Car Price Secrets

What Dealers Won't Explain to You About Car Prices

In order to understand what price you might expect to have to pay for your next car, you must first understand how new car pricing really works. As you know, pricing is very important whether you lease or buy.

Different customers can pay widely different prices — for the same car, at the same dealer, on the same day — depending on each customer's knowledge of how car pricing works.

New car dealers expect traditional customers to negotiate prices. Unfortunately, buying a new car is more like haggling for a donkey in Marrakesh than buying a refrigerator at Sears.

Manufacturer's Suggested Retail Price
First, for new cars, automobile manufacturers decide what retail price they will set on each model, each model variation ("trim"), and each option. These become the Manufacturer's Suggested Retail Price (MSRP). These prices can change from year to year for the same models, or can even change one or more times during a model year.

This price becomes the "sticker price" — the price shown on the vehicle's attached window sticker. There will also be additional charges for transport and preparation ("destination charge"), and distributor/dealer installed options. These charges are not technically part of the MSRP, but are part of what you pay.

Notice that the "S" in MSRP is short for "suggested," meaning that a vehicle's sticker price in only a recommended price. A dealer is perfectly free to charge more or less if he chooses. In cases of a very popular new vehicle, selling prices can easily be higher than sticker price when demand is high. For slow selling vehicles and excessive inventories, selling prices will almost always be less than sticker price.

In general, manufacturers raise MSRP sticker prices every year, following inflation trends. However, car makers such as General Motors and Ford are actually decreasing prices to create sticker prices that are more in line with what customers expect to pay. They call this "value" pricing.

Invoice Price
Sometimes called "factory invoice price" or "dealer invoice price," this is the price that a dealer pays the manufacturer for a vehicle. All dealers pay the same price. Dealers are independent businesses, not owned by car makers, which means they buy wholesale, and sell retail, to make money.

The difference between sticker price and invoice price is a dealer's primary profit margin, assuming the vehicles sell at sticker price — ignoring other costs or any rebates he might receive. This profit margin, as a percentage of sticker price, is not the same on all vehicles. Some vehicles have a very low profit margin percentage, others have a very high margin percentage. A vehicle with a high potential profit margin provides an opportunity for a higher dollar discount than a similarly priced vehicle with a lower profit margin. (The Lease Kit provides a chart that compares profit margins for all vehicle makes and models)

Invoice price alone, however, does not tell the entire story of what a vehicle costs a dealer. He has other costs and other sources of profit.

Dealer Costs
Dealers usually have to pay national or regional group advertising fees (for TV and newspaper ads) and interest on loans ("floorplanning") used to buy vehicles from the manufacturer. They also have the costs of running a business: employee salaries, rent, utilities, taxes, etc. Many customers mistakenly believe that dealers should be able to sell cars at their true cost, including all business expenses. If they did, they would soon be out of business.

Dealer Assistance
Dealers receive special fees from manufacturers that reduce costs and add to profit potential. One example is what are called "holdbacks." Holdbacks are a kind of rebate that is usually a small percentage (typically 1%-2%) of a vehicle's MSRP or invoice price that a dealer receives only after a vehicle is sold. Technically, this is compensation for the finance fees he has to pay to keep a vehicle on his lot.

There might also be promotional factory-to-dealer rebates or bonuses based on certain conditions or sales goals being met. Factory rebates can often be significant in times of slow sales. Dealers can choose to pass some or all of his factory rebates along to customers, or not. These rebates are especially common at the end of the model year.

Selling Price
This is the price that customers actually pay for a vehicle, which is usually somewhere between MSRP and dealer invoice price. Again, there are conditions under which selling prices could be higher than MSRP or lower than invoice price depending on manufacturer-based incentives that might be available.

Selling prices can vary considerably for a particular vehicle make and model, depending on the dealer doing the selling, area of the country, city, time of month, time of year, negotiating skills of the buyer, promotions, or whether there are other competitive dealers nearby.

Remember that there are two parties to car price discounting — dealer and manufacturer. Manufacturers provide factory-to-customer cash rebates and factory-to-dealer rebates. A dealer can provide additional discount by giving up some of his own normal profit, or some/all of his factory rebate, if any. Customers sometimes overlook the possibility of a negotiated dealer discount when they are already getting a factory-to-customer rebate. The combination of strong dealer discounts and aggressive manufacturer incentives can easily result in below-invoice selling prices.

Ideally, we should be able to determine what other customers are paying for the same vehicle make and model that interests us. However, this is virtually impossible since dealers are not obligated to publicly report selling prices. Although Edmunds.com posts a True Market Value (TMV) price for each vehicle make and model that purports to be a representative selling price, these are based on limited information and not always accurate.

Many vehicle makes and models have owner-enthusiast web sites in which users willing share prices they've paid. Although this can be helpful, it doesn't provide an accurate picture that represents all dealers, in all cities, under all conditions.

Where to get the best new car prices
One of the best ways to get a feel for dealer selling prices is to request free quotes from online pricing/buying services that partner with dealers across the country to provide Internet customers with good prices. The dealers typically agree with the online service to offer the services' customers prices that are a percentage or dollar amount over invoice price (or under invoice if manufacturer incentives are available). In return, the dealers pay the services a small fee for the referral. The service is free to the potential customer.

If you request quotes from a minimum of five companies, you'll start to get a good idea of the actual selling price for your vehicle of interest. For example, if you get five prices, and see that three that are similar, one is higher, and another lower, you know the range of prices that you have to work with.

Canadian viewers can get Canadian car price quotes from CarCostCanada.

In summary, a little negotiation may get you a better deal but, at least you'll have a good starting point that is probably much less than sticker price. Typically, the dealer-discounted quotes you receive will have any rebates already included.

Some of the online pricing/buying services that we have found to have high customer satisfaction are the following:.

InvoiceDealers is a no-nonsense auto pricing service that lets you simply specify the vehicle you want and request your price quote — fast and easy. If you don't need to do a lot of research and know what you want, this site works great. Their vehicle configurator is incredible, showing MSRP and dealer invoice prices on each option you add to the vehicle. Since they work with dealers for all brands of vehicles all over the country, you're pretty certain to get a competitive price from them.

Edmunds is the recognized leader in online car information. Their web site is one of the most frequently visited by automotive consumers who are doing research before they buy or lease a new or used car. On this one web site, you can get all the information you need about the vehicle you are interested in, and get free price quotes from dealers in your area that work with them.

CarsDirect is unique in that they show you their quote price, MSRP, invoice price, as well as financing and lease payments on your car — instantly — right on the website. You can easily compare what it would cost you to lease versus buy any vehicle. They also have a low-price guarantee, which may explain the fact that many of the people we've talked to seem to think this service offers the best prices. They also handle most of the paperwork of your lease or loan via mail so that all you have to do is go pick up your vehicle at a local dealer.

Automotive.com provides competitive, no-haggle, price quotes for those who want to see the real prices up front — an instant actual price for the car of your choice. And because they don’t have commissioned sales representatives, you’ll get actual vehicle prices that reflect the true invoice price. Automotive.com has one of the strongest sourcing networks of any car buying website, you don’t need to compromise on important factors like color or sub-models. Just choose your model and color and they’ll deliver pricing direct to you from a local dealer

Autoweb provides a full-featured user-friendly site that makes it easy to do all your research before requesting a price quote from them. The convenience of having everything you need in one place is this site's strong point. We especially like the rebates/incentives, vehicle reviews, and "side-by-side comparison" sections of their site. They've been providing this service for years and their customers seem to like them, often coming back time after time. You can also sell your old used car here.