6 Consumer Purchasing Strategies

1. 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

2. 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

3. 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

4. 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

5. Research-Based BuyingMajor 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

6. Objective 2Implement a Process for Making Consumer Purchases A Research-based Approach to Buying a Motor Vehicle 6-6

7. 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 6-7

8. Buying a Motor VehiclePhase 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

9. Buying a Motor VehicleComparing 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

10. Buying a Motor VehicleLeasing 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

11. Buying a Motor VehicleFinancial 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-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 6-11

12. Buying a Motor VehiclePhase 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

13. 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?”

14. Buying a Motor VehiclePrice 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

15. Buying a Motor VehiclePrice 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

16. Buying a Motor VehiclePrice 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

17. Buying a Motor VehicleComparing 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 6-17

18. 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?

19. Buying a Motor VehiclePhase 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

20. Buying a Motor VehiclePhase 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

21. Buying a Motor VehiclePhase 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

22. Objective 3Describe 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

23. 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 services 6-23

24. 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?