Decoding the Mystery of Selling Below Invoice: A Comprehensive Guide for Smart Car Buyers
Car dealerships often sell vehicles below invoice for various strategic reasons, aligning with financial incentives and negotiation tactics. Understanding these practices and the nuances behind invoice pricing is crucial for savvy buyers.
Why Can Dealerships Sell Below Invoice?
While the invoice price may seem like the final cost at first glance, car dealerships utilize several financial strategies to sell vehicles below this price point. Here are the key factors:
1. Manufacturer Incentives
Auto manufacturers frequently provide dealerships with rebates or bonuses to incentivize the sale of specific models. These incentives help bridge the gap between the actual invoice price and the sale price. Dealers can use these bonuses to cover the difference and maintain profitability.
2. Volume Sales
Selling vehicles in high volumes can lead to better manufacturer incentives or bonuses, which offset the cost of selling a vehicle below invoice. Higher sales volumes in turn can lead to greater discounts and bonuses, making it a strategic choice for dealerships.
3. Trade-Ins
When a dealership accepts a trade-in, they often undervalue the vehicle to maximize their profit margin. By devaluing the trade-in, dealers can lower the net price of a new car, even if the overall sale price is below invoice.
4. Flooring Costs
Dealerships typically secure financing for their inventory, known as flooring, through interest-bearing loans. Boilerplate quickly covers the initial cost and incurs ongoing interest charges. To reduce these costs, dealerships may opt to sell vehicles below invoice to clear out inventory faster.
5. End-of-Year Sales
At the end of a model year, dealerships often discount existing inventory to make room for new models. This practice can lead to prices below invoice as they attempt to clear out stock efficiently.
6. Negotiation Strategies
Dealerships might initially list a vehicle at or above invoice, then negotiate the price down, giving the impression of selling below invoice. This technique can create an illusion of better deals for customers, prompting them to engage in further negotiations.
7. Financial Position
Some dealerships may possess a strong financial position, allowing them to absorb losses on certain vehicles, especially if they expect to offset these losses with other profitable sales or services.
The Truth Behind Invoice Pricing
It's important to recognize that the invoice price is not the final price a dealer pays for a vehicle. Over the years, dealers and manufacturers have developed a complex pricing scheme that includes various incentives and financial strategies. Here are some key hidden costs and incentives:
1. Holdback
Holdback is a percentage of the Manufacturer's Suggested Retail Price (MSRP) that dealers receive when a car is sold. For instance, if the MSRP is $30,000 and holdback is 2%, the dealer receives $600. This hidden incentive contributes to the overall cost structure for dealers.
2. Volume Incentives
Manufacturers offer volume incentives, such as $200 per vehicle for reaching a sales target. If 100 vehicles are sold, the dealer receives $20,000 in additional incentives. Many such incentives are well-known, while others are less transparent to both dealers and customers.
3. Unknown Incentives
There are numerous hidden incentives that few, including sales representatives, are aware of. These unknown incentives can significantly impact the final price a customer pays.
How to Buy a New Vehicle Wisely
To negotiate effectively and avoid paying more than necessary, car buyers should:
Start the negotiation process at invoice less holdback minus any known incentives.
Always offer to buy at no more than invoice, shifting the control to the buyer and forcing the dealer to work to meet the offer.
Be well-informed about the various incentives and holdback rates.
By understanding these strategies, car buyers can make more informed decisions and negotiate a fair price that aligns with market value.