Car price is important in both buying and leasing

In order to understand what price you might expect to pay for your next car, you must first understand how new car pricing really works. As you know, pricing is very important whether you lease or buy.

Different customers can pay widely different prices — for the same car, at the same dealer, on the same day — depending on each customer’s knowledge of how car pricing works.

New car dealers expect most customers to negotiate price. Unfortunately, negotiating is not easy. Buying a new car is more like haggling for a donkey in Marrakech than buying a refrigerator at Sears.

Dealers are able to quickly spot customers who don’t have the knowledge to negotiate well. Knowledge is key.

Let’s take a look at how dealer pricing works.

Manufacturer’s Suggested Retail Price

First, for all new cars, automobile manufacturers decide the retail price that will be set on each model, each model variation (“trim”), and each option. Combined, these prices become the Manufacturer’s Suggested Retail Price (MSRP). MSRP can change from year to year for the same models, or can even change one or more times during a model year.

MSRP is the “sticker price” — the price shown on the vehicle’s attached window sticker. There will also be additional charges for transport and preparation (“destination charge”), and distributor/dealer installed options. These charges are not technically part of the MSRP, but are part of what you pay.

Notice that the “S” in MSRP is short for “suggested,” meaning that a vehicle’s sticker price in only a recommended price. A dealer is perfectly free to charge more or less if he chooses. For hot-selling new vehicles in high demand, selling prices can easily be higher than sticker price. For slow selling vehicles in good supply, selling prices will almost always be less than sticker price.

Vehicle discounted prices can be found at our own  LeaseGuide Car Deal Finder

Invoice Price

Dealers are independent businesses, not owned by car makers, which means they buy wholesale and sell retail to make money — like any other business. Wholesale price, sometimes called “factory invoice price” or “dealer invoice price,” is the price that a dealer pays the manufacturer for a vehicle. All dealers pay the same price for the same vehicle. However, there are other factors that determine a dealer’s actual cost. We’ll examine those in a moment.

Dealer Profit Margin

The difference between MSRP sticker price (retail price) and invoice price (wholesale price) is a dealer’s potential profit margin, assuming vehicles sell at sticker price — ignoring other costs, charges, or rebates he might receive.

This dollar margin, as a percentage of sticker price, is not the same on all vehicles. Some vehicles have a very high profit margin percentage, others have a low margin percentage. For example, Lexus vehicles have very high 13% margin, while Fiat vehicles have only 4% margin. Average profit margins fall in the 5%-8% range.

A vehicle with a high potential profit margin provides an opportunity for a higher dollar discount than a similarly priced vehicle with a lower profit margin. (The Lease Kit compares profit margins for all vehicle makes and models.) You are more likely to get a better deal on a car with a $5000 potential profit margin than on one with a $1500 potential profit margin.

Invoice price alone, however, does not tell the entire story of what a vehicle costs a dealer. He has other costs and other sources of profit.

Dealer Costs

Dealers usually have to pay national or regional advertising fees (for TV and newspaper ads), shared with other dealers. They also have typical costs associated with running a business: employee salaries, rent, utilities, taxes, etc. Many customers mistakenly believe that dealers should be able to routinely sell cars at their base cost. If they did, they would soon be out of business. Any business must make a profit to survive.

Dealers pay interest on the loans they use to buy cars from the manufacturer — it’s called floorplanning. The longer a car stays unsold on a dealer’s lot, the more interest he pays — and the less profit he makes. Many consumers believe that a dealer’s cars belong to the manufacturer. Not true.

Factory Assistance to Dealers

Dealers receive special fees, bonuses, and “hidden” rebates from car manufacturers that reduce costs and add to profit potential. Without manufacturers’ assistance, many dealers wouldn’t be able to make it. “Holdback” is an example of a common type of bonus received by dealers.

Holdback is a kind of rebate from the car maker that is usually a small percentage (typically 1%-2%) of a vehicle’s MSRP or invoice price that a dealer receives only after a vehicle is sold. Technically, holdback is intended to be compensation for finance fees the dealer incurs while vehicles sit unsold. The faster a vehicle sells, the more profit he makes on the holdback. A vehicle that sits on the lot for a long time can be a money loser, even with holdback.

There might also be promotional factory-to-dealer rebates or bonuses based on certain conditions or sales goals being met. Such rebates can be significant in times of slow sales. Dealers can choose to pass some or all of his factory rebates along to customers as price discounts — or not. These “hidden” rebates are especially common at the end of a model year to help dealers get rid of last-year’s vehicles.

In most cases, heavily advertised new-car price discounts have a “factory contribution” as well as a “dealer contribution.” This means both the manufacturer and the dealer give up some (or most) of their potential profit to help promote sales and move cars off the sales lot.

Holdbacks, factory rebates, and bonuses are what allows dealers to sometime sell cars for less than invoice price, and still make a meager profit.

Additional Dealer Profit Items

Dealers have other profit sources. Documentation fees (“doc fees”) of a few hundred dollars are administrative fees but usually exceed actual costs, thereby providing a profit. Preparation fees (“prep fees”), allegedly for cleaning and preparing a car for delivery, are often excessive, providing profit.

Add-on “protection” products  such as rust proofing, fabric protection, security systems, window etchings, extended warranties, and credit insurance are all high profit generators for dealers. Even dealer-arranged financing brings a dealer profit from commissions and interest rate mark-ups (“reserve”). Lease acquisition fees, charged by lease companies, bring some kickback profits.

Trade-in vehicles are a large dealer profit source. Dealers who take trade-in vehicles and sell them on their used-car lots make more profit per vehicle, on average, than on brand new cars. Many new-car dealers would not do as well if it were not for their used-car business, especially in a tough economy.

Selling Price – Market Price

This is the price that customers actually pay for a vehicle, which is usually somewhere between MSRP and dealer invoice price. Most new car are sold at discounted prices.

Again, there are conditions under which selling prices could be higher than MSRP or lower than invoice, depending on supply and demand, discounts, and promotional incentives.

Selling prices can vary considerably for a particular vehicle make and model, depending on the dealer, area of the country, city size, competition, time of month, time of year, negotiating skills of the buyer, and available incentives.

With all these factors at play, it’s easy to understand the wide range of prices that consumers pay for a particular vehicle, even from the same dealer on the same day.

Price Discounting

There are two parties to new-car price discounting — dealer and manufacturer. Manufacturers provide factory-to-customer cash rebates and factory-to-dealer rebates. A dealer can provide additional discount (“contribution” or “participation”) by giving up some of his own normal profit, or some/all of his factory-to-dealer rebate, if any.

Customers sometimes overlook the possibility of a negotiated dealer discount when they are already getting a factory-to-customer rebate. Dealers often encourage this misunderstanding. There is no reason a dealer cannot offer an additional discount on top of any rebate that a customer is already getting from the manufacturer. The combination of strong dealer discounts and aggressive manufacturer incentives can easily result in below-invoice selling prices.

However, without manufacturer participation, dealers can not and will not routinely sell cars at or below invoice price. A profit must be made to stay in business. Consumers often have unrealistic expectations regarding dealer discounting.

What Are Others Paying?

Many vehicle makes and models have owner-enthusiast web sites in which owners are willing to share prices they’ve paid. Although this can be helpful, it doesn’t provide an accurate picture that represents all dealers, in all cities, under all conditions. Price patterns can vary greatly across the country. Even manufacturer incentives can vary by region. Prices also vary from customer to customer, depending on negotiation skills and knowledge about pricing.

How to Get Prices

One of the best ways to get an accurate feel for dealer selling prices in your town is to request free quotes from online pricing/buying services that partner with dealers across the country to provide Internet customers with discounted prices. See a list of the most popular services below.

The more prices you ask for, the more prices you’ll have to compare. Another reason to get prices from more than a couple of services is that, for various reasons, some services may not respond to you.

Getting Online Pricing

You should understand that Internet-based car-buying/pricing services are not car dealers. State laws dictate that all new-car sales must be transacted by a licensed franchised dealer — new-car dealers in your town.

The online pricing service we recommend is our own LeaseGuide Car Deal Finder which makes it fast and easy to get price quotes from multiple dealers who are competing for your business.

Participating dealers typically have agreements with the online service to offer the services’ customers prices that are a percentage or dollar amount over invoice price (or under invoice if manufacturer incentives are available). In return, the dealers pay the services a small fee for the referral. The services are free to potential customers.

If you request quotes from a minimum of three pricing services, you’ll start to get a good idea of the actual selling price for your vehicle of interest. For example, if you get five prices, and see that three that are similar, one is higher, and another lower, you know the range of prices that you have to work wit

Canadian buyers can get Canadian car price quotes from  CarCostCanada.

A little negotiation may get you a better deal than the already-discounted quotes you receive but, at least you’ll have a good starting point to begin your negotiations if you are so inclined. Typically, dealer-discounted quotes will already include any currently available rebates — but not always. It doesn’t hurt to ask.

Summary

Automotive consumers who understand how car pricing works will get the best prices when buying or leasing a new car. Knowledge is power, as always.