Car pricing definitions
First, let’s start with some definitions that affect pricing:
Dealer Invoice: Because dealers are independent businesses and are not owned by the automobile manufacturers, they must buy cars at wholesale prices and then sell them at a retail markup just like any other retail business. The Dealer Invoice (also known as the factory invoice price) shows exactly what the dealer paid for the car. All dealers pay the same price for identical vehicles. There are other factors that go into figuring the dealer’s actual cost beyond the invoice. See below.
MSRP (Manufacturer’s Suggested Retail Price): The MSRP is the base retail price of the vehicle as suggested by the automaker. It does not include extras/options, destination charge, or other fees. Dealers may sell a vehicle for either above or below the MSRP.
Optional Equipment: These are “extras” that are added to the MSRP of the car and are shown on the sticker. Some vehicles come with special “packages” that increase the price of the vehicle. These options are negotiable but if they’re on the sticker, you’ll most likely pay something for them.
Destination Charge: The Destination Charge is a fee that is charged for delivering the vehicle from the factory to the dealership. This fee is non-negotiable.
Market Adjustments: These are extra charges that dealers typically add on to the price of a high-demand vehicle in order to garner extra profit. It will be difficult to negotiate this fee down if the vehicle is popular and selling well in the area.
Car Sticker Price: The Car Sticker Price is the price that is shown on the “sticker” on the vehicle. It is required by law to be displayed on a new car that is being sold. It is also called the Manufacturer’s Suggested Retail Price (MSRP). It will also include any optional equipment costs, destination charges, and other fees. Note that according to the American Automobile Association (www.aaa.com), the markup between the sticker price and the dealer invoice is usually between 7 percent and 20 percent. And the options listed on that sticker could be marked up 20 percent to 30 percent or even more!
Dealer Profit Margin: The difference between the Car Sticker Price or MSRP and the Dealer Invoice price is the potential profit that the dealer can achieve. Other factors can affect the dealer profit such as rebates, incentives, other markups, financing fees, and other add-ons (see below). The dealer profit margin averages about 8 percent across all manufacturers but can vary greatly. Because of this, you should always research the profit margin on any vehicle you are considering.
Dealer Expenses: Beyond the actual price paid for a particular vehicle, it’s important to keep in mind that dealers are businesses just like any other. They need to make a profit if they are to stay in business. Dealer costs include general expenses, payroll, rent, utilities, taxes, etc.
Dealer Assistance: Automobile manufacturers give dealers special fees, bonuses, rebates, and other incentives that reduce dealer costs and add potential profit to a dealer’s sales. Without the assistance of automakers, many dealers would not be able to stay in business. These types of programs include Holdbacks and Dealer Incentives.
Holdback: Automakers offer a percentage of the MSRP, or a percentage of the invoice price, back to the dealer as a refund when they sell the vehicle. Typically, a Holdback is no more than 2 to 3 percent. Because of Holdbacks, dealers can still make a profit even if he sells a car at invoice.
Dealer Incentives: Dealer Incentives are bonuses that the manufacturers pay dealers for selling certain (usually slow-moving) models. The money from the incentive can be passed on to a buyer in the form of a lower price, or kept by the dealer as added profit. This is one of the reasons that a dealer can afford to sell a vehicle at or below “dealer cost.” These programs are not announced to the public and may or may not be in place on a car you are interested in. Dealer Incentives may also be based on sales volume. You can find out about dealer incentives on auto-pricing websites.
Other Dealer Profit Items: There are other ways dealers make money. Doc Fees, Prep Fees, Financing Commissions, and Mark-Ups, as well as Add-ons such as warranties, rust proofing, special wheels, and much more all add to the dealer’s profit margin.
Dealer True Cost: The Dealer True Cost is what the dealer paid for the vehicle (Dealer Invoice) without any Holdbacks and Dealer Incentives. You can typically get near the True Dealer Cost by taking 3 to 5 percent off of the Dealer Invoice.
Factory Rebate: A Factory Rebate is a direct-to-buyer incentive that is provided by the manufacturer. Because it is a buyer incentive and not provided by the dealership, you should disregard it in your pricing negotiations. You will get the exact same rebate no matter what price you end up paying for the car.
Certified Pre-Owned Vehicle: A Certified Pre-Owned Vehicle means that the dealer has certified the car prior to putting it up for sale. These used cars are typically of higher quality than vehicles that have not been certified. They also may carry special financing rates that could save you money.
Used Car Auction: Most dealers get their used cars at a Used Car Auction. At the auction, bidders try to get the best price for a used car that will allow the dealer to maximize profits on the vehicle when it’s sold at retail. It’s important to know that many cars sell for far below “Blue Book” (www.kbb.com) at the auction. But, cars that have been well maintained, are in demand, and have had only a single owner can sell for well above the Blue Book price.
Used Car Auction Price: This is the price the dealer actually paid for the car at the Used Car Auction. In many cases a dealer will not show you this price. In some cases, they may show it to you.