Quote:
Originally Posted by Rainger99
If every car dealer sold cars at 5% below MSRP (out the door price - the 5% includes taxes, fees, and any additional costs), could the dealer stay in business?
A friend of mine (who worked as a car salesman) told me that the MSRP is worthless. He said that they could do that because they get the car for substantially below MSRP and that the car dealers get bonuses for meeting sales goals. So even if they sell for below MSRP, they would get additional money from the manufacturer on top of the sales price.
Are there any people on Talk of the Villages that worked in auto sales that can confirm whether this is true?
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I can confirm what you say is partially true.
Here's a brief primer:
There are 2 "sticker" prices (for lack of a better word).
First off, every new vehicle for sale in the USA, must have a Monroney Label (MSRP) affixed to the window. This is required by the Automobile Information Disclosure Act of 1958. (Named after Mike Monroney, who filed the legislation).
The profit margin from Dealer Invoice to MSRP will run about 4% - 13% profit margin. Some less, a few a bit more. There is no standard.
If you were to look at a Dealer Invoice, you would see "adjustments" to the Dealer Invoice Price. They would include things such as "advertising allowance", "floor plan assistance" and "hold back". These are monies which are rebated to the Dealers, under various scenarios and conditions. They could amount to as much as 3% - 4% of the Invoice price.
You might also see "Factory Incentives", which could be any amount of money, depending on the manufacturers need to sell certain vehicles, over a given period of time.
So the answer to your question is, "yes, under some circumstances, Dealers will still make a 'profit' if they sell a vehicle under Factory Invoice". That doesn't mean they make a "net profit", because there's overhead and commissions to consider.
Here's the biggie, the public doesn't understand and is usually not privy to ... but can make a huge difference in what you pay for a new car.
I'll try to explain it, in a (fairly) simple example.
Nissan is having trouble selling their "Leaf" model, so they set up an incentive program for the Dealers and it goes like this:
We (Nissan) will rebate you (the Dealer) $1000 for every Leaf you sell, between May 1 and June 30, provided you sell a minimum of 100 of them.
One June 28th, the Dealership has sold 91 Leafs. Now what? If they don't sell 9 more, than stand to lose the $91,000 they (thought) they'd already earned.
Here's what they do (in simplified terms).
Every salesman gets on the phone and calls every Leaf customer they've had for the last 90 days and offers them the "deal of a lifetime". They offer Leafs at $3000 UNDER Invoice price. (Remember, they have to get to 100 or they lose $91,000.)
They sell the (9) Leafs they need to sell, but "lose" $3000 each.
The math works like this:
(9) vehicles sold for $3000 under cost = $27,000 "loss".
(100) vehicles sold, with a $1000 "incentive" to the dealer = +$100,000.
Net in Dealer Incentives = + $73,000.
This is an over-simplification of the process, but other than a few details, that's the basic premise of how it works.
I also haven't mentioned the "Inventory Allocation System", which is also a critical component, related to how much you have to pay for a specific vehicle.
All the above is why I laugh every time this "how to negotiate for a new car" thread shows up. As ShippingUpToBoston aptly said, the customers are playing checkers and the dealers are playing chess. The average customer has no clue how it all works. Some of us in the business, have trouble figuring all the angles. [Yes, I'm a consultant to a very successful Automotive Group. I mostly do the real estate, but used to be on the other side of curtain.)
Just an added note, to give some perspective on the industry. The EOY profit is likely to be 2% - 3% of total sales volume.