Pros and Cons of Pricing Above MSRP

Pricing, Customer Loyalty, Market Adjustments, MSRP

Many home buyers have been forced into bidding wars due to the pandemic housing market, with the winner paying well over listing price. This was unheard of in most markets 10 years ago. New car buyers are now facing the same “market adjustments” and experts predict this “new normal” will continue for months, maybe even into 2023. 

A recent iSeeCars analysis of over 600,000 new car listings found the average new vehicle priced 10.5 percent above MSRP. As a dealer, you have every right to price your vehicles according to what your market will bear. After all, the “S” in MSRP stands for “suggested.” Yet, there are pros and cons to this approach, and adopting a more strategic way to communicate market adjustments will help retain loyal customers and save your CSI. 

How Market Adjustments Affect CSI.

Let’s say you drive to Home Depot to pick-up some lumber. The sticker price per board foot is $500, but when you go to pay, the clerk tells you it’s now $1,000 because of “supply and demand.” If you’re like most people, you’d be furious. It would feel like a bait and switch. 

Now apply that scenario to your dealership. Your website displays the MSRP for a new SUV. But when a customer comes in, the price shoots up $5,000. The explanation given is again “supply and demand.” That customer will feel taken for a ride. Yes, many customers will still buy the vehicle. But, your reputation will likely take a hit, and so will your CSI. 

How Market Adjustments Affect Loyalty and Retention. 

In our industry we typically shoot for a three-year turn cycle. Consider the loyal customers who bought thousands of dollars over MSRP. What are they going to do down the road when it’s time to buy again? Many will likely return the favor by shopping competitors with the lowest prices. Compounding the problem, many high-sticker customers will not be in an equity position in three years, so now we’re breaking the trade-in cycle. 

Finally, there’s the service angle. Can we retain customers to service who are paying these high sale prices? In my mind, a dealership that takes me for all I’ve got in a vehicle sale will do the same in the service drive – and that’s a slippery slope towards losing service customers and future vehicle sales. 

Pros of Pricing Above MSRP.

As I said before, there is nothing wrong with pricing high. You will make more gross per unit now. But, it’s not a good strategy to simply cite “supply and demand” as the culprit and leave it at that. Instead, relate to rising prices we’re seeing everywhere, from homes to the grocery store to the gas pump. Supply chains are broken across the board – auto sales are caught up in that. 

Then, focus on the positive. Namely, the customer’s used car is likely worth more than it has ever been before – the added value can negate your market adjustment. 

Another strategy is to focus on the future. This “new normal” may be here to stay. Will there be bidding wars for vehicles in the future? We don’t know; anything is possible. Customers today may be paying over MSRP, but at least they’re not bidding against other buyers as in the housing market. 

Pros of Sticking to MSRP.

If you decide to stick with MSRP, you will make less gross now. However, you’re more likely to drive service revenue now and in the future, and earn a customer’s next sale. Customers have long memories and I firmly believe they will reward dealers who resist market adjustments.  

You can also offer MSRP to only your loyal customers. I was recently talking to a colleague about a dealership he visited in Indiana that is selling only to in-state customers and only at MSRP. They are doing it to prove they value their Hoosier customers and want to earn their future business. That’s a retention goldmine and a message that I hope the dealership is spreading far and wide on social media and other marketing channels. 

We are in unprecedented times in our industry with no end in sight. There’s no right or wrong way to adjust your pricing for this market – just do it strategically. Consider gross profit, loyalty, service revenue, and future sales before you adjust pricing so you don’t have regrets later.

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Tiffany Peeler is the VP of Sales & Operations for Proactive Dealer Solutions. Tiffany joined the Account Management team in 2014 and quickly became recognized for driving growth and retention with her expertise in developing and delivering effective coaching solutions. Today, Tiffany leads the sales and fulfillment teams with a laser focus on delivering industry-leading solutions to improve upon the customer experience and radically improving dealership profitability for over 1,200 North American dealerships.

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