Most buyers of a new car have the goal of negotiating a price on a new car that is well below the sticker price or MSRP. But there is also a more attractive objective to try which is the dealer invoice cost. In theory, the dealer invoice is the price a car dealer pays to buy a car from the manufacturer directly. However, the reality is a little more complicated. Today, we are going to let you know about what dealer invoice pricing is and why it matters.
What Is Invoice Pricing?
Invoice pricing or also called dealer cost is the price that appears on the invoice which the manufacturer sends to the dealer when the dealer receives a car from the factory. It is almost always higher than the amount the dealer ends up paying to the manufacturer. With this, a variety of discounts are offered to the dealer which do not appear on the invoice. Two of the most common discounts are Dealer Holdback and Dealer Cash Incentives. Aside from those, there are also other discounts that may be based on factors like a dealer’s sales volume for a specific month.
Also, keep in mind that invoice price is different from MSRP or Manufacturer’s Suggested Retail Price. The invoice price does not reflect any manufacturer-to-consumer rebates, title, license, the destination charge of the tax, registration, or advertising fees. The amount quoted as the invoice price sometimes includes the destination charge and sometimes it doesn’t. Therefore, it’s important to look closely.
Why Doesn’t a Dealer Pay Invoice?
Dealers pay less than a vehicle’s official invoice price in many ways when they purchase cars from manufacturers. A dealer is getting some of these discounts by their willingness to negotiate a discounted price that is below MSRP. However, car shoppers will rarely know exactly what the car dealership actually paid for the car.
A manufacturer to consumer cashback offer is one of the best ways for consumers to save on a new car. Aside from that, there are also manufacturer-to-dealer cash back programs on some models. For each car that they sell, they get a certain amount of cashback.
Does this mean the dealer is trying to direct you to buy a different car than what you came in to buy or lease? Well, there’s a chance that they are earning a big rebate on the one that you are being shown. Most of the time, manufacturers use dealer rebate programs for slow-selling vehicles and models that are due for replacement.
Holdback is a bonus paid by manufacturers for every car that a dealership sells in a month. This is common and typically reduce dealer cost by 2 or 3 percent. The holdback money paid at the end of the month mainly helps pay for dealer overhead and it also gives the dealership some pricing flexibility below the factory invoice.
Sales Incentives and Bonuses
Car dealers can make tens or hundreds of thousands of dollars by hitting sales goals. This is the reason why they encourage people to shop for cars near the end of the month, quarter, or year. Most of the time, the incentives are structured so that they make a bonus on every car they sell if they hit their target.
There are also times when dealers get bonuses or additional allotments of popular, profitable models for moving specific slower-moving models. A lot of manufacturers also pin dealer bonuses on consumer satisfaction surveys.
How Is Invoice Price Used by Dealerships?
There are times when dealers reveal the invoice price during negotiations for them to show that the price they agreed to is not making them much profit. Since car dealers are a for-profit business, they are entitled to make some money on a deal. Therefore, by revealing the invoice price of the car, a customer might think it’s fair to pay the listed invoice plus a couple hundred dollars so that the dealer will make some minimal profit on the deal.
However, the invoice price is most likely inflated due to hold back and manufacturer-to-dealer credits. This makes the dealer’s negotiation tactics more successful because it leads customers to think that the dealer is giving them the car at or near cost. With this, a dealership can sell a car at or around the invoice price and pocket the dealer holdback as its profit on the car.
Negotiating to the dealer invoice price is not always the best interest for customers. There are times when other discounts can bring your purchasing price lower than what the dealer invoice actually is.
Why Does Dealer Invoice Pricing Matters?
Dealer invoice pricing matters because it is a good place to determine your real-world price because it can give you an idea of what real cost is by guessing and estimating what the holdback might be. By looking around, checking your bottom line numbers against real-world sales data, and applying manufacturer incentives, you might get a deal that is well below the listed invoice.
However, keep in mind that you should not go barging into a dealership and demanding to pay dealer invoice on every car. It’s because there are times when dealers are unable to part with a hot-selling car anywhere near invoice price. The hotter the car, the less negotiating leverage you may have. This means that the dealer invoice represents a useful baseline to think about what you should pay but remember that it is not the final word.
For customers, it is always important to look for every opportunity to save money when buying a car. However, they also need to remember that buying a car is a business transaction and the dealer needs to earn a profit as well to finance their inventory, advertise, pay their employees, and improve their dealerships constantly. When purchasing a vehicle, just always remember that it is not a great deal unless it is a great car.