The Art of Car Dealership Profit Margins: Decoding the Hold Back
I spent my career in the automotive industry - as a sales manager, finance manager, and finally, general manager of various automobile dealerships. Now retired, my insight into car sales has given me a unique perspective on how dealerships operate. Today, I'll demystify a crucial aspect of this industry: Hold Back.
Understanding Hold Back
At its core, hold back is a financial mechanism that defines a specific dollar amount, often 3 to 5 percent of the total invoice price of a vehicle, which is returned to the dealer. This concept is significant in car sales because it shifts the focus from the actual cost of the vehicle to the dealership's income. The manufacturer labels this money as 'hold back' rather than lowering the vehicle's invoice price, which creates the illusion of a lower markup on the vehicle.
The Psychology of Hold Back
When a consumer sees the invoice price of a vehicle, they believe they are looking at the dealer's profit margin. This makes them reassured and less inclined to negotiate. However, the truth is far from it. For instance, if a car's invoice price is $30,000 and the hold back is $1,200, the dealer is still making a substantial profit even if they sell the car at the invoice price. This is just the tip of the iceberg.
Other Incentives and Bonuses
Manufacturers frequently offer additional incentives to dealers, which can change monthly. For example, if a new car manufacturer has a surplus of Tahoe inventory, they might offer a bonus of $2,500 for each Tahoe sold within a month. If the dealership misses the target, they miss the bonus. These specials can vary daily, creating a dynamic situation in which the dealership is constantly trying to meet targets and make a profit.
The Dealer’s Strategy
Dealers are experts in negotiation and have developed finely tuned sales tactics. They perform a three-minute relationship-building exercise the moment they meet you, aiming to establish control over the sale. They know precisely how to keep you engaged and willingly move you through the stages of the sale. Some even go so far as to make you feel like they are the rare, trustworthy salesperson in the business - but it's all part of the strategy.
Consumer Protection and Strategy
Understanding these tactics is crucial for any consumer. Consumer Reports is an excellent resource to start your knowledge journey. It provides transparent information about vehicle invoice prices, hold backs, and current incentives. Remember, professionals at dealerships perform these negotiations several times a day. They are trained to control the process, and they will usually win if you're not prepared.
Never be afraid to walk away. If the dealer tries to control your process, negotiate on your terms once you have the keys back for your trade-in. Once you have safety and certainty, the bargaining process is much more straightforward. The art of car dealership sales revolves around control, but with informed knowledge, you can navigate the process with confidence.
Stay informed, stay prepared, and you'll be well on your way to a successful car purchase.