A new car's invoice price is the amount that the dealer ends up paying for the car. Dealers must buy their inventory from the manufacturer. The price they pay is called the invoice price. Then, there is a markup, which ultimately becomes the sticker price. To determine how much you should expect to pay, let's discuss what the car invoice price is made up of, the typical markups, and then the typical profits for dealers. From there, you should have a grasp on how car dealers make their money, and how you can ultimately negotiate them down into a happy medium.
As stated earlier, the invoice price is how much the dealer actually pays for the car upfront. There are several parts to this cost. First is the car's price itself. The manufacturer makes some money on the car. There are also some other expenses built into the invoice price. The most important one that is often misunderstood is the hold back. This small chunk is designed to lower the profits on your income statement. This in turn will lower commissions. What people don't know is that it is called hold back, because it is then released back to the dealer at a later date. People try to use that in their number calculations and it throws off the calculations. Also added into the final cost will be interest. Dealers often take loans out to pay for their cars, and then pay them right back once they sell a car. If they sell it quickly, it will reduce the total amount of interest. This comes to your advantage as you can use that as potential savings and to your negotiating benefit.
The sticker price is the amount that is on the car as you walk in, usually on the windshield on a sticker, hence the name. This is the price that the dealer wants to get for the car. However, that number is nowhere etched in stone. In the past, cars salespeople used to be much more strict about budging off the price. In modern times where dealers need sales, they are more likely to negotiate down. Keep this in mind all the time.
Dealers are always willing to come off their price a little, but they try not to show that they will come down a lot. The fact of the matter is that they will go down a lot, people just usually don't try it. Dealers get incentives from manufacturers that allow them to get money back after they sell the car. Couple that with the manufacturer rebates they offer the customer, and that makes for a low price. You should expect to pay no more than 5% above the invoice price. If you do, you shouldn't take the deal and go elsewhere. Car dealers may say they make only 12% on the invoice price from the MSRP, but with the incentives, that number is doubled usually. Even if they sell the car at the invoice price, they will still make at least 10% on the car. You should expe ct to pay not that much over the invoice price, which ends up being a great deal.