When shopping for a car, knowing the invoice prices on the car you want is the key to negotiating a great deal. Where it gets confusing however, is finding the right invoice price to base your negotiations on.
In the car industry, there are generally two prices: the dealer invoice and the factory invoice price. Knowing the difference between the two gives you a far stronger and more accurate negotiating position. Dealers actually have to buy their inventory from the manufacturer. They are independent businesses, or franchises, not run by the top manufacturers like Ford or Dodge. Dealers can sell their products, but they have to buy their inventory before they can sell it.
The dealer invoice is the price the manufacturer bills the dealer for the vehicles they purchase, plus any options equipped. This is in essence the dealer's cost, and is not generally shared with the customer. All dealerships pay this same general price for a vehicle from the factory, and it does not include any of the individual fees that vary from dealer to dealer.
The factory invoice is the total cost to the dealer for a vehicle. This price is the sum of the base invoice or cost for the base model of the car, plus the cost of options, destination fees and manufacturer fees. What many dealerships won't tell you, however, is that this value does not take into account factory incentives that the manufacturer may give to encourage sales.
As with most items sold, cars have a manufacturer's suggested retail price. The MSRP is the price the manufacturer suggests that the car dealer should charge for the car. This is not a number set in stone; the dealers can charge truly what they want.
Here's where the difference in pricing is most noticeable and relevant. The sticker price of the car is the amount the dealer is looking to get on the car. Often, they will also list how much the invoice price was, to show that their prices are fair, as well as the MSRP, to show that the asking price may be lower. Seeing a lower sticker than the MSRP gives the buyer a feeling that he or she may be getting a good deal. However, don't be taken in. It is common for dealers to sell cars for less than MSRP and still come out ahead according to their invoice prices. One may ask how a dealer can sell a car they bought for x dollars for that same amount and still make a profit? Dealers get incentives and rebates from the manufacturers that end up allowing them to make a profit. Buyers may not know this and think they are getting a great deal, when in fact they had much more room to negotiate.
How a Car Dealer Invoice Is Calculated
The dealer invoice includes the cost of the car itself, as well as any added option packages. Then the destination charge is calculated into the dealer invoice amount. The invoice usually spells out this charge, which covers the transportation costs of a new vehicle from the factory to the dealership.
Manufacturers regularly increase dealer invoice costs, but not all online resources update this information. As a result, multiple websites are required to find car dealer invoice forms, to confirm the accuracy of the invoice costs and destination charge. For example, if two websites display costs that do not match, a third site should be consulted.
Next, the holdback amount is subtracted from the basic invoice amount. Manufacturers give the holdbacks to dealers. They are usually either a percentage of the invoice total, or a set amount. The holdback also varies by the car brand. Additionally, factory-to-dealer incentives are subtracted. These incentives are given directly to the dealer by the manufacturer. A dealership will keep the money if they want to lower the dealer invoice. When the money is not kept, the incentives are passed on to car buyers.
Dealer Costs That Affect the MSRP
The invoice price is the total investment of the car dealership for the car, meaning the total amount of money they pay for the vehicle. Here are 5 things that are included in that price, which increase the manufacturer's suggested retail price, or MSRP.
- The car itself. This is a given, and should cost the most. No matter where you're buying the car, this fee is exactly the same for all dealers.
- The shipping cost. This cost is added in, and is also the same for all dealers. It doesn't matter if the car is only traveling one state or twenty states away to its destination.
- Advertising. For example, Verizon spends 70% of its revenue, which comes out to seven billion dollars, on advertising. Car companies are no different, and it's not cheap. They pass this national advertising cost into the invoice price of their cars.
- The dealer floor plan. Not all dealers can afford tens of thousands of dollars at a time to pay for their cars. The dealer floorplan is a type of financing, but for a dealer. In essence, it is a line of credit. It allows dealers to get inventory, wait till they sell, and then pay off the brunt of the car loan after the car has been sold. That way, they haven't accrued much interest, and pretty much still just own the principal. The more the car sits on the lot, the more interest will be paid.
- Dealer facility overhead. Dealers can technically charge what they want. This will depend on many factors. First is their rent. Depending on location, this can be very expensive. Then, they have to pay all of the salaries for their workers. There are electric, gas, phone and other bills that also need to be paid.
How to Find Out If a Car's Invoice Prices Include Factory-to-Dealer Incentives and Rebates
Invoice pricing can be further lowered, thanks to incentives and rebates offered by new car manufacturers. Although rebates and other incentives are not shown on a new vehicle invoice, they can be applied to get you a better deal. When you are in the market for a new vehicle, be sure to use a service like CarsDirect to research invoice pricing. CarsDirect can also put you in touch with local dealerships who sell new and used vehicles. These dealerships offer specially-trained Internet sales managers who provide no-hassle price quotes on your vehicles of choice.
Determine the Classification of Discount Being Offered
There are numerous types of discounts offered on new cars and trucks. The most common is customer cash, which is passed directly from the manufacturer to the end customer. Any rebates passed on to the customer in this manner are not reflected on the vehicle's invoice. Another type of discount is dealer cash. This is a factory to dealer incentive that is automatically paid to the dealership when a vehicle is sold. Dealer cash is not normally reflected on a vehicle invoice. It is not necessary to pass the dealer cash amount to a customer, as the dealer may choose to hold the amount to increase their profit.
Holdback is a type of discount that is always listed on the invoice. It is an amount paid from the factory to the dealership to offset normal costs of doing business. Although holdback is intended to pay for employee salaries, sales commissions and facility maintenance, it is also an incentive that lowers a dealership's cost for a car or truck. Holdback is usually listed near the bottom of an invoice under the heading H/B. This amount is actually subtracted from the invoice price, as holdback lowers the cost of a vehicle below invoice by the listed amount.
Holdback calculation is quite easy. Simply take the MSRP of a vehicle and apply the applicable holdback to find how much profit the dealership is getting from holdback. Once you have this number, simply subtract it from the invoice price of your car if available, along with any applicable rebates, to find out actual dealer cost on your car. A final price between $1000 and $1500 dollars of this dealer cost means that you are not only getting a great deal, but the dealer is also getting a reasonable profit from the sale.
Most dealerships hope that buyers will purchase a car based on MSRP, and starting negotiations at this point will only end in a higher price out of your pocket. By knowing the holdback amount, you can start negotiations 1-3% lower, even if you don't have access to the invoice price. This means you have a good chance of negotiating a deal that's 1-3% lower than it could've been. On a $20,000 car, this could be as much as a $600 in savings.
Ask to Review a Copy of the Invoice
The easiest way to check if the invoice price includes any factory to dealer incentives and rebates is to ask to see a copy of the invoice. If there are any incentives reflected on the invoice, they will be listed near the bottom. If a dealership will not allow you to see the invoice, it may be best to find a new dealership by taking advantage of the tools available via CarsDirect.
Calculate an Approximate Cost
Once you have determined the invoice and holdback amounts on a vehicle, you can approximate the dealership's total cost. If there are any additional dealer incentives and rebates listed on the invoice, they may also be deducted from the invoice amount. Once you subtract holdback and other incentive amounts from the invoice price, you have the dealership's approximate cost for a vehicle. Determining the exact cost of a vehicle can be very difficult, so it is in your best interest to contact a dealership you can trust. You can find local dealerships that offer no-hassle pricing information on new cars.
Related Questions and Answers
How are MSRP Car Prices Calculated?
The Manufacturer's Suggested Retail Price, or MSRP, are car prices that are recommended prices the car makers use to help ensure that both the car maker and the dealerships can make a profit off the sale of the car. These prices take into account the cost of building the car, shipping the car to the dealership and dealership prep charges. These prices are usually quite a bit higher than the sticker price that you'll see when you visit the dealership, to make it look like you're getting a better deal on the car paying sticker price. This price is also set high enough that even with the salesperson's commission, the dealership can make a profit.