it and the shopping part of it."

That's because you'll be unprepared to make a wise choice until you've done a lot of research — and you're easy to seduce at that point.

Olsen: "When a new-car dealer is smooth-talking you, it's really easy to get hooked. God knows when I was younger, I did."