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What’s the Dealer Cost of a New Car?

What’s the Dealer Cost of a New Car? post image

If the dealer cost of a new car could be determined, it sure would be a lot easier to know that you got a good deal, right? Even Consumer Reports used to recommend a similar approach, circa 2009:

“A reasonable target price is about 2 to 4 percent over the Consumer Reports Bottom Line Price or dealer’s cost, depending on the demand for the model [emphasis added].”

Times have changed and Consumer Reports no longer offers their pricing service—a casualty of their partnership with TrueCar. But, even if they did, CR’s old bottom line price (based on the invoice, holdback, and published incentives) might be good for reference, but it certainly isn’t dealer cost.

Here’s why.

New-car invoices include embedded compensation that is "refunded" to dealers after a sale.

New-car invoices include embedded compensation that is “refunded” to dealers after a sale.

Today’s invoice price may start with dealer cost, but it’s inflated with compensation that is “refunded” to the dealer by the manufacturer after a sale.

The invoice price certainly includes holdback—the dealer reimbursement for inventory costs, and it also includes published manufacturer to dealer incentives. But in addition, it includes unpublished incentives, and bonuses for achieving business goals. As a result, dealer cost may be thousands of dollars less than the invoice price.

The auto industry, in an attempt to protect Internet-age profits, has successfully hidden dealer cost from public view.

DEALER COST = $1000s LESS THAN INVOICE

As a result, third-party services have popped up that offer pricing advice based on data from actual new-car sales. Of course, many of those sales came at too high a price. Again, such advice may be good for context, but certainly not for setting a target price.

So, what’s a car buyer to do?

Simply stop playing the guessing game. Stop trying to figure out the dealer’s cost. Stop setting a target price based on third-party market price estimates.

Instead, give dealers an opportunity to reveal the best market price.

Focus your efforts on boosting dealer competition. It’s really not that difficult. You simply have to notify enough dealers that you intend to make an immediate purchase, and give them one chance to win your business.

I know it’s hard to believe that dealers will willingly offer up their best price, but that’s the beauty of robust competition. When competition thrives, prices naturally fall. And, as a bonus, the buying experience also improves.

Meet me back here in the coming days to learn more about improving your car-buying experience. Or, if you need the info now, you can pick up a copy of my new ebook The 15-Minute Guide to Negotiation-Free New Car Buying. Check out a free preview on the Shop page.

How do you feel about haggling with car dealers? Do you dread it or enjoy the challenge? Leave a comment below and let us know!

Until next time, happy shopping!

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