What do you need to know to get the best price on a new car? Well, the main thing to remember when you look over vehicle prices is that "MSRP" stands for manufacturer's suggested retail price, and you should focus on the word "suggested." It's far from the actual cost of the vehicle and, in most cases, it's well above the price you should actually pay.
Here's how the system typically works. The manufacturer ships a bunch of Schnauzer 900XZs to the dealership. The dealership is billed at and pays the invoice price. Once a Schnauzer is sold, the manufacturer deposits a certain percentage of the vehicle price into a kitty for the dealer. This is the "holdback" percentage, which varies but is usually between 2% and 5%. You'll find the holdback percentage for any particular vehicle listed at many of the auto supersites online, such as www.edmunds.com, carpoint.msn.com, or www.thecarconnection.com.
Regularly, perhaps once per quarter, the manufacturer clears out the kitty and sends the dealer a check. This holdback system permits the dealer to swear to you that he's paying a certain invoice price for the vehicle, while not mentioning that he gets a certain percentage of that price back. On a $20,000 car, a 3% holdback comes to $600 -- and it's an amount you don't have to surrender in full to the dealer.
There are additional incentives for dealers, as well. You can learn about them by doing a little digging online or in trade magazines such as www.autonews.com. As a very rough example, imagine that you're looking at a vehicle with an invoice price of $20,000 and an MSRP of $22,000. A dealer might be telling you that he'll give it to you for just $20,500, fully $1,500 off the MSRP. But, he might not be mentioning that he's getting a $600 holdback, plus a special dealer incentive of $1,000. (Here and there, some special dealer incentives amount to several thousand dollars.) In other words, the $20,000 car is really costing him $18,400 and he's asking $20,500 of you -- looking for a whopping $2,100 profit. Naturally, car salespeople have to earn a living, but that profit sure looks larger than it needs to be.
With a bit of research under your belt before you approach a salesperson, you can create a win-win result, with the dealer netting a modest profit and yourself not getting taken to the car wash.
Fool readers respond
The last time we ran this article, we received some good feedback from Fool readers. For their perspectives on the topic, please read on.
Please note that while I enjoyed your article, you left out an important factor -- market value.
I work at
Please note in future articles that there are expenses above and beyond wholesale costs, and that certain vehicles are going to sell above MSRP due to supply and demand. Edmunds.com, as an example, offers a "True Market Value" on most cars. This number varies from region to region and usually is a good benchmark for a shopper to try and beat. My competitor Carsdirect also offers pricing to guide the consumer, as well as the opportunity to get a firm price to shop with.
And Todd offered:
Just read your piece on car pricing. As a consumer, I cheer mightily for a better-informed public, especially where car sales are concerned, long a black hole of misinformation and deception. It seemed to me that you were implying in your example that the salesperson was getting that "whopping $2,100 profit." Maybe that wasn't your intent. Still, I just paid some dues in the car sales biz -- worked at Honda for six months -- and learned a lot of interesting things.
One: You may or may not know this, but the salespeople certainly don't get all the profit. Okay, you probably do know that.
They generally get a percentage, ranging anywhere from 15% to 30% (Usually the higher percentages once you have an established track record.) I found that the holdback information is also withheld from salespeople, or, more specifically new salespeople, called "green peas" in the biz. So one's commission is figured on the profit margin without the holdback considered. Obviously that's a smaller commission. Where I worked they also had established parameters on profit margin and if you dropped below a certain level, all you got was what's called a "mini." This is a standard flat rate of $100 for the car sold. In many cases enough money was made, especially when the holdback is factored in, that said salesperson should've been entitled to considerably more commission based on the salesperson's usual commission rate. My rate was supposed to be 25%. I should add that I was strictly commission. 100% commission, no base pay.
What I found was that the better-informed consumer coupled with integrity-challenged dealership management resulted in mostly minis for me and many of the other newer salespeople. Consequently, I found myself working 65 to 80 hours a week and making sometimes as little as $500 a week. Now selling 5 cars a week is pretty good, but those hours are brutal! At $100 a car, that works out to an average of about $7 an hour. So much for sleazy, high-flying, high-rolling car salespeople. I'd make more cleaning toilets. Of course, I know some folks think that's where car salespeople belong... Actually, I found that the customers were as dishonest or more so than the dealership, lying about their credit, their employment, their finances, their trade-in vehicle and so on. I guess it's not so much about customers versus salespeople. It's about basic human nature and a lot of fear and mistrust. Oh well...
Anyway, thought I'd pass this on, for what it's worth. I did leave car sales, mostly because the hours -- and the low pay was killing me. Not to mention all the fear and loathing... there's a reason why the washout ratio is about 75%!
One final observation: I observed that the salespeople whom people claim to dislike the most -- the deceptive, slick, controlling, pushy and intimidating "pros" -- were the ones who sold the most cars at the highest profit margins. The nice, sincere guys with integrity, many of whom came from backgrounds other than car sales, did not fare well. That speaks volumes on the human condition, doesn't it? One could do a dissertation on human behavior based on what goes on in those places.