Before every single car purchase that has been and ever will be made, a negotiation takes place. Negotiation is an unavoidable part of car buying, and many buyers are not particularly confident in their ability to do it well. That is exactly what we’re here to fix!
In this article, we’ll go over some tips and preparatory steps that are likely to get you closer to that magic number. Understand them all, and I promise that you’ll be a better negotiator once you do!
So, I won’t mince words to start: preparation is 90% of any negotiation. But I don’t just mean the typical “do your research, look at recent local sales” etc., as I’m sure you’ve all heard that advice many times before. When I refer to negotiation prep, I’m referring directly to the following necessities:
- establish what your best alternative to a deal is (i.e. what happens if you can’t reach an agreement),
- establish a reservation price, and a target price.
- Additionally, and perhaps most importantly, do your best to estimate all of these things for the seller as well. This is an absolutely critical step that gets overlooked entirely too often.
These steps are absolutely critical to negotiation success, so let’s break them down in a bit more detail.
First, you need to establish your best alternative to a negotiated agreement (commonly shortened to BATNA by all the fancy-pants negotiation theorists and scholars.)
This means that you have to know exactly what will happen if you cannot reach a deal on this particular car. If you have another car lined up (presumably one you like less than the one you’re negotiating for now, because otherwise you would’ve gone to that one first) then your BATNA is purchasing that other car. If you don’t have any other cars lined up, then your BATNA is simply not buying a car.
It’s important to know that you can only have one BATNA, and it should always, as the name suggests, be the best rational alternative to a deal. Look at all of your options, and select the best one. This is your BATNA. This is an important step because without a BATNA it’s much more difficult to determine exactly what you’re willing to pay.
For example, if Car A is listed for $15,000, and Car B (your BATNA) is listed for $13,000, you should not be willing to pay more than $13,000 for Car A, because you know that you can get Car B for that much or less.
The next step, after establishing your BATNA, is to establish your reservation price,or RP. Your RP is the absolute highest number that you’re willing to pay: a penny more and you walk away (rhymes!) This will be closely related to your BATNA, as we saw in the example above. It is important to know this number and stick to it, as your negotiation strategy is hinged on this number quite strongly.
Finally, you need to establish a target price, the most desirable number at which an agreement can be reached. This should be a good bit lower than your reservation price, though it should still be realistic. And remember, this is the number you’re hoping for, not the highest you’ll take (that’s your RP), so be sure to make your first offer lower than your target, but don’t be afraid to agree on a price that’s over it.
A good way to set your target price is by checking the value of the car online using a tool like Kelley Blue Book. It’s okay to be optimistic and set your target a bit below the blue book value.
Now, as I mentioned before, you absolutely must estimate all three of the above for your counterpart as well, whether it be a dealer or private seller. Most often, the dealer’s BATNA will be to simply sell the car to another buyer, and that’s important to understand. They will want to make a deal with you, but they are probably not as eager to reach an agreement as you are.
Next, estimate the dealer’s RP (remember that this is the lowest acceptable number for them, whereas it was the highest acceptable number for you). This is best done by looking at recent sales data. Try to find out what similar cars have sold for from at the same dealer, and you’ll know that their RP is lower than that number, otherwise they wouldn’t have taken that deal.
However, be sure not to do this hastily. Use recent sales data as a guideline, and adjust your estimate for their RP based on the exact specifications of the car you’re looking to purchase. Next, try to estimate the dealer’s target price, the price that they would find most desirable. The best way to do this is to simply look at the listing price. Their target will be somewhere below the listing price, but above their reservation price.
Okay, now that we’ve gone over all the steps, let’s go through an example. You’ve got your eyes on a 2015 BMW 328i (Nice choice!) The car is listed for $14,995, has 60,000 miles, and is in good shape. It has the Tech Package, Cold Weather Package, and Premium package, so it’s pretty well-optioned.
You’ve also come across a 2014 Audi A4. The Audi has 70,000 miles, is in OK shape, not quite as good as the BMW, and has similar options. It is listed for $14,000. Right off the bat, you should be able to tell the following: your first choice is the BMW, and your BATNA is purchasing the Audi for $14,000.
Additionally, your reservation price is $14,000, as that is the value of your BATNA, the Audi (of course this price would be negotiated as well, but we’re not sure what it could be negotiated to, and you don’t want to make any assumptions when setting your RP).
Now you need to set a target price. You know that the Blue Book value of the BMW is $12,700, so, being the optimist that you are, you set your target price at $12,500. Now let’s look at the seller’s side. In this example, the seller will simply be a BMW dealership. Their BATNA will most likely be to sell the car to another buyer, which shouldn’t be terribly difficult for them to do.
Now let’s try to estimate their reservation price. You see online that a car similar to the one you’re interested in sold for $13,650. Using this information, you estimate that the dealer’s reservation price for “your” car is approximately $13,000.
Finally, let’s estimate their target price. The car is listed for $14,995. Their target is likely somewhere below that, as they expect some negotiation to happen. Knowing this, we estimate their target to be $14,200.
Okay, now let’s recap before we start negotiating: your target price is $12,500, the dealer’s reservation price is $13,000, your reservation price is $14,000, and the dealer’s target price is $14,200. Look at all of the valuable information you’re able to get just by doing some strategic planning!
Now let’s take a look at how this negotiation might pan out. You open with $12,300 (NEVER be afraid to make the first offer, despite what everyone tells you. Making the first offer lets you set the tone for the rest of the negotiation, and it is a tremendously powerful thing when done correctly.)
The dealer, expectedly, says “no way” and comes back with an offer of $14,500. Your counter-offer is $12,800 (now the dealer is seeing you get closer to their RP that we estimated, so they’re probably starting to think that a deal is likely). They come back with $14,000. You go back and forth a bit more, and eventually agree on a price of $13,450. Congrats, you bought a car!
This example, while intentionally general, should serve as an adequate outline for most car deal negotiations—though every deal will of course be different.
Sometimes you might not be able to estimate the seller’s reservation or target prices, or perhaps you learn that they’re not as willing to negotiate as you thought they were. If this happens, walk away and re-evaluate—don’t make a bad deal just because you’re eager.
The right deal will come along eventually, and when it does, know that now you’re prepared to negotiate it like a pro!