Dealer Invoice Pricing

One of the unique aspects of the auto industry is that you can find out, virtually to the penny, what the retailer paid for the product he's about to sell you. Just try to find out what Sears paid for the Frigidaire refrigerator you're about to buy. Or make an attempt to discover what Circuit City paid for the High-Definition Sony TV you're looking at so longingly. You will find the going tough, if not impossible.

But when it comes to the auto industry, if you have access to the Web, and one presumes you must since you're reading this, then you have almost instant access to sources of so-called "dealer invoice pricing." The dealer invoice is, of course, the price the dealer pays the factory (or distributor, in the case of the imports) for an individual vehicle. Just log onto one of several Web sites that offer the detailed information and you can quickly and painlessly tote up what the dealer paid for a vehicle equipped exactly as you want it, base price and options included. In fact, some of the sites have "calculators" that will do the toting for you. And the cost to you is a very reasonable free.

Among the sites that offer this potentially valuable information are Kelley Blue Book, Edmunds Publishing, and two that are linked directly through the Driving Today web guide - MSN CarPoint and IntelliChoice. My advice is, you might as well log on because knowing the dealer invoice price for the vehicle you want to buy can be a very valuable piece of information. As the guy who wrote The Complete Idiot's Guide to Buying and Leasing a Car (which is available from Amazon, Barnesand Noble and the friendly local bookstore near you), I recommend very strenuously that you avail yourself of this information. But I must also recommend that you be careful how you use it. Because it is my view that having the dealer invoice price might not get you a good deal, but it might bring you a great deal of frustration.

What You Should Pay for a Car

In preparing to write The Complete Idiot's Guide, I drew on my experience as Editor of Motor Trend magazine, Auto Age magazine (a dealer publication) and Director of Publications for J.D. Power and Associates. In addition I talked with a number of dealers and on-the-floor car salespeople, and I spent more than two years working within an auto manufacturer-distributor. From this you might gather I know whereof I speak. And based on all this experience I get more than a little peeved when a so-called "car-buying expert" says on a TV talk show or writes in the pages of a magazine that the "fair price" for a vehicle is X dollars over dealer invoice, usually a number like $400 or $500. Other quasi-experts even suggest that you the consumer demand that the dealer sell at the invoice price, relying on the elusive concept of "holdback" to give the dealer his requisite profit.

This does both you, the consumer, and the dealer an enormous disservice. First I defy anyone to define exactly what a "fair price" or "fair profit" is. It strikes me that definition is utterly in the eye of the beholder. Second, and equally important, sometimes $400 or $500 over invoice is way too little to pay and sometimes it's way too much.

Just as I tell the car-buying classes that I've been teaching for more than three years now, simply having the dealer invoice price in your hands won't guarantee that you'll get a good deal. And trying to goad the dealer into selling you the car you want for invoice price plus a few dollars is a recipe for customer dissatisfaction. On top of it, you might still end up paying too much for your particular vehicle. Why? Just because of a natural law called supply-and-demand.

Let's say you want one of the sport utility vehicles that are so hot today. Do you really think the dealer is going to forego a legitimate big-profit opportunity and instead sell you a $30,000 vehicle for a $500 gross (that's pre-expense, folks) profit? In other words, is a dealer expected to sell a 30 grand piece of equipment for a 1.7% profit BEFORE EXPENSES? Come on! And do you think holdback will add a bunch to the dealer's profit. Maybe two or three percent is the absolute max. Now how much gross profit do you think a jewelry store expects to get when it sells you a $30,000 ring? You can bet it's one huge amount more than 2-3%. Unless you're one of the last of the Communists, you've got to believe that a dealer needs and deserves to earn at least enough gross profit in every deal to pay all his expenses (things like personnel, rent, advertising, etc.) and make some money for his efforts. Frankly, that ain't going to happen on a 2% gross profit. So if you go into! a dealership asking to get the deal that most of these self-proclaimed experts say you should get, you will be rudely disappointed. The dealer can't sell that low and stay in business.

On the other hand, sometimes if you buy a car at $500 over invoice or even right at invoice, you're actually getting a bad deal. How can this be, you ask, especially after reading the previous paragraph? That's right, supply-and-demand.

Let's say that you set out to buy a car or truck that isn't real hot in the marketplace. What is the dynamic there? Well, the first thing you should know is that once manufacturers/distributors have established Manufacturer's Suggested List Prices (the fabled MSRP) and their accompanying dealer invoice prices, they are very loathe to lower them. To understand why you'd have to talk with their shrinks, but take it from me, they don't. They'll raise prices without batting an eye, but lower them? It's rare as a cocktail reception at an A.A. convention.

What they do when they encounter a lack of demand is 1. Offer you, the consumer, cash or special financing deals or 2. Offer the dealer a cash bounty for every one of the slow- or even average-movers that he/she sells.

Of these two options, Number 1 is easier to understand and deal with. The sticker says $15,000 (and the invoice price is, say, $13,500) but there's a $1,000 cash-back offer. Since $15,000 minus $1,000 equals $14,000, it might look to you like you've achieved that mystical $500-over-invoice deal. Sorry, pal, if you just take the grand and make it part of your down payment or if you pocket the dough, the dealer is still (most often) getting most, if not all of his (in this case 10%) gross profit. You probably could do better.

Number two, of course, is much more nebulous because you, the typical person-on-the-street, have no idea and pretty much no reliable way to find out the current cash bounty or, in industry parlance, "factory cash" being put against the vehicle you are about to buy. And it could be a big hunk of change - as much as $5,000. So if you walk into a dealership to buy a slow-seller and the dealer writes you a deal at invoice price - he'll probably be happy to show you the actual invoice - he might well be walking away from your deal with a $5,000 gross profit plus a little holdback. On a $40,000 car, that's a 12.5% profit, not bad at all in automotive terms.

So what to do? Shop, compare prices and make several dealers compete for your business. You should do this whether or not you have obtained dealer invoice pricing, and if you've got the dealer invoice you'll have another tool by which you can judge the deal. But, the key to a good deal is not having dealer invoice pricing in hand; the key to a good deal is making supply-and-demand - the push-and-pull of the marketplace -- work for you rather than against you.

-- Jack R. Nerad

Nerad's book, The Complete Idiot's Guide to Buying or Leasing a Car, is published by Alpha Books, a division of Macmillan.