We've talked to you a number of times about buying a car (http://cheapiosity.blogspot.com/2008/05/buying-car.html and http://cheapiosity.blogspot.com/2010/04/how-to-negotiate-car-trade-in.html)
"Follow The Money" is good advice for someone trying to understand the hidden side of any business. Nowhere is this more important than on a car lot. Rows of shiny new cars on a dealer's lot make consumers believe that's where the big money is. But if you follow the trail of dollars, it leads in a surprising direction. And knowing where the profit is will make you a better shopper. The trade-in alone can be a huge profit center; the dealership can make about $2,000 in the blink of an eye.
The pricing of cars is a complicated process. While we tell you to make an offer around dealer invoice and you'll get a great deal, it's really just a good place to start. What we don't know is whether there is a dealer holdback or dealer cash from the car manufacturer.
Holdback is usually either 2 or 3 percent of either the invoice or the sticker price of the car. On a $20,000 car that's either $400 or $600 that is held out of the initial deal until after the car is sold. This allows dealers to sell a car at invoice price and still make a profit. Check the holdback percentage before going shopping but don't try to negotiate on holdback, since dealers consider this money sacred. Still, knowing it is there will help you press for a better price.
Dealer cash is even more significant. When a car isn't selling well, the manufacturer will sometimes offer an incentive — often as much as $2,000 — but only lets the dealer know about it. This is like a wild card in negotiating, and it lets the dealer claim he's taking a loss while still actually making a nice profit.
Buying your used car can be a cash cow for the Dealership. Profits can be as much as $5,000 when they resell it. Buyers need to get Edmunds' True Market Value (TMV®) appraisal of the used car. But while TMV adjusts for regions, local markets have quirks that are difficult for the car shopper to spot. Only by thoroughly researching the market and comparing prices can you understand what a good price is for a used car. Another good tip is to go to a CarMax-type place and see what they offer for your used car. It will give you an idea of what the market is like.
While the traditional sales staff works on straight commission, Internet sales managers earn a salary plus a bonus on volume. This means that more sales — not more profit — equals a bigger paycheck. This sets up a very favorable situation for car buyers. Buy from the Internet sales manager, if you can.
Once the price of the car has been established by negotiations with a car salesperson, the buyer is routed into the F&I (Finance and Insurance) office. This is the last place the dealer can make money before the consumer leaves the car lot. However, they are really there to make extra profit for the dealership by increasing interest rates, selling extended warranties and add-ons such as fabric protection and paint sealant. How much does the F&I room contribute? In a typical deal, an average of $947 is generated in the Finance and Insurance office, according to F&I Magazine. The National Automobile Dealers Association (NADA) estimated that 28.5 percent of the profit from selling a new or used vehicle came from F&I.
If an aggressive car buyer is able to get a rock-bottom price, the dealer knows there is still profit to be made when the car is serviced. Servicing cars is so profitable that, in economic hard times, the service bay has kept many dealerships afloat.Here, too, commissions play a big part in getting the service staff to boost sales. The service advisor, who positions him or herself as a "trusted advisor" is actually receiving a commission on all the parts and services you agree to. High-profit jobs such as brake pad replacement were often sold by pitching them as a safety issue. In other cases, oil changes and fluid flushes are done before they are needed. This is costly for the consumer and wasteful. Instead of questioning the dealer's integrity, understand the flow of money. Remember these points:
- Dealer profit is based on the car but also on related products and fees.
- A salesman's commission is dependent on the percentage of profit.
- A car's invoice price is a useful reference, but other behind-the-scenes monies are in play.
- The salesman, F&I manager and service advisor are all commission-based positions.
- Information and negotiation are always the keys to getting a good deal.