If you have ever purchased a new car, you probably recall the salesperson disappearing into the sales office to check if your offer would be accepted. Twenty minutes or so later, the salesman reappears with a document that is a counter-offer composed with a felt-tip marker or a “Sharpie.” This is known in the car business as a “pencil.” The “pencil” is a written response to the customer’s offer during the negotiation and it is usually written over the top of the “Write-Up (the customer's original offer).”
The “pencil” is typically written by the sales manager and it is most effective when it is attempted several times. The first attempt—or the “first pencil”—is a response to the customer’s initial offer. Although it is presented as a response, it rarely has anything to do with what the customer actually offered. For instance, during the commitment, the salesperson probably drilled down to find out how much a customer would pay. However, when the “first pencil” arrives from the sales manager, it most likely will contain an inflated payment that is not even in line with the reality of simple math.
This first attempt or “first pencil” is meant to create a reaction and provoke negotiation. Usually, the dealer will justify these inflated numbers by explaining that the payments are “normal” for a vehicle of this price. The pencil is often hand written. This is because the dealer wants to keep all the elements of payment and price as vague as possible. Look at it this way: if they provided the customer with a “pencil” printed from a payment calculator, they would not have any place to hide their potential “Back-End” profit.
Often, during a finance or lease negotiation, the “pencil” will conveniently be missing the selling price and only contain the payments and down payment. This allows the dealership to change the price based on the customer’s agreed upon payment. This is a central theme of car negotiations. Dealers will adjust the price, interest rate and money-factor to their benefit. This strategy focuses the attention away from their hidden profit streams, as well as the overall price of the vehicle. During this kind of negotiation, the customer must realize that he is not negotiating with the salesperson who is sitting in front of him; he is negotiating with the sales manager who is in the sales office. This separation allows the sales manager’s “pencils” to be vague and incomplete. In other words, if the sales manager was right in front of the customer calculating the payments on his computer, he would have to address and justify his calculations. Because the salesman can’t answer for the sales manager, he will simply try to get the customer to submit a counter-offer. Then he will leave to see if the customer’s offer is approved. This is done to create a feeling of alliance between the salesman and the customer. The salesman wants the customer to believe that they are working together, negotiating against the “Desk”(Sales Manager).
After the shock of the “first pencil,” the dealer expects the customer to respond with a counter-offer or a “Bump” in his initial offer. Believe it or not, the inflated numbers in the “pencil” usually have the intended effect. The customer will act in disbelief and sometimes anger; this will result in a counter-offer too often based on emotion rather than logic. Anytime they have the customer confused or emotional during the negotiation, they increase their opportunity for profit. Also, an inflated “pencil’ generally will increase the customer’s offer.
Putting you in the river
The psychology behind this can be described as “putting you in the river.” By presenting the customer with an “average” payment and price (which is actually inflated) they start the customer in the “river,” very high “upstream,” and by the time he swims across to the opposite bank, he ends up “downstream” at the dealer’s intended payment amount. Most customers believe they are excellent negotiators and they can be successful simply by relying on their wits. It is very important to avoid this kind of thinking. Car dealers embrace this type of customer. It is good advice to always enter the negotiation process fully prepared with all the information. Dealers fear customers who are prepared and able to perform accurate calculations on the spot (See our online Cheat sheet and Payment checker).