Foolishly Pricing Vehicles

Buying a Car
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Remember that in Step 6 we had you build the exact car you wanted on the manufacturer's website. Hopefully you've now had a chance to drive these cars and you've taken down the exact information with regard to the vehicle and the option packages on your Foolish Test Drive. Now it's time to take all that data and put a price on it -- not a manufacturer's list price, but something we call the Foolish Value Price or FVP (hey, the auto companies have their MSRP, why can't we have our FVP?).

But first there's some more homework to do. You must figure in all the various manufacturer to dealer incentives, customer incentives, and holdbacks. This can become more strenuous than supervising 10 4-year-olds immersed in the "pool of balls" at the local Ronald McDonald Playland. Lucky for us, though, we have the Information Superhighway as a marvelous tool to help us put a value figure in place of that blown-up sticker.

Before we crawl onto the web to find out exactly what prices our specific Foolmobile is selling for in the marketplace, it's important to spend a few minutes discussing automotive pricing and the market itself. In Step 3 we referred to the insane nature of the automobile business. Much of that lunacy stems from the pricing and selling systems that have become standard practice in the industry today.

As we said before, that first price you run into as a consumer is the one stuck securely to the window. In simple terms, as a consumer, the first thing you should do when you see the sticker price is, memorize it and then promptly forget it. That's right, cast that manufacturer's suggested retail price (MSRP) from your head. Why? Well, it's hardly worth the paper it is printed on; it is, after all, a figure the manufacturer has manufactured. In other words, it's nearly arbitrary.

Many would consider us to be exaggerating here, and would claim that the MSRP is based simply on the economic principles of market demand and the manufacturer's supply of the vehicle. But that still doesn't make it the "right" price for the vehicle. The most important phrase to remember in MSRP is suggested. That in itself implies that it's arbitrary -- it is what the manufacturer is suggesting the dealer can charge for the vehicle. That said, vehicles are sold every day at MSRP and higher, but an informed buyer would only in a few special cases pay full MSRP. Thus, as a rule, a Fool never bargains, or negotiates pricing from the MSRP.

How much does it really cost a automobile manufacturer to make a car? Well, good luck figuring that one out, because nobody really knows. Not even the automaker's bean counters know for sure, and it is doubtful the CEO does either. Even if that information were known, the companies that make automobiles have no reason to share it. Suffice to say that the costs are well below the sales price, because in good times, no industry can touch the top line (revenue/sales) or the bottom line (profit) of the auto makers.

In the last couple of years, the domestic automakers routinely reported profits of more than $1.5 billion in a quarter. Think for a second how much money that represents, and remember these are profits. That translates into $12,000 per minute in profit, every minute of every day for the 90 days during the quarter. Mind-boggling!

With no true point of reference to work from with regard to actual cost, consumers are forced to look to other means in order to figure a Foolish Value Price (FVP). We already know that the MSRP is not a viable starting point, so we turn our gaze next to the manufacturer's invoice price (also known as a "tissue"). This price is not related to cost, but it is more realistic when taken in the context of the supply-and-demand economic factors in the marketplace than the MSRP. The Invoice Price in its simplest terms is what the manufacturers charge the franchise dealerships when they ship the vehicle to them.

The great thing about the Invoice Price is that we as consumers can easily determine it. Yes, just click onto one of the many Internet Car Buying Pricing Guides like Edmund's and you can get a listing of just about any make and model's Invoice Price. Of course, these invoice prices are for base models, but don't fret -- these websites also have manufacturer-installed option equipment prices. (Also check out Edmund's new SUV, Vans and Pick Up Trucks, Microsoft's CarPoint, Autosite's new car pricing area and

Now you realize why you took down all that option information on your test drive. You simply match your options to the applicable invoice prices. Then, add all the option prices to the base invoice price, repeating this same routine for your three choices, and voila! You have your three vehicle prices!

In recent years, as more buyers have become more savvy and have begun ignoring the MSRP, they have diminished the dealer's profit (remember that the car company is still getting rich even when a car sells a few dollars above invoice, that's because they are "selling" to the dealership and their costs are well below invoice price which they charge the dealership). The car manufacturers do have a vested interest in the dealership network (most businesses like to have happy, profitable, and cash-on-hand customers) so they have devised a plan called Dealer Holdback to help the dealer profit on the front end.

Here's how the system works. First, the manufacturer ships and sells the dealer a vehicle at the listed invoice price. Then, after the dealer sells the vehicle to a consumer, the manufacturer takes a certain percentage of that vehicle price and puts it in a kitty for that particular dealer. The percentage that is put into the kitty is dependent on the agreement the manufacturer has with the dealer franchise network (usually 2% - 5%), but it is not dependent on the model or the number of models sold by the dealer. At the end of the quarter the manufacturer clears out each dealer's holdback kitty, sending them a check for the total amount. In reality, it provides the dealerships with a two-invoice system, one to show the consumer, as in the one-cent-over-invoice sale, and the other to make the profit they need as a business.

Remember, don't call it a kickback. It may smell and look like one, but it's a holdback. Lucky for us consumers, most of the buyer's guides we mentioned four paragraphs up have a listing of the holdbacks; just find your three makes and write down the holdback percentage.

But wait! There's more. Some consumers have caught onto the holdback and claimed part of it as their own. So the manufacturers have put another profit card up the dealer's sleeve: the Manufacturer to Dealer Incentive. It is super-secret and is guarded by the dealers as if it were the fifth ace up their sleeves. From time to time this type of incentive can become rather large, particularly on slow-moving luxury cars as much as $4,000 to $6,000 for the dealer. Again, a consumer can use the buying guides below to determine what, if any, manufacturer-to-dealer incentives are being offered on the makes and models they have chosen.

The only problem with figuring out these incentives is the secrecy issue. The buying guides and industry-related print magazines such as Automotive News (a weekly, from Crain Communications in Detroit, available in well-stocked libraries or newsstands) do an admirable job of sniffing out these incentives, but cross-checking several sources is a good idea. In reality, the manufacturers are offering these incentives as a kind of dealer wide spiff (sales contest) to move extra slow-moving inventory, so eventually the "deals" become "public" knowledge. Remember that manufacture date you so diligently recorded during Step 7 the test drive? Well if that was more than 150 days ago, you'll probably find some sort of dealer incentive on this vehicle.

To put this all into perspective, we recently spotted a large dealer incentive ($4,500 on a 1997 Mazda MX-6) in one publication only to find no listing of any kind of incentive in several of the other buying guides, or one of the buying services (for which we paid a fee). So check several sources when determining these incentive figures. Auto makers juggle and jockey these incentives on nearly a weekly basis, depending on sales. In addition, dealer incentives are often run on a sales region basis (i.e. that MX-6 deal above wasn't nationwide) or even offered in conjunction with other incentives dependent on the regional manager's discretion.

From time to time, manufacturers offer special circumstance dealer incentives. These are virtually unknown to the public. Heck, we didn't even know about these until we read a 10-foot stack of car-buying books all covered with mold. In reality, they are like winning the lottery, you just have to be darn lucky. You might find, for instance, a new dealership, which the manufacturer wants to help promote, or to take a larger inventory. It can't hurt to put that particular dealership front and center in your upcoming bidding war.

We'll see you in Step 9 for our remaining pricing homework. Until then, be Foolish and remember to drive awake and aware!

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