Just like so may of us, except for a very small few, the buyer has had some car troubles and has decided it’s time to purchase another one. Before heading to the dealership this buyer as already checked is budget and what he will walk in with the willinness to pay.
The list price for the Toyota Corolla Hybrid of $28,590 was the initial number the company put on it, because let’s be honest they’re trying to make the most money legally possible off of each vehicle they purchase to sell.
This particular buyer was considering this car for a couple reasons, one if which it’s gas mileage per gallon was a big plus. The fact that the dealership was overstocked with this specific car and the demand wasn’t as such it should be, the buyer and the dealer come to an agreement.
The buyer using his budget of $26,500, and also using the info is friend had obtained too, began negotiating. Knowing the company paid $25,000 he had decided to offer $26,000 which the dealer accepted. This left the buyer with a consumer surplus of $500. The dealership didn’t bring in what they had the Corolla Hybrid listed for but did have a producer surplus of $1,000.
The willingness to pay is what a consumer is willing to spend on a product. I currently own a Chevy Cruze Sport Edition and a Chevy Colorado. Recently, me and my husband went to the local Chevrolet dealer to look at new cars for me. My car is not old, I was just looking for something different, and we looked I was looking to spend no more then 27,000(willing to pay) but due to the shortage of new vehicles and the ridiculously elevated prices on the used vehicles, I decided against it. I was looking to get a SUV but when I went over everything it wasn’t worth it, I couldn’t touch one for what I was willing to pay, it came close like 1000 more but I went in with a firm knowledge no more then 27,000 . Meaning 28,000 is what they wanted, there demand price , because they lowered some, but that was it, they didn’t meet my willingness to pay price so it stayed on the lot.
Ultimately, I am glad I didn’t with the way that the gas is priced now my little Chevrolet Cruze is good enough for me.
Many people set there goal price and many reach it, I’m glad for them and that’s good for business as well. But referring to cars and pricing it’s a tough business right now because of all the elevated prices due to low stock on vehicles.
I paid at least $1000 too much. I failed to do my research based on the information given to me by my friend at the auto dealership and I paid for it. Had I researched floor planning costs I should have been able to purchase the car for $25,000 but I had set my willingness to pay or the value to myself at $26,500 based solely on my budget. Yes, I did initially feel that I received an excellent deal when I only paid $26,000 and benefited with a consumer surplus of $500.
However, the fact that there was a sale on the vehicle because of too many in stock should have been an indicator. There is currently not a demand for the vehicle and people are not purchasing that model, and that is why it was listed as a sale price. I believed that the dealership was receiving $1000 profit or producer surplus because I knew that they paid $25,000 for the vehicle. My mistake was that I did not factor in actual producer cost and the dealerships willingness to sell.
The key element that I should have researched was how floorplanning costs work for auto dealerships. Most dealerships take out a loan to purchase new inventory. The longer that the vehicle sits on the lot unsold the more that they pay in interest on that individual vehicle. Everyday the producer cost of the vehicle was rising, and the dealership was unable to purchase new inventory. Had I understood this I would have had a better idea of the dealers willingness to sell.
New car sales have steadily decreased by 5.8 percent since 2018 with at least another 1% decrease for 2022. That 1% was factored in January 2021 prior to the current economic down-turn. The car dealership knows that it will become increasingly more difficult to sell the car I purchased. It is not unprecedented for new cars to sell below cost when the economy takes a down-turn. According to data from TrueCar, in July 2008 dealers sold about 21% of 2009 model year vehicles for less than what they paid for them. By March 2009, they were selling 25% of 2009 vehicles below cost.
I paid too much for the car.