Taking the P on MSRP

Price gouging on the Chevy Volt has been big news again lately, with the story of a Florida dealer marking one up by over 60%. There are all sorts of positions on this behavior. I acknowledge the dealer’s right to charge what the market will bear, even as I think GM should have done a better job of heading this off at the pass. For its part, GM maintains that with franchise laws there’s nothing they can do about it. Marketing chief Joel Ewanick insisted in a conversation we had last July both that it’s not preventable, and that my concern was overblown, since none of their dealers would engage in the practice. The next day, the first story broke of a dealer charging an extra $20k for a Volt. Others maintain that the problem will take care of itself either by community pressure or as supply catches up with demand. The latter is certainly true, but we’ll face the problem again each time a new model comes out or gas hits a new high. While it’s been most visible with the Volt, this won’t be an issue unique to that model.

(As a side note, I’d contest the “not preventable by the OEM” bit; we did it on both Saturn and EV1, and Nissan has avoided the practice by structuring their ordering process to give customers their choice of dealer, rather than dealers their choice of customer.)

The frustration over markups is exacerbated by the fact that plug-ins receive a federal tax credit as high as $7500 and in some areas, additional state rebates. Originally meant to make this technology more affordable, these incentives are essentially being handed over to dealers instead. Granted, many dealers aren’t charging over MSRP- though as I’ve also heard from buyers who’ve had to sign confidentiality agreements about their surcharge as a condition of getting to buy a Volt at all, we’ll probably never really know how widespread the practice is.

So what if instead, we use these incentives as a tool to help curb price-gouging? As I mentioned briefly a few weeks ago, any state or federal financial incentives should be conditional on the vehicle selling at or below MSRP. This doesn’t mean that dealers can’t still charge over sticker. They absolutely could, and customers who are willing to pay that price (and forgo the incentive) to get the first car on the block can do so. But taxpayer funding would no longer enable these transactions.

While we’re at it, we need to at least consider other reforms. It makes most sense to do this as part of the current effort to switch the credit to a rebate available at time of purchase, rather than re-open the issue later. For example, those who argue that some of these incentives go to wealthy early adopters who don’t need them have a point. On one hand, it doesn’t keep me up at night; there are worse things than everyone who makes the same “better” choice getting the same benefit. (And for simplicity’s sake, I’m not getting into AMT or how an individual might not qualify for the full tax credit.) But it’s also true that with limited resources, we have to think about how to best use them to enable more plug-in cars on the road, sooner than later- and in the case of market incentives, that means broadening the market by making sure they reach the people for whom the credit or rebate does make the difference between buying an EV or not.

Since the Tesla Roadster was the main qualifying plug-in vehicle, it’s unlikely that the federal credits given out last year meaningfully helped sell more electric cars. I doubt that a $7,500 credit was the defining factor in anyone’s decision to purchase a car that starts at $109,000. For that reason, I encourage cities and states that simply can’t afford to do big financial perks not to worry about it, and focus instead on the incentives that actually move early adopters- things that offer convenience, access, or time saved. But even where financial credits are possible, there are other ways to direct them for maximum effectiveness. A good start would be to cap the price of vehicles eligible for certain incentives, to preclude public funding subsidizing truly high-end vehicles. There’s precedent for this: in the 1990’s, federal EV credits (then, 10% of MSRP, up to $4,000) only applied to vehicles that fell below the luxury tax threshold, around $44,000 the last time it mattered.

Another option is to scale incentives based on the income of the buyer. However, it would also likely be the most complicated to implement, and if not structured and communicated clearly, more frustrating to buyers who end up surprised to find themselves ineligible come tax time. With any policy, it’s important to balance value with complexity, and make sure we provide clear education for consumers. But as weak spots like price gouging emerge, we’ll be a lot better off if we’re the ones to shore them up.

18 thoughts on “Taking the P on MSRP

  1. I can’t agree more with you about changing the tax credit to a rebate and setting some ceiling on the purchase price to qualify. It all makes perfect sense, which is reason enough that the politicians probably won’t make it happen.

    As for some dealers charging over MSRP, it really doesn’t bother me much. I do like how Saturn operated, with haggle free pricing and I wish more brands would do this. It would make buying a car much less stressful for a lot of folks. I know how to play the game and always get a good deal but others that walk into a dealership blind get really taken advantage of many times.

    As for volt price gauging, I can tell you it isn’t happening much at all in New Jersey. Last month I bought my first GM vehicle in two decades, a 2011 Equinox LTZ for my wife. While I’m driving around in my MINI-E, my wife needs a 4wd vehicle (especially this miserable winter) for frequent visits to her parents in Vermont and we don’t have any plug in options yet so this was the best choice until a 4wd plug-in hybrid or EREV comes to market. I went to four different Chevy dealers in my quest for the color, options & price that I wanted. I talked to a salesman at all of these dealers about the volt, asking how many they’ve sold and what are they charging. All four dealers were selling at MSRP and had volts available to sell that were coming in within a few weeks. Two of them even had a volt on the lot that wasn’t pre-sold and I could have driven it home that night if I wanted it.
    I was very surprised by this, thinking they were all pre-ordered and people would be waiting months for them. Not so in New Jersey. There was someone on gm-volt site looking to come to NJ from another state to buy one and I referred him to on of the dealers I went to and he bought one that was on the lot over the phone, flew to NJ and drove it home. My point, it’s just like buying any other car, shop around people and you won’t have to pay a penny over MSRP. If you are in other states maybe that will mean you’ll wait a few months longer, but you’ll get your car and not have to pay over MSRP.

  2. This article is both (hopefully) just preceding a tipping point on the decision regarding rebates AND is very timely as to price gouging, which I believe is likely to be encouraged by the increase in demand for EVs caused by middle-east political instabilities, oil price increases and growing public awareness of the huge advantages of EVs in general and the Volt in particular.

    Inspired by this, I’ve just posted a feature topic at http://gm-volt.com/forum/showthread.php?6930 on this subject, quoting your key arguments and giving the link to this page. I’d be driving a Volt right now if the things you’ve proposed here had been in effect a few months ago. I know any further remarks you might care to make over there would be welcomed by everyone.

    Phil Toney, aka nasaman

    PS: My apologies for not waiting to ask your permission to lift a few excerpts; hopefully, you’ll accept my excuse that the time difference discouraged that ….and accept my request for forgiveness instead.

  3. The age of government largess at any level with the pretense of pump priming is about to end, The full extent of the colosol failure of the 2008 stimulus clamoring programs to sugar coat huge undertakings that defy economic sensibility, of which the ethanol-from-corn is the first such program to become staringly obvious, with many others will follow, will dull the voters’ apetite for the inconvenient untruth of such programs for decades to come. The Volt program, should it be destined to become the next Tucker, would be a good candidate to remind generatiots to come that pump priming should be reserved for companies with the public accountability and cash to mess around with and not the public’s funds.

    1. Hmmm- your meandering discharge of the political process seems to have more in common with a Rambler than a Tucker, much less a Volt…


  4. The line between rebate and no rebate is based on environmental impact and not on how hard the individual has worked to get to where they are today or what they’ve given up to be able to afford the right environmental choice for themselves, their families and the people around them.

    It doesn’t matter who we encourage to buy an EV as long as they buy. You might argue that the wealthy amongst us are the most in need of an incentive; they are most likely driving the worst vehicles already. But, they are certainly no different and generally no less price conscious than anyone else.

    Calming down a little because you guys don’t think I deserve a rebate for ‘skinting’ myself to buy a Roadster…

    I think what you’re looking for is an incentive that directly & negatively, targets those who needlessly generate un-nessasry pollution – you guys with the over-sized, over-weight, under-performing gas guzzlers. For that, Europe has shown the way & demonstrated success with:

    – Gas tax
    – Annual road fund (registration) based on emissions – sliding scale
    – Social rejection of the SUV

    Then throw in:
    – Low cost electricity (transfer oil industry support to power industry)
    – Tell people “America needs you…” to support it

    1. Hey Michael,

      I don’t fundamentally disagree that rewards should be geared toward the merit of the choice, not who makes it- that’s why I said it doesn’t keep me up at night that Tesla/Fisker buyers get the credits. These things will always get sticky if framed around whether the people involved are “deserving”, and I’m certainly friends with lots of Tesla drivers, many of whom are not nearly as wealthy as the stereotype would suggest. But, I think it’s fair to consider the various details and how to use what are, in fact, limited incentive resources most effectively. In my experience, the earliest adopters are moved by different incentives anyhow- things like HOV lane access and free parking/charging at LAX, for example, have more of an impact on their behavior than a tax credit. It’s not that Tesla buyers aren’t entitled to financial incentives in my opinion (nor that mainstream buyers aren’t moved by the more “privileged-based” incentives), just that it may make more sense to gear each type of incentive more specifically, so that they each hit the market segment that are moved most by them.

      Also, I’m all for gas taxes. I’m also happy to toss out the financial incentives EVs receive, long as we also end oil subsidies. I’m a big fan of level playing fields, even as I see usefulness in early market stimulation for new technology. But this post wasn’t meant to be a comprehensive discussion of all the reforms that ought to be made, just a few we should investigate with respect to this particular incentive.

      1. Sounds good. I don’t want to keep it too off topic but I generally feel that any positive incentive gives rise to a ‘them and us’ barrier. I’ve over-heard people grumble about HOV access for EVs even; the exact conversation revolved around the perceived ‘smug’ factor and went along the lines of “Why should they get the benefits because they can afford an EV?” Whereas, I’ve never heard any grumbles about my lower cost of fuel; it seems welcome by everyone.

        So I suppose I’m actually advocating to cut all positive incentives; treat the right behavior as normal and penalize the wrong. In my perfect world a move to an EV is just escape from pain… Anyone want to live in that world?

  5. I remember the Buick Reatta and the first retro VW bug having the same issue. Then when the fanfare dies down, things went back to normal. I myself would like a Volt, read alot about them, but I never buy a first model year of a vehicle. It would be nice if people would let these gouging dealers sit on their inventory, but once somebody pays over price it sets a precedent.
    By the way, I stopped by a dealer near Denville, NJ and the sticker was already off the window. So I’ll keep my Saturn SL-2 which gets 30-34 MPG with 205,000 miles a little longer. Can you imagine the hangover after waking up and realizing paying way over sticker ?!!!

  6. Dealers… a necessary evil I suppose. This is something that the manufacturers will need to address if the EVs start to become unpopular to the mainstream due to price gouging. Its bad enough that EVs are already being viewed as “too expensive” by some in the general public. The auto makers can simply employ a commission incentive to the dealers for volume which will help to prevent gouging. However there will always be those in the dealer market who remain blind to anything beyond 30 days & so they will always place margin over all else and gouge when they think they can get away with it.

  7. price gouging is just the way things often go with a hot item. when my daughter wanted a zuzu pet last year, the only ones I could find were on eBay at 100% a mark up.

    you have a couple (at least a couple) really good ideas here. limiting incentives to vehicles that sell at or below MSRP is a great idea. the ones that sell above MSRP would likely have sold regardless of incentives.

    I don’t like the idea of means testing for incentives. as you said there are many problems with it, although as you said AMT can already do this. and as Michael Thwaite pointed out, everyone should be rewarded/encouraged equally to do the right thing.

  8. Interesting that the limit you mention falls between Volt and Model S. I’d argue the Volt is already above the price range which is “affordable”. The Model S will have a price where many who usually would not buy a car above even $35,000, would consider it for being an EV. The Model S profits will be used towards development of the Bluestar ($30,000), so this money goes exactly where it should go. Tesla doesn’t have the financial background to develop a mass market car out of the blue. You are effectively about to “punish” the company which has ignited the current wave of EV enthusiasm, and without which the Volt would not be. There are many who think the Volt doesn’t deserve an incentive with its range of just 40 miles, but don’t make such a bug fuss about it, as they allow others to go a different path.

    1. Norbert, I didn’t mention where the limit should be (only noted what it was years ago for those who were interested- I expect it would be set higher now.) For the record, I think it should probably be in the ~$65-75k range, which would accommodate both the Model S and the Fisker Nina. I’m all for supporting the start-ups and their future development, and I am a known Tesla fan. ;o)

  9. While I can’t say the $7,500 tax credit was the “defining factor” in any Tesla owner’s decision to buy a Roadster, I do think it played the same role it plays in Leaf and Volt purchases: allowing consumers to justify buying a car that has a higher up-front cost than a comparable gas car.

    When the tax credit became available in January of 2009, Tesla promptly and retroactively raised the price on the remaining first-year model orders so that the tax credit would go to Tesla Motors instead of the buyers. While that credit wasn’t enacted when those buyers made their initial deposit, it was on the books when they locked in their options and pricing to turn that refundable reservation deposit into a binding commitment to buy.

    This was a huge deal for many buyers. Not only was it an insult to some of Tesla’s most adamant supporters, it presented a financial dilemma to many during a tough economic time. I believe 100 of the 400 affected customers dropped their orders because of this price increase. We were among the first few owners to get slapped with this price increase. I spoke out about it so that Tesla could not continue their intended practice of springing this on customers one at a time, and took a lot of grief from Tesla Motors for doing so.

    Personally, I had no need to buy a then nearly $100,000 sports car, but in 2006 after seeing “Who Killed the Electric Car” my wife and I decided we needed to turn her years-long interest in getting an electric car into action that would bring that option to the public. Tesla Motors was the only game in town, so we made a huge bet on an unproven start-up with an at-risk $50,000 deposit on a car that didn’t yet exist. Our bet paid off, not only in getting an awesome car, but more importantly in financially supporting the company that showed the world electric cars are awesome and shaming the big automakers into producing the mass market cars that are becoming accessible to the broader public. I’m really glad we took that risk and stuck with Tesla through years of thick and thin (mostly thin). If the price had been another $7,500 higher I’m not sure we would have gone through with actually buying the car. If everyone else in the same situation had bailed, I’m not sure Tesla Motors would still exist.

    While Chelsea isn’t one of them, a lot of people think Tesla owners are rich jerks randomly blowing money on impractical toys. The truth is that everyone who looks at the Leaf, Volt, or any of the upcoming plug-in cars should know those cars would probably not exist if Martin Eberhard hadn’t decided to start an EV company and gained the support of hundreds of people who wanted electric cars available to everyone enough to make an investment that had only downside financial risk with no possibility of financial reward.

    By the same token, early Leaf and Volt buyers are opening the doors to the development of less expensive and more capable vehicles in the future. Having the federal government match a small part of those personal investments is appropriate even if the vehicle is more expensive than the average person can afford. The whole idea is to get to the point where the average person can afford an energy efficient vehicle that has no tailpipe emissions, has lower well-to-wheel environmental impact, reduces our economic dependence on foreign dictatorships, keeps our energy dollars local, and improves our national security.

    1. Hey Tom,

      Thank you so much for your always thoughtful comments! I agree that the credit helped some Roadster buyers justify the higher cost- I’m just not sure that sales would have been measurably lower without it, that’s all. People took the leap you did for a variety of fantastic reasons, but I think most had already conceded that the financial cost was going to be higher. The same is true with the Leaf and Volt, and I agree that it’s appropriate for the government to match the personal investment, especially in light of the subsidies both oil and ethanol enjoy. But given that it comprises a higher percentage of the overall cost, I suspect more people think the credit makes a difference between being able to buy a Leaf/Volt or not, than a Tesla. Since they currently have to wait and claim the credit later, I don’t know that it’s really as much of a defining factor in affordability as its perceived to be, but you’re right about it being part of the justification. Changing to a rebate would absolutely affect the affordability factor, but not if the dealers absorb the rebate.

      I remember well when Tesla raised the prices, and how poorly they executed that decision. And I know it caused some people to pull out- but again, while a few may have been sitting on the affordability edge, I heard from more who were simply (and rightfully) pissed at the bait and switch. As others have pointed out, Tesla’s not the only manufacturer to raise the MSRP as a result of the credit, and it’s poor form no matter who does it. But it’s compounded when dealers then pack the price on top of that, and it’s an aspect that could be dealt with, with the proper political will.

  10. I would term it ‘profiteering’, not ‘gouging’ which is more apt in regard to pricing for necessities without alternative choices.

    Re: gas tax…. I’d support an incentive-driven tax which would encourage people to do a couple of important things – eliminate wasteful driving habits and seek vehicles that minimize or eliminate usage of gasoline.

    How it could work would be to have two prices for a gallon of gas at the pump – one with no additional taxes, or in other words, current day price structure; and another with a hefty (e.g. $2) tax added on.

    Each driver would be allowed to purchase a certain number of gallons (e.g. 200) at the non-taxed price level, with taxed pricing kicking in when purchases exceed that gallon allowance. The time basis for this pricing allowance would be for a period of one year, with an annual renewal as per annual vehicle registration.

    Drivers would have to insert their driver’s license into the credit card slot at the pump; within seconds the information from the license is processed and a command is sent to the pump to set that driver’s price for that purchase based on his/her YTD gasoline purchases – if less than the allowance limit, the pump price remains unchanged, if over the limit the pump price jacks up to taxed level.

    Why I think this is better than a flat tax? Because flat taxes offer no choice. People grumble but tend to bite the bullet and adjust in ways that tend to be minimally effective. Give people the opportunity of having some control in the matter, and there will be much more incentive to find ways to save.

    The Chevrolet Volt is the perfect analogy to this idea. Many if not all Volt owners are very much conscious of their EV range and make attempts to pack as much of their driving within those limits, even though they don’t have to.

    In summary, a tiered gas tax would be far more effective than a flat tax in creating the sort of changes those of us in the green community would like to see happen.

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