Dealerships, Invoice Pricing, Profitability, and Negotiating
First, let’s all understand that car dealerships are “for profit” businesses. They don’t exist simply to benefit us. The do provide that service, but at a price. They exist to make money. That’s OK as they should make money. They need to stay in business, pay their employees, and taxes, etc…
Let’s also understand that the salesperson is not the “enemy”. I spent some time as a new/used car salesman a few years ago and it’s a tough way to support your family. It seems that most customers come on the lot expecting to do battle with you. They treat you as the enemy and think no matter what, you will try to screw them. This isn’t true! Treat your salesman with respect and appreciation. Their job is to help you decide which vehicle is best for you and then reach an agreement on a sales price that is fair for you and the dealership. Keep in mind that most are paid according to the profit to the dealership, so it’s inherently in their best interest to keep a higher price. But at the same time, they have to make a sale in order to make any money. So it’s a difficult job.
Invoice Pricing is usually NOT what the dealer’s actual cost is on the vehicle.Years ago the invoice was a simple figure that described a dealership’s actual purchase price for a given vehicle. When this data started to become common knowledge to the consumer, the auto industry got smarter. They increased the invoice price and introduced dealer “hold-back”. Dealer “hold-back” is a supplemental program in which a percentage of the vehicles MSRP or actual invoice price is paid back to the dealership upon purchase of a new vehicle. It is designed as an additional revenue stream to the dealership in order to reduce expenses or commissions by artificially increasing the dealer-cost of a vehicle.Not all manufacturers partake in this practice but Nissan does.
What is the complete picture for dealership profitability through car sales?
Well, we’ve established that the dealership earns a profit from the difference between the sales price and the invoice price. We’ve also now established that the dealership may earn an additional income through dealer hold-back. The third major part, and often the most profitable for the dealer, is through the finance department. The finance managers of a dealership earn profit through selling car loans, car care packages, extended warranties, gap and disability insurance. Did you know that the prices on some of these items are also negotiable? This can be a great way to save a few bucks a month on your payments. In addition to the finance area, car dealerships can earn profit through specialty part sales and add-ons and the service center as they earn money through the repair and maintenance of your vehicles. An additional point to consider is that dealership sales volume is also a source of profit for the dealership. Having more units to spread out fixed costs is a benefit. More than that, most manufacturers give preference in allocating future vehicles to dealerships which can move higher volume. So, simply moving more units off the lot can also be a source of benefit for the dealership thus it is in their best interest to negotiate.
How should I prepare to negotiate a good price on my vehicle?
Knowledge is key! After you decide which vehicle is best for you, it’s best to leave the dealership and do some homework before returning to discuss terms of purchase. Go ahead and fill out a credit application to save time when you return, but don’t get caught up in the heat of the moment and negotiate directly after falling in love on the test drive. You can go ahead and ask the salesman for a price prior to leaving, but tell him that you’d like to do some homework prior to entering negotiations on price. Before negotiating price, research a few key items. First off, know the MSRP of the exact build you desire. Second, know approximately what the dealer invoice is on the build. Third, have a feel for what the dealerships hold-back would be on each car. Fourth, get a feel for what others are paying on the same vehicle you are looking at. Fifth, decide ahead of time what other services you are willing to discuss (getting your car loan from the dealer, insurance, extended warranty, etc.).Finally, know where you stand from a financial standpoint.Pull a credit report and if possible procure the availability of being pre-financed via another bank or financial institution as this will give you further negotiating power for lower dealer finance rates. Now that you are equipped with the proper knowledge, you can make some decisions.
Competition is key!
In my experience, the single greatest negotiating tool is to introduce competition into the equation. A dealership will fight tooth and nail for every dollar they can get as long as they feel they have the sale hostage. However, as soon as you introduce competition into the mix, the dealer’s new chief concern is simply putting another deal into their books and not the competing dealerships books. Remember that volume is important to most dealerships as it gives them additional competitive advantages. I can tell you that many times the goal in the negotiating went from “let’s make a profit on this sale” to “let’s make sure we get this sale”. When this happens, the prices can fall very quickly.
What is a fair price?
So now that we’ve gotten down to the nuts and bolts of this pricing game, what is a fair price? Well, we should all agree that the dealership needs to make some money and they will be unwilling to take a loss. Of course, we all want the lowest price we can possibly get as well. At this point we truly come down to an individual’s opinion on the matter.
My opinion is that on the average new car a fair deal for both parties is a price of a few hundred over invoice and the consumer’s willingness to use the dealership’s finance department for their services as well. I think asking for a price in that “hold-back” territory is unfair to the dealership. A consumer should not ask for this as it’s vital to the dealership to cover its fixed expenses. The exception to this rule is in certain very high volume, high competition vehicles. For example, the Toyota Camry is a car that is very often advertised for hundreds under invoice. It’s the highest volume seller, and competition has gotten so cut-throat that dealership simply view them as a volume tool and to help drive in finance and future service business.
I think a price at or over MSRP is unfair for the customer. Unless it’s a new Nissan GT-R, a vehicle who’s demand will far out-pace its supply, the negotiated price should always be under MSRP. Please don’t pay the sticker price on your new vehicle. Even with a brand new release, when dealers claim they can sell them high because of supply and demand. Remember that the quicker they can sell those first units, the more allocations they will get in the future.
Further, a well equipped consumer should be able to sit down and have a stress free experience in negotiating a sale price. Start low and understand that they will counter you high. Every time you make an offer express some of your reasoning for making that new offer. Tell them what you know to be true and show them that you are well prepared. Always remember to play the competition card early in the process as that will change the dealerships train of thought and help immensely. If you plan to discuss financing and other insurance or warranty purchases, make sure you express this to the dealership so they can consider these other profit centers into the equation and hopefully relax their stance on the contract price alone.
I hope you find this helpful. Good luck in your vehicle purchases!
Article By:Seth Blackman, NICOclub.com techie and Nissan Enthusiast