In Search of the Real Dealer Cost

published 1 May 2010

Most new-car shoppers know that invoice price is a bargain. But does that mean the dealer makes no money? And how can dealers sell cars below invoice?

Deals on New Wheels

The true dealer cost is decidedly less than the invoice price, although exactly how much a dealer pays a carmaker for a vehicle is an elusive figure. We set out to determine the true dealer cost.

Elusive numbers. "The auto industry is the only business in which the term invoice doesn't actually define cost," says Jesse Toprak, of TrueCar.com, an automotive-data company. For example, the invoice price does not reflect the holdback, a discount the dealer gets from the manufacturer that the dealer uses to help pay the cost of financing its cars. Dealers may also get cash from the manufacturer to move certain models. The thinking is that dealers know the best way to close a sale, and they can use any or all of the cash to help get the deal done. But, says Toprak, "if you know the incentive exists, you'll likely get 100% of it."

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TrueCar.com lists the holdback and dealer incentives in its price report for each vehicle. The report, which is free, also shows the site's best estimate of the actual dealer cost, the higher, factory-invoice price and the average price that buyers are paying. Say you're shopping for a 2010 Volvo V70 wagon. The sticker price is $34,400 and the invoice price is $32,887. But the site's TrueCost is $4,000 below invoice, after subtracting $1,000 for the holdback and $3,000 for dealer incentives.

Dealers may also benefit from other carmaker-to-dealer kickbacks, such as carryover (for selling last year's models to make room for new inventory), volume bonuses (for moving a lot of cars) and customer-satisfaction bonuses (for high scores on customer surveys).

Knowing the dealer's actual cost and potential profit can help you drive home a bargain. But to get the best deal, make dealers compete for your business. "You don't need to be an expert," says Robert Ellis, of CarBargains, the car-buying service of the nonprofit Consumers' Checkbook organization. Pit dealers against each other -- all the dealers in your area will be working with the same holdback and dealer cash incentives.

You can follow Car-Bargains' strategy yourself: Approach several dealers, but ask to speak with one of the managers -- they know the bottom line better than the salespeople and care more about volume than commission. Solicit bids from them over the phone or via e-mail. Use the invoice price of both the vehicle and options to compare deals. Or for $200, CarBargains (www.carbargains.com) will get bids from five dealers in your area on the car you specify.

Good fees, bad fees. Legitimate fees are listed on the factory invoice, which the dealer should share with you. These are fees that the dealer has to pay to the manufacturer and is passing along to you, including the destination fee (the cost to transport the vehicle to the dealer) and the carmaker's regional advertising fee. TrueCar.com includes this in its invoice and TrueCost figures. You may also be stuck with administrative fees and fuel charges if they're listed.

A few fees inhabit a gray area -- you'll likely have to pay them, but you might be able to negotiate. The document fee is one example. Some states regulate it; others don't. California does and sets the fee at $55. But dealers in Florida may charge several hundred dollars. Find out what other dealers charge -- the dealer may reduce its fee to match the local competition.

Some fees you should never pay because they are part of the cost of doing business. They include floor-plan fees (the cost to hold inventory at the dealership) and vehicle-preparation fees (for cleaning, removing plastic and checking fluids). Any fee listed only as an acronym should raise a red flag. If it doesn't show up on the factory invoice, don't pay it.

Anderson has been with Kiplinger since January 2004, when she joined the staff as a reporter. Since then, she's covered the gamut of personal finance issues—from mortgages and credit to spending wisely—and she heads up Kiplinger's annual automotive rankings. She holds a BA in journalism and mass communication from the University of North Carolina at Chapel Hill. She was the 2012 president of the Washington Automotive Press Association and serves on its board of directors. In 2014, she was selected for the North American Car and Truck Of the Year jury. The awards, presented at the Detroit Auto Show, have come to be regarded as the most prestigious of their kind in the U.S. because they involve no commercial tie-ins. The jury is composed of nationally recognized journalists from across the U.S. and Canada, who are selected on the basis of audience reach, experience, expertise, product knowledge, and reputation in the automotive community.