4 ms·

> Dealer's know about the sunk-cost fallacy. Very few people are going to walk away from that new truck that they were so enthusiastic about put down $5k to res

> Dealer's know about the sunk-cost fallacy. Very few people are going to walk away from that new truck that they were so enthusiastic about put down $5k to reserve it. > Dealerships are typically a low-margin business, and probably negative margin during the early part of the pandemic. An e-truck is probably going to last 10+ years and rarely go to the dealer service dept. (the high margin part of the business). > So if you ran a dealership, and you knew that the market price for this e-truck was much higher than MSRP, and you aren't going to make anything on the back-end with dealer service, and you've been starving for many months, what would you do? Leave the money on the table? Worry that your customer won't return sometime in the next 3-10 years, long after the sting of being forced to pay market price wears off? Feel free to clarify, but I find your post self-contradictory. If customers don't walk away, then the dealers gain _no_ money by doing this since the money goes to the purchase. They only gain money if customers pull out and leave the reservation money with the dealer. So if dealers believe that customers will view this as a sunk cost, the only rational thing for them to do is in fact to offer to return the money.

avidiax 5y ago
If they gave the money back, some customers would walk away rather than pay the $30k markup. So yes, they only pocket the $5k if they walk away, but if they didn't pocket it, many more would walk away. And the economics above show why the dealer doesn't care if some customers don't come back.
- rsj_hn 5y ago
  That's gross margin, not profit. Then the dealer has to pay for the land, capital equipment, salaries, utilities, taxes, interest(*), etc. Profit is what is left after all these expenses are paid. In most situations, the dealer borrows to buy the car and then pays interest on that debt while trying to sell the car.
- CogitoCogito 5y ago
  > but if they didn't pocket it, many more would walk away. You do realize that this would that customers do _not_ view it as a sunk cost right? Hence my original confusion. Also your statement here pretty directly contradicts what you wrote earlier: > Very few people are going to walk away from that new truck that they were so enthusiastic about put down $5k to reserve it. edit: Okay the more I think about it I can see sort how you're calling this a sunk cost. You mean it's a sunk cost in the sense that the dealer isn't letting them take the 5k back and that will keep some people in the game. That's not really my understanding of a normal sunk cost though. In this case the 5k comes out of the purchase price of the car meaning that someone who has put 5k down will actually pay (marginally) 5k less than who has not. So there is actual economic value in considering the 5k down payment in future decisions as opposed to sunk costs that are entirely lost. In any case, I find it kind of insane to burn these customers like this when you have such a hot market. Instead just let people out if they want and increase the prices a little more if you want those 5k in your pocket. Killing your reputation for money you can get otherwise seems a bit silly when you realize that the market will someday turn around.

avidiax 5y ago

If they gave the money back, some customers would walk away rather than pay the $30k markup. So yes, they only pocket the $5k if they walk away, but if they didn't pocket it, many more would walk away. And the economics above show why the dealer doesn't care if some customers don't come back.

rsj_hn 5y ago
That's gross margin, not profit. Then the dealer has to pay for the land, capital equipment, salaries, utilities, taxes, interest(*), etc. Profit is what is left after all these expenses are paid. In most situations, the dealer borrows to buy the car and then pays interest on that debt while trying to sell the car.
CogitoCogito 5y ago
> but if they didn't pocket it, many more would walk away. You do realize that this would that customers do _not_ view it as a sunk cost right? Hence my original confusion. Also your statement here pretty directly contradicts what you wrote earlier: > Very few people are going to walk away from that new truck that they were so enthusiastic about put down $5k to reserve it. edit: Okay the more I think about it I can see sort how you're calling this a sunk cost. You mean it's a sunk cost in the sense that the dealer isn't letting them take the 5k back and that will keep some people in the game. That's not really my understanding of a normal sunk cost though. In this case the 5k comes out of the purchase price of the car meaning that someone who has put 5k down will actually pay (marginally) 5k less than who has not. So there is actual economic value in considering the 5k down payment in future decisions as opposed to sunk costs that are entirely lost. In any case, I find it kind of insane to burn these customers like this when you have such a hot market. Instead just let people out if they want and increase the prices a little more if you want those 5k in your pocket. Killing your reputation for money you can get otherwise seems a bit silly when you realize that the market will someday turn around.