6 Consumer Purchasing StrategiesPractical 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)

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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

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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)

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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”

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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

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Buying a Motor VehiclePhase 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

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• 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

Buying a Motor VehiclePhase 2 - Evaluating Alternatives

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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

Buying a Motor Vehicle Comparing Used Vehicles

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Your experiences with buying or selling used cars?

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

Buying a Motor Vehicle Leasing a Motor Vehicle

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• 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-of-

lease 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

Buying a Motor Vehicle Financial Aspects of Leasing

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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

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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

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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

Buying a Motor Vehicle Price Bargaining for New Cars

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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/low-

interest-rebate-calculator.aspx

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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

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You can expect to spend over $200,000 on car expenses over your lifetime!

Buying a Motor Vehicle Phase 4: Post-Purchase Activities

Automobile Operating CostsFixed Costs

– Depreciation– Interest on loan– Insurance– License, registration ,and taxes

Variable Costs– Gas and oil– Tires– Maintenance and repairs– Parking and tolls

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Buying a Motor Vehicle Phase 4 - Post-purchase

ActivitiesVehicle 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 fraud6-21

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 4Evaluate 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 services6-23

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?