Cars are expensive, which is why many of us are aggressively looking for all kinds of discounts – whether they are provided by manufacturers or dealerships themselves. Sometimes customers ask for a discount that a dealer cannot afford, prompting a quick rejection. The reason why they ask for so much off the retail price is because they often have no idea how much money exactly dealers make from the sale of a single car. We might think that since we’re dropping so much of our own money on a vehicle, the dealer gets a huge cut, but that’s not the case.
Let’s examine how much dealers really make and how they make up for small margins in other departments:
So, What Is the Dealer Margin?
Recent research shows that the dealer margin is not higher than 8.7 per cent. That’s the room that you can play with when negotiating, which means that it doesn’t take much before you start eating into the invoice price, which is the amount a dealer pays for a vehicle – and in many cases, the rock-bottom price.
On top of that, they have the standard overhead costs that any business has, such as a lease for the showroom, building maintenance, electricity, advertising and employee salaries. They need a number of specialized people to keep the dealership running, and that includes the detailer, salesperson, title clerk, accountant, sales manager, dealership manager and a few others.
Finally, sometimes manufacturers raise the invoice price, while keeping their suggested retail price the same, putting an extra squeeze on the dealer’s profit.
So, How Do Dealers Make Any Money at All Then?
Dealerships make a big portion of their profit on services and maintenance for the vehicle they’ve sold you, as well as on financing, insurance and add-ons. In fact, new car department of a dealership amounts to about 30 per cent of its gross profits, according to the National Automobile Dealers Association, so new cars are definitely not their main source of income. Used cars aren’t either, representing about 26 per cent of a dealer’s gross profit.
A dealership can also pick up incentives from the manufacturer like dealer holdbacks – just a couple hundred dollars that the manufacturer gives the dealer once the vehicle has been sold. Dealer cash, offered by the manufacturer, is meant to get older vehicles moving off the lot quicker to create room for newer models.
So, How Does This Knowledge Benefit Me, the Customer?
So, what can you do to get the best deal? Know the difference between the invoice cost and retail price. The invoice price on the 2016 Honda Civic Sedan DX 6MT is $15,031, while the MSRP is $15,990, with the profit being $959, which is less than six per cent of the total price.
As such, when negotiating the price, add three to seven per cent to the invoice price to account for the dealer margin. You can find out the invoice price right here on Unhaggle.com by configuring your vehicle on our homepage. Keep in mind that your goal shouldn’t be to bat numbers back and forth and see who tires of the exercise first. Come up with something reasonable for both of you, and remember that the dealership has minimal wiggle room to concede to an amount that still leaves them with a profit.
As customer your best bet is to go to a dealership armed with knowledge. You should know the invoice price, latest rebates and additional fees before you walk into a dealership. That way, you can walk away with an offer you and the dealer will both feel comfortable with.