Is Selling a Vehicle Above MSRP “Price Gouging?”
(Don’t worry, you won’t have to read this entire post to learn how I feel about calling this practice “price gouging.”)
Ugh. I am truly sick of seeing post after post about some new car dealer “price gouging” because they added a $6,000 “market adjustment” to a new vehicle or, heaven forbid, they added accessories and/or protection products to these vehicles at prices that seem higher than usual.
They are not price gouging. They are offering their goods at (or sometimes even below) the market price, despite the selling price being thousands above the Manufacturer’s Suggested Retail Price (MSRP).
And while I find it an unnecessary crutch when authors add dictionary definitions to their work to help make a point, I’m stuck without another way to explain what price gouging actually means… so here goes: Price gouging occurs when a seller increases the prices of goods, services, or commodities to a level much higher than is considered reasonable or fair.
Okay, with that out of the way, let’s dive into what has become a common practice with many new car dealers during the current inventory shortages. That is, adding market adjustments to their new vehicles.
Interestingly, some consumers who always considered a vehicle’s MSRP a joke, are now up in arms when a dealer offers a vehicle above this number. As everyone knows, the S in MSRP stands for Suggested. It’s not the selling price or the market price, it’s a suggested price that dealers are free to go below or above, based on market conditions. Today, the market conditions are clear. Inventory is tight and the pipeline of new vehicles is shaky and unreliable. It’s imperative that the dealer make good money on the units they sell today because they’re no longer sure they’ll have a vehicle to sell tomorrow.
The great news for car buyers is that (as has always been the case) if you don’t like the price, you don’t have to buy.
This is Why People Hate Dealerships!
I’ve read comments from some in the automotive industry stating that selling above MSRP is why people hate dealing with car dealerships, or that the practice of selling above MSRP is dishonest. While I’d expect this kind of naiveté from the public, I’m a little embarrassed for the industry commenters who spout these opinions.
It’s not dishonest to add a market adjustment to a new vehicle nor is it the reason people hate dealing with car dealerships.
When these markups are clearly stated before the customer gets to the write-up, this is an honest, transparent process. While dishonesty certainly still exists in some automotive transactions, a clearly-marked price that is honored by the dealership is exactly the level of transparency automotive buyers have been longing for. Pricing transparency – regardless of the price – creates an exceptional buying experience.
Don’t believe me? Look at any of the latest surveys of automotive consumers. In their 2021 Car Buyer Journey Study, Cox Automotive found 75% of vehicle buyers were highly satisfied with the dealership experience. Why? To oversimplify it, it’s because the process of buying a vehicle took less time. Why did it take less time? Fewer vehicles available and (almost) no price negotiations.
Customer satisfaction with buying from a dealership is at all-time highs… and so are the prices.
Would satisfaction be improving if dealers were truly price gouging? Would it improve if they were being dishonest? Where’s the hate so many in the industry claim follows when vehicles are sold above MSRP?
But Why Can’t Dealers be Like Tesla?
Tesla’s gross margin is now at 33%. Are they price gouging? Are they dishonest? Do people hate buying from Tesla?
It’s not about price! It’s about the experience! Dissatisfaction with buying from dealerships has never been about the final selling price. As any veteran in the industry knows, the least satisfied buyers are the ones who got the best deals, and those most likely to give the dealership a great survey often paid the most for their vehicles.
So, to those who point to Tesla as the way car buying should be, make no mistake. Dealers and OEMs would love these margins! (Imagine if the gross margins that were split by the OEM and the dealer were routinely in the 33% range?) Tesla makes a higher margin on their vehicles than a traditional OEM + the dealer makes, yet no one claims Elon Musk is price gouging.
Okay, But a $6,000 Markup is Crazy!
While a $6,000 market adjustment might feel crazy to some, let’s look at the reality of what’s happening in automotive retail today:
Dealers who’ve sold popular or hard-to-get vehicles at MSRP often find that the buyers flipped these for $6,000 (or more) within a week of purchase. Were those buyers price gouging?
Two- and three-year-old used vehicles have routinely sold at auction for the original MSRP (or higher). Were those wholesaling these units price gouging?
Labor and other costs are rising at a dramatic rate for most dealers. In fact, I know dealers who’ve had to raise the hourly pay for technicians by 50% above where they were in 2019. Are these technicians price gouging?
Moreover, these same dealers now adding market adjustments to their new vehicles were selling many of their new vehicles for a net loss on the front-end in 2019. They weren’t being naïve back then; they were merely selling at the market price… just as they are today.
Salespeople Want to be Paid
Salespeople who once sold 20+ vehicles a month from their dealership’s vast inventory of hundreds of new vehicles are now selling eight. Not because they’ve suddenly lost their way, but because there just aren’t enough vehicles to sell. This begs two questions:
How is a salesperson who lived off the commission of 20+ vehicles per month supposed to feed his/her family on eight sales without an increase in the net per vehicle commission?
How is the dealership supposed to pay more net commission per vehicle without a substantial increase in the final selling price?
The Reality of Supply & Demand
The law of supply and demand works, and the cure for high prices has always been high prices.
Are the airlines price gouging? (I recently booked a flight that cost me 100%+ more than the same flight did just a year ago.)
Is your local butcher or grocery store price gouging?
Are the oil companies price gouging?
Just like car dealers (and OEMs, by the way), they are all selling their goods and services at a price the market will bear. When supply improves or demand decreases, these same sellers will be offering their goods and services at a lower price… one that the market will bear.
While you may think a $6,000 markup is unreasonable or unfair, the market disagrees. (I, for one, think paying more than double for the same airline seat is unreasonable and unfair… but I paid it. It’s not price gouging; it’s just high prices.)
A New Car is Not a Necessity
A new car is not a necessity, and your local dealer doesn’t control the market – they never have. Don’t like the markup? Don’t buy. There are millions of new and used vehicles for sale right now in the US. Buy something else or delay your purchase until inventories normalize.
Of course, if you don’t like the price of milk, meat, eggs, gas, or even an airline ticket, you may have very little choice. That is, you need to eat, you need to drive (or do you?), and you may need to fly. You don’t need to buy that new vehicle with the $6,000 markup… though with the tight supply, someone does and will.
And they’ll do so without any tricks and without anyone twisting their arm. They’ll pay a market adjustment commensurate with the supply and demand for that vehicle. It’s not price gouging and it’s not dishonest. It’s as we now know, a better customer experience.
Automotive Sales Books by Steve Stauning: