More "Markup In The Automobile Business"

[TedH]

Thanks again to all who replied to my post, “Markup In The Automobile Business.”  I compiled the comments and applied the various percentages-off MSRP mentioned to TrueCar’s 2017 CRV pricing (attached).  TrueCar’s MSRP is $28,895 and the factory invoice is $27,444, which is about 5% below MSRP.  No forum member mentioned a typical markup that low.  The lowest was 8%; the highest was 33% off a “slow-selling car with 500 miles” which the 2017 CRV isn’t but just for comparison, this would result in it selling for $19,360, a loss of $8,084 to the dealer if TrueCar’s $27,444 factory invoice is correct. Naturally, “holdbacks,” “volume discounts,” etc. might have an impact, but they are among the factors that motivate this in a 2013 Edmund’s story (https://www.edmunds.com/car-buying/dealer-holdback/):  “However, determining the dealer's actual net cost is difficult, even for seasoned automotive insiders.”  The “even for seasoned automotive insiders” is telling.  Some members have commented that my story is “old news” or well-covered.  I’d appreciate any book or magazine article titles or website URLs that members are aware of that plainly lay out markup in the automobile business—I’d like to review them. 

 

Edited January 25, 2017 by TedH
Math error. (see edit history)

[60FlatTop]

Friday I am meeting with the accountant for our corporate taxes. A decade ago she asked if I had accounting experience. I told her I knew how to add, subtract, multiply, and divide. I have no accounting skills.

"This is how accounting was always meant to be."

Bernie

[Frantz]

Net cost is invoice - holdback. The only additional money is bonus money for hitting sales goals, and for Ford, it's generally nothing too exciting (though when multiplied by the number of units you sell it's a sizable chunk, but your focus is per unit). That's not hard at all. You're seriously looking far too into it. Again, several dealers are publicly traded and their entire operation is available for public review. Why don't you open up their books and see that the smoke and mirrors isn't quite what you're expecting. Piecing it together through hearsay when there are documents in black and white can only lead to misguided half truths. Further, if you think there is so much money int he industry, just open a franchise up! If it was that much of a cash cow, every investment company in the world would be piling on board. The truth is, it's a market driven profit center just like any other business. I'm sorry vehicles cost so much, but they simply cost so much, there isn't anything more to it than that.

Penske Investor info

[poci1957]

1 hour ago, Frantz said:

You're seriously looking far too into it. Again, several dealers are publicly traded and their entire operation is available for public review. Why don't you open up their books and see that the smoke and mirrors isn't quite what you're expecting

 

The truth is, it's a market driven profit center just like any other business. I'm sorry vehicles cost so much, but they simply cost so much, there isn't anything more to it than that.

 

Frantz, I was about to post a similar thought until you beat me to it.  TedH, apparently the significant amount of feedback you received before did not satisfy your questions.  Here is an answer if you choose to accept it--the invoice is the cost number you can (more or less) accurately determine.  You cannot determine "actual net cost" because it is impossible to isolate on a unit basis, as it is on most other products in a marketplace.  As many people said before the dealer gets an invoice for a car and that is the basis for making a deal since it is indeed true that "even....seasoned automotive insiders" cannot know the end result.  Costs going out and factory incentives and bonuses coming in are a constant variable. 

 

If your real exercise with all this is to buy a car for yourself at the best possible savings then here is solid advice:

 

1. Narrow down your search to a few suitable models the right equipment for you and chart sale prices and internet information until you know a good deal when you see it.  The best deal will inevitably be on overage or slower selling merchandise and/or especially at the end of the month to hit a sales quota. 

 

2.  Go to your preferred dealer on the last day of the month making it clear that you will buy that car today if you get a good enough deal AND ESPECIALLY be prepared to follow through and do it.  Dealer sales people and managers get excuses and inaction every day; if you are vague and indecisive they will also be less motivated.  If you demonstrate you know you want THIS car and are ready NOW that commitment to buy today will get you the best possible deal, Todd C

 

[TedH]

I'm not in the market for a vehicle but have leased or purchased many over the years (I'm 66 and my first experience was helping my mom buy a new car in 1973 while I was in college).   I'm working on this because it interests me.  

 

[Restorer32]

Or try my method. Determine what you are willing to pay for a particular in Stock vehicle. Walk into the dealership, sit down with a sales person and tell them this. "I am here to buy this vehicle today. I am going to tell you what I am willing to pay. When I tell you my number your only response can be Yes or No. Any other response, even one word, and I walk. If you say No there will be no negotiation, I simply walk. If you say Yes then I will write you a check immediately". It's fun to do and has worked for me twice but maybe it worked because I actually offered too much.

 

[60FlatTop]

 

[Frantz]

My goodness that was amazing! Where is that from? (besides the wonderful WWW)

Ah, a movie called "Suckers"... I'll have to invest, looks like an upgrade from "used cars" for my collection.

Edited January 25, 2017 by Frantz (see edit history)

[padgett]

Since I only buy a new car every few decades am hardly an egg-spurt but do something similar except usually wind up leaving and often get a call back. Am much more in control when not there. Other difference is I prefer cash deals.

[Frantz]

Quote

Other difference is I prefer cash deals.

Cash deals tend to be worse than finance ones. We do get kickback from the banks for getting the banks deals. if you insist on cash, for petes sake, don't say it! As I said before, use the kickback on finance deals to your advantage. Get your own banks rate and let the dealer match/beat it. This way the dealer gets something for helping you out and you get a better deal overall, and they may be willing to help a few bucks because they'll get some in finance.

[padgett]

Understand that. Payment is after negotiation. If need a loan, prefer the credit union. No "rule of 78". 

[60FlatTop]

The movie "Suckers" and reruns of Wonder Woman are enough entertainment for me. I do have a playful streak of larceny in me..... well, maybe just plain exploitation.

 

On the finance thing, I saw an old guy walk onto the showroom floor and say "I have cash on the barrel head. A salesman brushed past him and said "I can't get one of those."

 

I wrote earlier, ask for dealer financing, make one payment and roll the loan over to a credit union or cash it out. The ultimatum approach works great on the last day of the month as long as you are reasonable. They are counting down (or up) that quota.

 

The ultimatum thing works for both buying and selling if you recognize the motivation. "I live 300 miles away, I am paying cash and you will never see me or this car again. If you are buying a Jaguar it's really good!

 

Almost forgot, the first car I sold on Ebay was a Rover TC 2000. It was shipped from western New York to a buyer in California who told me he planned to disassemble it when it arrived. Wow! Talk about a sweeeet sale!

Bernie

 

 

Edited January 25, 2017 by 60FlatTop (see edit history)

[Frantz]

 Most dealers work with credit unions too... The one local ones here won't even give their employees a better rate, so everyone who qualifies qualifies the same, yet we still get something if we send them the loan vs if you go there first and bring us a draft. It's not much, but when you're trying to squeeze every dollar you can out of a deal, you do need to understand all the angles. The movie clip that said if you don't come in and act serious you won't get a serious quote is pretty true. Even with the great pricing online, you're best leverage is when you're sitting at the desk, able and ready to buy. For some reason consumers view this as their weakest position, but it's also their best.

[Marty Roth]

The most recent three (3) new vehicles I bought, I went to the Fleet Manager of the dealership, identified exactly which model, color, and accessories I would accept, (either in stock - trade with other dealerships - or special order). My knowledge of dealer cost made my offer very specific. GMAC offered a 0% rate for 36 months - but later purchases had GMAC match my bank's best rate. I would pay only Dealer Cost MINUS one-half of the Holdback. In the recent case where there was a modest interest rate to GMAC, I chose that plan. At the same time I was able to negotiate a very substantial cash advance on a major credit card where they charged only a $10 fee and no percentage advance fee at 0% interest for two years, so I used that amount to buy a 5% CD at a S&L.

 

I also have a couple of GM credit card accounts which earn purchase credits toward acquisition of GM products. Since I will not need another new car anytime soon, I'm able to share these credits with others, who I may allow to use them at a discounted rate.

 

So if you are planning to buy or lease a GM product, after you negotiate your best deal, get with me or a friend who has this type of account with a GM card. You could likely save yourself a substantial amount more - completely legit - I've done it for 4 friends already. They use my accumulated credited amount as an authorized user on my account for the day of the purchase give me a lesser amount - they get a discount to use as a substantial down payment, and I get a lesser cash amount for a reserve i'm not using. This was suggested to me by GM, and it helps all around.

Edited January 26, 2017 by Marty Roth (see edit history)

[CarNucopia]

The last few cars we bought we used the Costco purchase program. The price is set and the dealer is not allowed to tack on extras or they will get booted from the program.  If my memory is right, we paid about $500 below "invoice".

[poci1957]

16 hours ago, 60FlatTop said:

The ultimatum thing works for both buying and selling if you recognize the motivation. "I live 300 miles away, I am paying cash and you will never see me or this car again. If you are buying a Jaguar it's really good!

 

Indeed Bernie, when I sold my Alfa it was to a guy in a nearby town and he knew where I lived...luckily he accepted that Alfas have.......ahem......."character."

[pont35cpe]

I bought my 1982 S-10 on Dec. 18, 1981, and at that time I claimed "I`d never buy another new vehicle". I have just a little under 900,000mi on it, and still holding true to my word. Been thru a few engines, I keep a fresh engine in my living room, for when I need it, I can have going again in a couple days. I can fix anything wrong with my truck for less than one months payment on a new one. I haven`t had a car payment since 1983. I spend my money on my 30s cars.. Computerized cars and cell phone are not for me...

[60FlatTop]

I have a weakness for Jaguars. The first one was a V12 XJS and I have run quite a range of them. None now, but I feel like one is pending. The windows are on the west side of my garage and I use them to keep the afternoon sun from damaging the concrete floor.

 

Anyway, here is a reply to remember. The last Jaguar that I was serious in was an early XK8, 1999 or 2000. I knew what is was and made what I figured was a reasonable offer near market price. The salesman, get this, told me that "they had more than that" in the car. Stupid takes a person by surprise sometimes and I really choked on that one. I immediately asked "Is the wholesaler's position open? You can't be serious. How did you ever expect to sell it?." Well, I guess he had heard a lot of replies, but not that one. I left my card and told him that I might consider the car as a sign on bonus if they would like to hire me as a buyer. The car sat there for about 8 months and I think it vaporized at a dealer auction.

 

I also ended up at a store where they were having an "emergency" liquidation sale. They had a million dollars in overstock cars that needed to be moved immediately. I asked why they didn't stop buying when they got to around $400,000 and offered to fill the obviously vacant position of buyer there, as well.

 

Maybe when I mature I won't take things literally, but I'm sure going to miss a lot of entertainment if I do.

Bernie

Edited January 26, 2017 by 60FlatTop (see edit history)

[poci1957]

1 hour ago, 60FlatTop said:

 

Anyway, hear is a reply to remember.....

The salesman, get this, told me that "they had more than that" in the car.........I immediately asked "Is the wholesaler's position open? You can't be serious. How did you ever expect to sell it?." 

I left my card and told him that I might consider the car as a sign on bonus if they would like to hire me as a buyer. The car sat there for about 8 months and I think it vaporized at a dealer auction.

 

Pretty good response Bernie, I like that

[Frantz]

Sometimes we own a car for more than we want to. Often it needed something bigger in the shop we didn't catch. Believe it or not, customers don't always tell us what all is wrong with their vehicle. Sure we make out more often than not, but not every thing a salesman says is a lie. I'd put money on the notion that the avg customer lies more during the process than the avg car salesman.

Edit: Starting with "I'm just looking" =-P

Edited January 26, 2017 by Frantz (see edit history)

[cheezestaak2000]

23 hours ago, Frantz said:

Cash deals tend to be worse than finance ones. We do get kickback from the banks for getting the banks deals. if you insist on cash, for petes sake, don't say it! As I said before, use the kickback on finance deals to your advantage. Get your own banks rate and let the dealer match/beat it. This way the dealer gets something for helping you out and you get a better deal overall, and they may be willing to help a few bucks because they'll get some in finance.

or simply finance the car then pay it off the first month

 

[padgett]

7 minutes ago, cheezestaak2000 said:

or simply finance the car then pay it off the first month

 

See "rule of 78" mentioned earlier. There are a number of creative accounting methods that can be used and might be amazed at how much you owe at the end of a month.

 

Is part of the reason I use my credit union for everything. No surprises.

Edited January 26, 2017 by padgett (see edit history)

[DAVES89]

I always thought it was the "Rule of 72"...

[Frantz]

I know there are always exceptions, but I'm pretty sure most dealerships work with simple interest loans. I would think the exceptions out there are for "special finance" aka, bad credit. We don't have a single bank that isn't simple interest, including our special finance ones. 

[brasscarguy]

One of the biggest scams the dealer pulls is to show you the "invoice" and sell you the car at dealer cost. The final price a dealer pays for any new car he buys from the factory is based on a number of factors, and not the "invoice"

 

The most important issue is known in the trade as "CSI" customer service index. This is a percentage number driven by customer reviews. Customers are mailed cards or notified by email to express their satisfaction  (or lack of ),with the overall sale, the condition of the dealership, the sales staff, the follow up, the service department just to mention a few.

 

The factory totals the CSI information and comes up with a number. Then added in to the mix is the number of complaints after the sale regarding service and follow up, another number generated. Then warranty rears its ugly head. To many warranty claims, or doing too much warranty charge backs add another number. Finally how many dollars spent on dealer inventory both cars and parts.

 

The factory has a quota that the dealer must meet per model season, total units purchased and units sold.

 

If the dealer makes all the quotas and keeps the CSI in line, purchases enough parts, keeps warranty claims down, the factory then applies a formula and comes up with a number. This is what they call "trunk money" This money is paid back to the dealer at the end of the model year or sometimes quarterly. So the dealer then decides whether to pocket the money, or to divide it up amongst the troops. If a dealer has all his ducks in a row and has a great year, the trunk money can amount upwards of $500.00 per unit purchased. Thus that is how you find the actual dealer cost of any unit. If the dealer is a sharp operator the net price is a far cry from the "dealer invoice" All manufacturers have different ways to calculate and arrive at trunk money but they all have a kick back scheme of one sort or another. 

 

just sayin'

 

brasscarguy

 

 

[maok]

I have trouble believing any business can run profitably for less than 20% markup.

 

In Australia, the dealers have a 'rebate' based on volume and targets that the factory would set for the month, this is what determines profitability for most dealers.

Yes, the add-ons, finance, servicing, spare parts, and other profit making parts of the business make a huge difference to their profitability just as much as selling a car. But at the end of the day, if you don't move a car, you don't have an add-on, financing, etc.

 

Agree with others, last day of the month is a great time to negotiate. And also look out for the slow moving models that the factory has a sale on, often advertised aggressively to clear. These sales are often too good to pass up. Don't be shy to still negotiate.

[Frank DuVal]

Marty, that dates your response! Both the 5% interest you got on a CD and it was from a Savings and Loan. This was an 80s story at the most recent...

 

Rule of 78s. Very common also back in the 70/80s, but almost unheard of today. It is prohibited in the US on loans with terms 61 months or longer.

 

I would like to not replace a daily driver, but salt here is a concern on steel bodies!

[D Yaros]

The "Rule of 78s" is prohibited in the U.S. for 61 mo or longer loans?  Did not know that.  In fact, only vaguely recall the rule at all and had to google it - https://en.wikipedia.org/wiki/Rule_of_78

 

Was going to make "tongue-in-cheek' remarks like even tho' 45s were the big seller, I preferred buying 33 1/3s myself!