“Why is the dealer’s invoice different than the amounts I see online?”
“The dealers show you the fake invoice; don’t fall for it. According to this website, the car’s invoice is this…”
“Dealers only pay half of the car, you can get a better deal.”
The above are some of the things you often hear from your smart friends.
KarFarm wants to teach you the basics of pricing structure, so you can save time by effectively negotiating with the dealership. If you hear anything other than what you read below, then they are blowing smoke up some body part you don’t want smoke in.
The website says the invoice is this…
Yes, the websites are correct. Some are more accurate than others. So why such discrepancies?
Most of the websites (such as KBB.com, Edmunds.com, etc…) have the base price right, and even the correct dealer’s cost on optional equipment. But there are some hidden fees that are charged to the dealers, which are not disclosed to the public. See below for some of them.
Dealer’s cost is 50% of MSRP, and the invoice they show you is not the true invoice.
That statement is the most common myth I hear all the time. With the advent of the internet, this myth almost becomes a battlecry to many car shoppers. The cold-hard truth is that dealer’s profit margin on an average vehicle is about 8-13% of MSRP. Since dealer cost is tiered, some people perceive this as being ‘not the true invoice’.
Here are the facts about Dealer’s Cost.
1. The margin from Dealer’s Invoice to MSRP is about 7-11%. Oddly enough, the cheaper the vehicle, the less profit margin – even in percentage. Some vehicles are only marked up by a few hundred dollars, usually the entry level car of a particular make.
2. There is Holdback. This is basically a rebate to the dealer after the sale, to help out with the incurring finance charge on the inventory and other operating costs. The Holdback is usually about 2~3% of MSRP.
3. The Delivery Allowance. It means exactly what you think it means. After every month of business, the manufacturers will give the dealers a bonus of about 0.5~1.5% of MSRP.
4. The Advertising Fee Reimbursement Program. This varies between manufacturers, but it’s usually less than 1% of the car. Also this is paid much like the Delivery Allowance, on a monthly interval.
5. Dealer Incentive. The Dealer Incentive is not Dealer Cash. Dealer cash is much like an instant rebate for the dealer, which is not disclosed to the public, although you can easily find it on the Web. But, Dealer Incentive is extra money for the dealer from the manufacturers for moving slow selling vehicles. This money is not on every vehicle, only on few certain vehicles that manufacturers choose for that selling period.
Now even with all that, and if the dealer sold you the car for MSRP, the dealers make about 11-15% of MSRP.
Then, what’s the true cost for dealerships?
When the dealer sells the vehicle at the invoice amount, they still profit between 3-6% of the MSRP. But when you factor in the cost of operating the dealership and payroll, the net profit margin is not what most people think it ought to be. The major profit generating departments in a dealership are the used vehicle and service departments.
How much over, or under, invoice should you offer?
That largely depends on the vehicle purchasing. What I would advise would be to check your newspapers, or KarFarm’s AdSpace, for the weekly specials. Often, they are far below dealer’s true cost (yes, they will actually lose quite bit of money on these units). These are called ‘loss-leaders,’ they are to entice you come into their respective showrooms. So, when you are ready to purchase and start negotiating, give them a figure between the loss-leader price and dealer’s invoice. If you are purchasing a vehicle that is not a loss-leader car, then offer them a few hundred dollars over invoice and slowly increase your offer.
One last fact – when the dealer shows you their invoice, make sure to spot any evidence of forgery on it. If you don’t find any white-out, mismatching font type, or extra delays on producing the invoice then you can be assured that they are showing you the copy of the original invoice (most dealers will have a small stamp with their accounting numbers on them). It is illegal for the dealers to change or fix the stated invoice amount. So if they show you the invoice, thank them and believe that it is, in fact, the amount they are paying the manufacturer.
-KF