Why Invoice Price Is Not the Dealer's True Cost
The dealer's true cost is usually hundreds, sometimes thousands of dollars below the invoice price. How can that be?
The reason: manufacturers pay hidden incentives, holdback, and other fees to dealers after each vehicle is sold.
Hidden dealer incentives are similar to cash-back rebates, but instead of going to the consumer, they are paid to the dealer. If you use my car negotiation method, you stand a good chance of having the dealer pass these hidden incentives to you through a lower purchase price.
Other types of hidden incentives include "stair-step" incentives, which are given to dealers when they hit certain sales goals. For example, a Nissan dealer may get an additional $250 bonus for each vehicle sold if they sell at least 50 cars per month. The bonus may increase to $500 once they sell 100 cars.
Some manufacturers give "credit vouchers" that dealers can use on any customer. Each dealer may have a dozen or so vouchers that can be used throughout the month to help seal deals.
On top of these hidden incentives, dealers also get reimbursed for their financing costs through holdback. This usually amounts to between 1 - 3% of the invoice price of the vehicle, which can be as high as $1,250. In most cases, the holdback amount exceeds the dealer's cost of financing so this is just extra profit for them.
Finally, some dealers get reimbursed for advertising expenses, fuel charges, and servicing the vehicle. All in all, when you add up the hidden incentives and kickbacks, the dealer's true cost is usually at least $750 under invoice price, and can be as high as $10,000 under invoice (for leftover, or slow-selling models).
So next time a dealer whines to you about not making any money on the deal, you can remind them about these hidden kickbacks.
My Recommendation for Car ShoppersTrueCar No-Haggle, Edmunds Price Promise and 1-800 Car Show are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
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About: Gregg Fidan
Gregg Fidan + is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.