Volvo just launched a new subscription service for its cars — but it's a bad deal for consumers

Car by Volvo XC40

• Care by Volvo is a new premium subscription alternative to buying or leasing a vehicle.

• It eliminates price negotiation.

• No-haggle pricing is almost always a bad deal for consumers because it takes away one of their only negotiating advantages.

Volvo is rolling out a new alternative to traditional car buying or leasing, called Care by Volvo.

It's essentially an elaborate rental arrangement, eliminating loan/leasing down payments and insurance requirements while adding a suite of concierge services. Volvo described it as a "premium subscription" and will offer it when a new compact crossover SUV, the XC40, hits the market. The vehicle was unveiled on Thursday in Italy.

In a statement, the Swedish-Chinese carmaker said that "Care by Volvo also removes the practice of price negotiations," pointing out that "[c]ustomer research shows that this is one of the elements of the car-buying process that customers dislike the most."

A no-haggle deal is nothing new; consumers have long agitated for it, and some automakers have responded, most famously Saturn in the 1980s.

Why no-haggle is no good

car dealership

But to anyone with experience buying or leasing vehicles, no-haggle is a non-starter. Yes, the buying/leasing process through a traditional dealership can be annoying and time-consuming. But by surrendering their ability to negotiate on price, consumers give away their biggest economic advantage when obtaining a set of wheels.

This matters because car payments are typically most peoples' second largest fixed monthly expense, after rents or mortgages. Lease and loan payments are determined by several factors, but price is the most important: what you end up paying begins with the big number on the sticker.

The manufacturer's suggested retail price (MSRP) is suggested for a reason — it's merely a baseline. Unpopular but perfectly good new vehicles — think Volkswagen's small sedans, for example, which have been losing out to SUVs — can be had for far less than MSRP. But you have to be willing to wheel and deal a bit.

It's hard to understand why this freaks people out so much. You don't even have to go to the dealership. You can simply call around to various dealers, focusing on the vehicle you want, and say something like, "I'd like to spend this much, what have you got?"

The dealer's mission in life is to sell cars, because if he or she doesn't, the dealership can't profit from generating financing and insurance opportunities, as well as servicing the car down the road and setting the customer up to buy more vehicles later.

Bad deals

car dealership

No-haggle deals, in this well-understood framework, are always going to be bad for the consumer. They're also not so great for the dealer, who wants to be able to buck the MSRP when warranted. They're good for carmakers, because, for the most part, they collect their cut when an assembled vehicle is "purchased" by the dealership, often via what is called "floor plan" financing, whereby a carmaker extends credit to a dealer to create inventory.

So why do consumers want bad deals?

Fear, plain and simple. Car dealerships are intimidating, and even a cheap car will set a buyer back $20,000. A lot of folks are willing to sacrifice thousands of dollars in savings to avoid the unpleasant experience.

It doesn't help that most people buy or lease a car only every three-to-five years. The experience is newly unpleasant every time because it happens so infrequently.

As we shift our ownership priorities with new, younger generations of car buyers coming into the market, we're likely to see more services like Volvo's. The upshot is that buying or leasing a car will be more "frictionless."

Unfortunately, the friction of the older system is what made getting a good deal on a new car possible. Consumers should be careful before they trade that away.

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