Well, not only could that dealer stay in business, they were probably making a killing on their vehicles - even when selling them at invoice price.
One reason is due to a payment called holdback, which the dealer receives from the manufacturer for each car they sell. The holdback is paid on a quarterly basis and is usually equal to 1 - 3% of the total price of the vehicles. For example, if a car has an MSRP of $25,000 and there is a holdback of 3%, then the dealer will receive $750 from the manufacturer whenever he sells that vehicle.
A dealer could run a highly profitable operation simply off the holdback they receive. Although not all manufacturers offer holdback, most do and here is what each one currently offers:
|Acura||2% of the Base MSRP|
|Buick||3% of the Total MSRP|
|Cadillac||3% of the Total MSRP|
|Chevrolet||3% of the Total MSRP|
|Chrysler||3% of the Total MSRP|
|Dodge||3% of the Total MSRP|
|Ford||3% of the Total MSRP|
|GMC||3% of the Total MSRP|
|Honda||2% of the Base MSRP|
|Hyundai||3% of the Total MSRP|
|Infiniti||1.5% of the Base MSRP|
|Jeep||3% of the Total MSRP|
|Kia||3% of the Base Invoice|
|Land Rover||No Holdback|
|Lexus||2% of the Base MSRP|
|Lincoln||2% of the Total MSRP|
|Mazda||1% of the Base MSRP|
|Mercedes-Benz||3% of the Total MSRP|
|Mercury||3% of the Total MSRP|
|Mitsubishi||2% of the Base MSRP|
|Nissan||2.8% of the Total Invoice|
|Saab||2.2% of the Base MSRP|
|Subaru||2% of the Total MSRP|
|Suzuki||3% of the Base MSRP|
|Toyota||2% of the Base MSRP|
|Volkswagen||2% of the Base MSRP|
|Volvo||1% of the Base MSRP|
When figuring out the holdback for the vehicle of your choice, here is how to calculate it based on the table above:
The obvious question - why is there even a holdback amount? Manufacturers actually started using holdback over 50 years ago when new car dealers were having problems paying their taxes. They decided to keep a reserve for each car purchased by the dealer and would give them the payments on a quarterly basis - when their taxes were due.
This kept many dealers afloat and the practice continues till this day, although now it's just more of a profit center for dealers rather than a way to avoid tax foreclosure.
In addition to holdback, there can also be other hidden kickbacks such as advertising credits and other forms of manufacturer incentives. The bottomline: Invoice price is never what a dealer actually pays for their vehicles - there's always going to be a lot of wiggle room for you to work with.