6
Consumer Purchasing Strategies
Practical Purchasing Strategies
• Timing purchases
– Price variations by time of year (seasons)
• Store selection
– Location, price, selection, services
• Brand Comparison
– Private-label or store brands (sold by one
chain) vs. national brands
• Label Information
– Open dating (shelf life of products)
6-1
Practical Purchasing Strategies
Price comparison
– Unit pricing = standard of measurement
– Coupons and rebates
– More store convenience higher prices
– Ready-to-use products higher prices
– Large is not always best buy (check unit price, usage)
– “Sale” prices not always a savings (anchoring)
– Online sources can save time
6-2
Practical Purchasing Strategies
Warranties
• Written guarantee from manufacturer or
distributor specifying conditions under which a
product can be returned, replaced, or repaired.
• Express Warranty (usually written); 2 Forms
– Full Warranty (covers entire product; fix or repair for a time)
– Limited Warranty (covers only certain parts of a product)
• Implied warranty (covers a product’s intended use)
– Warranty of title (says seller has the right to sell a product)
– Warranty of merchantability (product is fit for its use)
6-3
Warranties
• Used Car Warranties
– FTC requires a “buyers’ guide sticker”
• Tells if car has warranty and, if so, what it covers
– Warranty of merchantability (item fit for intended use)
• New Car Warranties
– Basic parts against defects
– Power train coverage (engine, transmission)
– Corrosion warranty (covers holes due to rust)
• Service Contracts
– “Extended warranty”
6-4
Research-Based Buying
Major Purchase Decision-making Process
• Phase 1: Pre-shopping Activities
– Problem identification: prioritize needs and wants
– Information gathering: information is power! WHERE to go?
– Follow the RULE OF THREE (all major products and services)
• Phase 2: Evaluating Alternatives
– Price analysis (range of prices and differences in cost)
– Comparison shopping (especially complex and expensive items)
• Phase 3: Determining Purchase Price and Selection
– Negotiation (cars: start with dealer invoice, NOT sticker price)
– Payment alternatives (cash, loan, lease)
– Acquisition and installation
• Phase 4: Post-purchase Activities
– Maintenance and operation
– After-sale service alternatives
– Resolution of purchase concerns
6-5
Objective 2
Implement a Process for Making
Consumer Purchases
A Research-based Approach to Buying a Motor Vehicle
6-6
Buying a Motor Vehicle
Phase 1 – Pre-shopping Activities
• Problem Identification
– Focus on real needs (e.g., reliable transportation)
• Information Gathering
– Personal contacts
– Business organizations
– Media information
– Independent testing organizations
– Government agencies
– Online sources
6-7
Buying a Motor Vehicle
Phase 2 - Evaluating Alternatives
• Purchase Alternatives (e.g., new vs. used, makes/models, delaying)
• Selecting Vehicle Options
– Performance Options (mechanical devices, engine size,
transmission, power steering, cruise control, and
antilock brakes)
– Comfort and Convenience Options (power seats, air
conditioning, power locks)
– Aesthetic Features (metallic paint, special trim, leather
interior, sunroof)
• Comparing used vehicles
• Leasing a motor vehicle
6-8
Buying a Motor Vehicle
Comparing Used Vehicles
Common sources of used cars include:
– New-car dealers
– Used-car dealers
– Private sales
– Auctions and dealers sell previously owned
cars
– Used-car superstores such as CarMax
– http://www.dealernet.com
Your experiences with buying or selling used cars?
6-9
Buying a Motor Vehicle
Leasing a Motor Vehicle
Advantages
– Small cash outflow (security deposit vs. downpaymt on loans)
– Lower monthly payments than buying (renting a car)
– Lease provides detailed records - helps if you use your
car for business purposes
– Able to obtain a more expensive car more often
Disadvantages
– No ownership interest
– Must meet requirements to qualify (similar to credit)
– May have additional costs for extra mileage, “wear and
tear”, turning car in early, moving, or certain repairs
6-10
Buying a Motor Vehicle
Financial Aspects of Leasing
• Capitalized Cost = price of the vehicle
– Average buyer pays 92% of list
– Average leaser pays 96% of list
• Money Factor = interest rate paid on cap. cost
• Payment Schedule
– Monthly payment amount
– number of payments
• Residual Value = expected value of the vehicle at the
end of the lease
– Closed-End Lease (“Walk-away” Lease)- no charge if end-oflease value is lower than projected residual value
– Open-End Lease- lease holder pays difference between
projected residual value and actual market value at end of lease
6-11
Buying a Motor Vehicle
Phase 3 - Determining Purchase Price
Negotiation may lower price or add features
– Have all the necessary information
– Deal with a person who has the authority to give
you a lower price or additional features
Used-Car Price Negotiation
– Edmund’s Used Car Prices http://www.edmunds.com
– Kelly Blue Book - http://www.kbb.com
The more new cars sold, the more used cars
there are for sale, keeping the prices down
6-12
Car-Buying Terms
• Highballing – dealer offers a trade-in allowance
that is higher than the vehicle is worth
– Counterbalanced by charging more for new car and/or
financing (“no free lunch”)
• Lowballing- dealer quotes a low price that
increases when add-on costs are included
• “Upside Down” – to owe more on a vehicle
during the first few years than it is actually worth
(also known as “negative equity”)
How can a buyer avoid being “upside down?”
Buying a Motor Vehicle
Price Bargaining for New Cars
• Sticker Price = suggested retail price
– Includes base price + accessories
• Invoice Price = dealers cost
– Consumer Reports: http://www.consumerreports.org
– Edmund’s New Car Prices: http://www.edmunds.com
• Negotiate a cost somewhere in range in
between
• Until price of the new car is settled:
– Don’t mention any trade-in
– Don’t mention dealer financing
6-14
Buying a Motor Vehicle
Price Bargaining for New Cars
• Price bargaining - compare dealers
– Set-price dealers (“no-haggling” prices)
– Car buying services = auto broker
• Car prices $50 - $200 over dealer’s cost
• Fee-based; arranges purchase with dealer
• Sales agreement = specific details
• Consumer protection for new-car buyers
– Warranties
– State lemon laws
6-15
Buying a Motor Vehicle
Price Bargaining for New Cars
Sales Techniques to Avoid
• Lowballing and Highballing
• “How much can you afford per month?”
• Offers to “hold” a car with a deposit: Never
leave a deposit unless ready to buy
• “Your price is only $100 above our cost”
– Usually added hidden costs or dealer incentives
• Sales agreements with preprinted amounts
– Cross out inappropriate numbers
6-16
Buying a Motor Vehicle
Comparing Financial Alternatives
• Financing Sources
– Banks, credit unions, other financial institutions,
finance companies, or dealer financing
– Get preapproved for a certain amount: will let you
know how much you can borrow, at what interest
rate, and for how long
• Check the APR and any Rebates
– Use online calculators to determine whether to take
low interest rate OR rebate (usually can’t get both)
– http://www.bankrate.com/calculators/auto/lowinterest-rebate-calculator.aspx
6-17
Researching Rebates
• Rebate – Nothing more than a refund of
part of the purchase price.
– Factory-Direct Rebates – Come directly from
the manufacturer to the buyer rather than to
the dealer as part of a dealer incentive
package.
• Buyer should use rebate money for
downpayment on car- NOT spending
money!
– Benefits of doing this?
Buying a Motor Vehicle
Phase 4: Post-Purchase Activities
• Maintenance and ownership costs are associated with
some purchases
• Correct use yields improved performance and fewer
repairs
• Investigate, evaluate, and negotiate a variety of
servicing options
• Complain if not satisfied with a purchase
You can expect to spend over $200,000 on car expenses
over your lifetime!
6-19
Buying a Motor Vehicle
Phase 4: Post-Purchase Activities
Automobile Operating Costs
Fixed Costs
–
–
–
–
Depreciation
Interest on loan
Insurance
License, registration ,and taxes
Variable Costs
–
–
–
–
Gas and oil
Tires
Maintenance and repairs
Parking and tolls
6-20
Buying a Motor Vehicle
Phase 4 - Post-purchase Activities
Vehicle Servicing Options
– Car dealers
– Service stations
– Independent auto repair shops
– Mass merchandise retailers like Sears
and Wal-Mart
– Specialty shops such as oil/lube, muffler,
transmission, and tire shops
Be alert for signs of fraud
6-21
Objective 3
Describe Steps to Take to Resolve
Consumer Complaints
Step 1: Return to place of purchase
• Calm, rational, persistent approach
Step 2: Contact company headquarters
•
“Contact Us” on firm’s website
•
Use e-mail or letter
Step 3: Obtain consumer agency assistance
– BBB provides pre-purchase information
– File a complaint on line at http://www.bbb.org
– Mediation - third party negotiates (non-binding on parties)
– Arbitration – Third party’s decision is legally binding
– State consumer protection office or agency
Step 4: Take legal action
6-22
Objective 4
Evaluate Legal Alternatives Available to
Consumers
Legal Options for Consumers
– Small claims court
– Class action suits
– Using a lawyer
– Other legal alternatives
• Legal aid society (public agency)
• Prepaid legal services
6-23
Wrap Up
• Chapter Quiz
• Concept Check 6-1- How Does Service
Contract Differ from Warranty?
• Concept Check 6-2- When Might
Leasing be Appropriate?
• Concept Check 6-3-How Does
Arbitration Differ From Mediation?