how dealers can sell below invoice price

[russross]

This question keeps coming up in various threads: how can dealers sell for less than cost and still make money? I read something about this a while back. I can't find it now, so I'll do my best to re-state the argument.

Invoice price used to be a secret number, and smart buyers who could figure it out went into negotiations in a strong position. They knew what the dealer actually paid, and so they could accurately judge what a dealer offered them. Then, along came the internet and now everybody is a Google search away from knowing the invoice price. Instead of trying to hide it, car companies have used this to their advantage. They know that many buyers will go in armed with the invoice price and think they are getting a really good deal if they meet or beat that price.

If you look at pricing data from the 80s to now, the gap between invoice and MSRP has steadily gotten smaller. MSRP has risen at a fairly steady rate, but invoice price has gone up faster than MSRP. If you compare it to the rate that MSRP went up, it is clear that something is fishy. Everyone knows that MSRP is a fake marketing number that you can beat pretty easily, but many don't realize that invoice has become the same thing. The invoice price is not a reliable measure of the dealer's actual cost.

Now, invoice does mean something. It is technically the price dealers pay when they buy a car from the factory. But since that is now a publicly-known number, car companies have found new ways of hiding the real price that a dealer pays so they have room to make a profit while still hiding it from customers. So back in the pre-internet days, MSRP was the public number and invoice was the secret dealer-only number. Now invoice is a public number, and the secret dealer-only number is harder to calculate and still a closely-guarded secret. This is possible because it varies from dealer to dealer and even month to month.

Part of it is the holdback, which most people are familiar with. The dealer pays invoice price, sells the car, and the factory gives them a kickback. Holdbacks are basically the same across an entire brand. They are also pretty widely known and understood (Jeep has a holdback of 3% of MSRP according to Edmunds). So every dealer across the country effectively pays 3% under invoice without doing anything special.

The murkier numbers come from special incentives and bonuses that the factory works out with dealers. These are not published, but generally they are tied to volume. The more a dealer sells in a month, the bigger the kickback they get from the factory on each vehicle sold. I've never seen a formula or specific numbers for these kickbacks, and for all I know they are changing all the time. Holdbacks, limited time dealer rebates, and these volume kickbacks all combine to give dealers a cushion that wasn't there 30 years ago.

In summary:

• Invoice price is a marketing number now, just like MSRP, and it has profit baked in
• Holdbacks are the easy part to look up and calculate: 3% of MSRP for Jeep
• High volume dealers generally get bigger kickbacks (beyond holdbacks) than low volume dealers

So a high-volume dealer can work with internet buyers like us and give us killer deals. They are not losing money on the deals, they just aren't getting as much profit (especially when you factor in financing, warranty sales, affiliate pricing rebates, etc.). They can go lower than you think and still be profitable just on the sales price. Having a stream of those deals actually helps them, too, because it drives their overall volume up which makes them eligible for better kickbacks from the factory. These really can both be true:

1. The high-volume dealer is still making money on your sale
2. Your local low-volume dealer cannot match their price without losing money

I'm just a random guy on the internet echoing what I've read and heard. I'd be interested to hear from anyone who understands this stuff better or has more first-hand knowledge.

Added more insight from @Haus, who works at a dealership.

There is a little more to pricing than the above, as well.

A simple understanding of the process is that a car dealership buys a vehicle from the manufacturer for X dollars (invoice). We can extrapolate that buying in bulk gives a discount (X - discount) and that the manufacturer gives financial incentives on top of that for selling cars (X - discount - incentives - holdback) = Cost dealer pays for a car.

However, there is more information to consider.

Dealers do not "own" their inventory. They don't just write a check to the manufacturer and receive a car. Usually they have what is called a floor plan which is an open line of credit where they pay interest on the total dollar amount open at any given time. The interest rate is a certain percentage above the LIBOR rate. For instance, right now LIBOR rate is 2.73%, so let's say it's 3.73%.

Now the dealership has a floor plan of vehicles from the manufacturer that they did not buy but they are paying 3.73% interest on every month. So if they are stocking 300k worth of vehicles, that is the 'loan' amount they are paying that interest on. So when 'invoicing' a vehicle from the factory, they are adding the amount to the current floor plan, and paying it to the manufacturer once the car is sold.

Manufacturers pay what's called "floor plan assistance" when a vehicle is sold. Which means, they will pay X days of interest to the dealer who sold the vehicle to make up for the fact that the dealer is paying money on interest just to have the vehicle on the lot. Usually this covers about a month and a half of interest. So if a vehicle from the dealership sells immediately, they actually make money on the floor plan assistance sent from the manufacturer, since they did not have to pay a month and a half interest on that vehicle. However, a lot of vehicles sit on the lot for a while, and those interest costs aren't recouped when the vehicle is sold. This is why factory orders are usually the best deal. It's a guaranteed sale immediately so the floor plan assistance goes straight into the profit.

Even with all of the above, a dealership is not a super profitable business. The average dealership owner, after all costs are paid, receives 2.3% profit on every car sold. Most dealerships combat the low per-vehicle profit with extreme volume or multiple dealerships owned under one owner. This is why high volume dealers are much more willing to eat into their minor profits to give more money back to the customer (to then ensure that the high volume continues). This is also why you will be 'laughed out' of many normal dealerships when you attempt to get 5% under invoice. Smaller dealers just can't make a good business case on getting such a minor profit out of a vehicle sale.

Hope this helps anyone wanting to understand more of the process.

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[Daddiator]

Thank you for taking the time to explain that. The JT is going to be my first new vehicle purchase and all this chatter about buying a new car for less than invoice has had me confused.. particularly because I’m a bad negotiator when they have the exact vehicle I want. I think I talked a dealership 200$ off an 850$ car once Lol.

 

[Bt_okst]

Mostly true but those sales incentives and kickbacks you refer to are not all the time. Depends on how good or bad of a year the manufacturer is having and how bad they need to have dealer inventory moved so they can sell the dealer more. Even so this is usually less than $500 a car, but can be more.

Where dealers make money are on used cars since most used cars are not the same( number of owners, condition, mileage, etc.), service and parts, and the finance dept upselling and bumping interest rates.

A few years ago the avg. dealer lost almost $300 a car on the sale of the vehicle across the board but made over $2,000 in finance/upsells.

Be smart and leary when a price seems too good. They're gonna try to nail you elsewhere.

 

[DenverGladiator]

I read somewhere Wrangler sales were down 21% on the year ... I think Subaru was only manufacturer that increased. I could be wrong, but new car sales across the board seem to not be doing too well.

 

[Blown7]

All true and as I have said before only two people in the whole dealership know the true cost number...the owner of the dealership and the general manager.

 

[ZEN357]

This question keeps coming up in various threads: how can dealers sell for less than cost and still make money? I read something about this a while back. I can't find it now, so I'll do my best to re-state the argument.

Invoice price used to be a secret number, and smart buyers who could figure it out went into negotiations in a strong position. They knew what the dealer actually paid, and so they could accurately judge what a dealer offered them. Then, along came the internet and now everybody is a Google search away from knowing the invoice price. Instead of trying to hide it, car companies have used this to their advantage. They know that many buyers will go in armed with the invoice price and think they are getting a really good deal if they meet or beat that price.

If you look at pricing data from the 80s to now, the gap between invoice and MSRP has steadily gotten smaller. MSRP has risen at a fairly steady rate, but invoice price has gone up faster than MSRP. If you compare it to the rate that MSRP went up, it is clear that something is fishy. Everyone knows that MSRP is a fake marketing number that you can beat pretty easily, but many don't realize that invoice has become the same thing. The invoice price is not a reliable measure of the dealer's actual cost.

Now, invoice does mean something. It is technically the price dealers pay when they buy a car from the factory. But since that is now a publicly-known number, car companies have found new ways of hiding the real price that a dealer pays so they have room to make a profit while still hiding it from customers. So back in the pre-internet days, MSRP was the public number and invoice was the secret dealer-only number. Now invoice is a public number, and the secret dealer-only number is harder to calculate and still a closely-guarded secret. This is possible because it varies from dealer to dealer and even month to month.

Part of it is the holdback, which most people are familiar with. The dealer pays invoice price, sells the car, and the factory gives them a kickback. Holdbacks are basically the same across an entire brand. They are also pretty widely known and understood (Jeep has a holdback of 3% of MSRP according to Edmunds). So every dealer across the country effectively pays 3% under invoice without doing anything special.

The murkier numbers come from special incentives and bonuses that the factory works out with dealers. These are not published, but generally they are tied to volume. The more a dealer sells in a month, the bigger the kickback they get from the factory on each vehicle sold. I've never seen a formula or specific numbers for these kickbacks, and for all I know they are changing all the time. Holdbacks, limited time dealer rebates, and these volume kickbacks all combine to give dealers a cushion that wasn't there 30 years ago.

In summary:

• Invoice price is a marketing number now, just like MSRP, and it has profit baked in
• Holdbacks are the easy part to look up and calculate: 3% of MSRP for Jeep
• High volume dealers generally get bigger kickbacks (beyond holdbacks) than low volume dealers

So a high-volume dealer can work with internet buyers like us and give us killer deals. They are not losing money on the deals, they just aren't getting as much profit (especially when you factor in financing, warranty sales, affiliate pricing rebates, etc.). They can go lower than you think and still be profitable just on the sales price. Having a stream of those deals actually helps them, too, because it drives their overall volume up which makes them eligible for better kickbacks from the factory. These really can both be true:

1. The high-volume dealer is still making money on your sale
2. Your local low-volume dealer cannot match their price without losing money

I'm just a random guy on the internet echoing what I've read and heard. I'd be interested to hear from anyone who understands this stuff better or has more first-hand knowledge.

Most sales people don't make any money off the vehicle. They make their commission from extended warranties, rust proofing, and financing the loan.

 

[furrymurray]

Rust proofing??

 

[Haus]

There is a little more to pricing than the above, as well.

A simple understanding of the process is that a car dealership buys a vehicle from the manufacturer for X dollars (invoice). We can extrapolate that buying in bulk gives a discount (X - discount) and that the manufacturer gives financial incentives on top of that for selling cars (X - discount - incentives - holdback) = Cost dealer pays for a car.

However, there is more information to consider.

Dealers do not "own" their inventory. They don't just write a check to the manufacturer and receive a car. Usually they have what is called a floor plan which is an open line of credit where they pay interest on the total dollar amount open at any given time. The interest rate is a certain percentage above the LIBOR rate. For instance, right now LIBOR rate is 2.73%, so let's say it's 3.73%.

Now the dealership has a floor plan of vehicles from the manufacturer that they did not buy but they are paying 3.73% interest on every month. So if they are stocking 300k worth of vehicles, that is the 'loan' amount they are paying that interest on. So when 'invoicing' a vehicle from the factory, they are adding the amount to the current floor plan, and paying it to the manufacturer once the car is sold.

Manufacturers pay what's called "floor plan assistance" when a vehicle is sold. Which means, they will pay X days of interest to the dealer who sold the vehicle to make up for the fact that the dealer is paying money on interest just to have the vehicle on the lot. Usually this covers about a month and a half of interest. So if a vehicle from the dealership sells immediately, they actually make money on the floor plan assistance sent from the manufacturer, since they did not have to pay a month and a half interest on that vehicle. However, a lot of vehicles sit on the lot for a while, and those interest costs aren't recouped when the vehicle is sold. This is why factory orders are usually the best deal. It's a guaranteed sale immediately so the floor plan assistance goes straight into the profit.

Even with all of the above, a dealership is not a super profitable business. The average dealership owner, after all costs are paid, receives 2.3% profit on every car sold. Most dealerships combat the low per-vehicle profit with extreme volume or multiple dealerships owned under one owner. This is why high volume dealers are much more willing to eat into their minor profits to give more money back to the customer (to then ensure that the high volume continues). This is also why you will be 'laughed out' of many normal dealerships when you attempt to get 5% under invoice. Smaller dealers just can't make a good business case on getting such a minor profit out of a vehicle sale.

Hope this helps anyone wanting to understand more of the process.

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