Archive for the ‘Dealer Profit’ Category

New Car Negotiating Tips: Do I have to pay for extra dealer installed items that I don’t want?

Wednesday, March 31st, 2010

W.A.  Asked: “A car I was looking at had an extra sticker next to the regular price sticker.  It included VIN etching, an interior protection package, and pin-striping.  The total cost for these was over $1,000.  Do I have to pay for that?  These are not things that I do not want.”

There are a number of items that some dealerships try to sell you that you seldom if ever need, and that are almost pure profit for the dealer. Some dealers even call them “packs.”  Here are a few examples.

•    Undercoating – Given today’s manufacturing techniques, rust-through is a very rare problem. Furthermore, most manufacturers have 5-7 year warranties against rust and corrosion. Undercoating is something you almost never need and could in some cases even damage the car.
•    Scotchguarding (“Interior Protection Package”) – If you feel you need to Scotchguard the fabric in your car, buy a can for a few dollars and do it yourself.
•    Paint Sealant – Again, today’s manufacturing techniques make this an option that you don’t need.
•    Dealer Preparation Charges – Never pay anything for dealer preparation. In fact, in most cases, the factory pays the dealer a specific sum for the cost of prepping the car and putting gas in it.
•    VIN Etching – Supposedly making it easier to recover the car if it is stolen.
•    Window Tinting – If you really want this, you can get it much cheaper from a third party after you buy the car.
•    Pin-Stripping (“Appearance Package”) – Again, if you really want this, you can get it much cheaper from a third party after you buy the car.
•    Alarm System – Many cars come with an alarm system already installed.  Dealers sometimes even disconnect the factory systems to install their own.  If the car does not come with an alarm system and you want one, you can get it much cheaper from a third party after you buy the car.

Occasionally dealers will actually install some of these items when the car arrives on the lot.  They then put a “supplemental sticker” (“rip-off sticker”) on the car and insist that you have to pay for the extra items.  I would stay away from any car that has a “supplemental sticker,” and I would not do business with any dealer that puts them on all their cars.  If you absolutely have to have a car with a “supplemental sticker”, maybe because it is a color you have not been able find anywhere else, try to find out what the items would cost in the after market and then pay the dealer no more than 50% of that.  That way the dealer will probably just get their costs back.  And no, they do not deserve any profit an these items since you do not want them and dealer is forcing them on you.

For a complete roadmap on how to negotiate when buying a new car, go to the New Car Negotiating Page.  It has all of the strategies, tactics and techniques that you will need to negotiate a great price on that new car.

If you have any car negotiating questions, I would love to hear from you.

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New Car Negotiating Tips: What is a fair profit for the dealership on new car?

Thursday, March 25th, 2010

B.W.  Asked: “The last time I bought a car the salesperson went through a whole sob story about how the amount of money I was offering them wasn’t fair and didn’t allow them enough profit.  I’m afraid I fell for it and paid too much.  I need to buy another car now and I want to know how to handle the ‘fair’ argument.  What is a fair profit for the dealership on a new car?”

The whole fairness thing mixes up psychology and business.  Basically statements like:  “We have to make a profit too, you know.” “I have a mortgage to pay just like you do.” “You are really being very unfair to us.” “Do you really think that anybody could stay in business at the level of profit you’re offering us?” are guilt trips.  They are simply part of the dealership’s psychological warfare plan.

Do you imagine, even for a minute, that they are interested in fairness to you?  On those rare occasions when a car is very popular and in short supply, they have no hesitation whatsoever in charging above the sticker price for the car.  If you said to them, “that’s not fair,” their response would be “too bad.  If you want a car, that’s the price.”

The real issue is the dealer’s bottom-line and understanding the economic factors that go into creating that bottom-line.  Most dealers will, reluctantly, sell you a car that has a 3% profit margin for them.  And for most cars, that 3% will come from the Holdback.

Why?  Why will they accept a 3% profit?  The reason is that most of the dealer’s costs are fixed overhead costs.  They don’t change whether or not they sell you a car.  The only cost the dealer incurs when the cars sold is the salesperson’s commission which, on a 3% profit sale, will usually be in the neighborhood of plus or minus $100.

3% on a $25,000 car is $750.  When the dealer becomes convinced that you really won’t pay more than that and that you are about to head off to their competitor to buy that car, the light bulb goes off and they decide they would really have rather have that $650 net profit ($750 minus the $100 salespersons commission) instead of letting you take it to their competition.

Now this point you might be saying, “But $750 is still not a lot of money.”  There are two answers to that.  First, it’s important to understand that new cars are almost a loss leader for dealerships.  Dealer profit primarily comes from four sources.  These are: new car sales, back-end sales such as financing and extended warranties, used car transactions, and service.  Generally, the profit on new car sales makes up the smallest segment of total dealer profit.

Second, the only people who really can decide what is fair and what is enough is the dealership.  If it’s not fair and if it’s not enough, they won’t do the deal, even if you walk out.  However, we know from experience that in most cases they will accept a 3% profit, so by definition, it must be enough, otherwise they just wouldn’t do it.

So don’t engage or argue about fairness. Just refocus the discussion back to the price of the car. You can say things like “I understand what you’re saying but we really need to focus on the issue at hand here,” or “I understand fully, but it is your car and you will make the final decision as to whether or not to sell it to me.”  And then just wait them out.  Remember Schatzki’s First Law of Negotiation, “Don’t just do something, sit there.”

For a complete roadmap on how to negotiate when buying a new car and links to all the information that you need to calculate the dealers bottom-line, go to the New Car Negotiating Page.  There you’ll also find a compendium of all the strategies, tactics and techniques that you will need to negotiate a great price on that new car.

If you have any car negotiating questions, I would love to hear from you.

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New Car Negotiating Tips: Should you “shop around” to get the best deal when buying a new car?

Wednesday, March 17th, 2010

K.G. Asked: “A lot of dealers say ‘Shop around, get your best deal, then bring it to us and we will beat it.’  Is that a good strategy to follow?”

Running around to a lot of different dealerships is time-consuming and it’s not really necessary.  Every dealer has the exact same cost structure for their cars, and generally they have the same bottom.  Once you know how to calculate that bottom line, it really doesn’t matter which dealer you go to.

Basically the minimum profit that the dealer will accept for a car is 3% .  Where the Holdback is 3% (as it is for all American cars except Lincoln and many foreign cars) the dealer’s bottom line will be the Invoice price of the car, plus Delivery, plus the Advertising charge, less any advertised or hidden Rebates (I+D+A-R). The dealer keeps the 3% Holdback.  Where the Holdback is less than 3%, you can expect the dealer will still need to make a profit of 3%. Therefore, if the Holdback is 2%, you will probably need to pay an additional 1% above invoice.

Now here’s the surprise.  While most people perceive negotiating for a new car as an extremely difficult experience, if you look at it purely from a negotiator’s perspective, you find something quite unexpected. Negotiating for a new car is actually simpler than almost any other negotiation that you will ever undertake.

The essence of negotiating and what makes a negotiation difficult is that, usually, you don’t know the other party’s bottom line.  What makes a new car negotiation easy, from a negotiator’s point of view, is that, based on the experience of a lot of people, we pretty much know that the dealer’s bottom line is that 3% profit, which in most cases will come from the Holdback.

What makes the whole process of negotiating for a new car so difficult is that car dealers are acutely aware of their negotiating vulnerability and so they use all kinds of mind tricks, game playing, and psychological warfare to convince you that you will have to pay a lot more than you actually need to. Your goal is simple – move them to their bottom line while ignoring or sidestepping all of their nonsense.

So just start with the dealer closest to you (or the one where you want to buy, if it is not the closest).  Relax, take your time, don’t let them fluster you, and simply demand the car at the price that you have figured to be their bottom line.  After a lot of fussing and fuming, most dealerships will give in and sell you the car at that price.  If you happen to run into dealership that refuses to, then is it time to move on to the next one.

For a complete roadmap on how to negotiate when buying a new car and links to all the information that you need to calculate the dealers bottom-line, go to the New Car Negotiating Page.  There you’ll also find a compendium of all the strategies, tactics and techniques that you will need to negotiate a great price on that new car.

If you have any car negotiating questions, I would love to hear from you.

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New Car Negotiating Tips: When is the best time to buy a car?

Friday, March 5th, 2010

C. K. asked: “When is the best time to buy a car? I’ve been told that the end of the year is the best time since dealerships want to unload all of their current cars to bring in the new ones for the new year. Is there a best time to buy one or does it not matter?”

Model changeovers take place in the summer, not at the end of the year. Frequently manufacturers will increase their rebates on the older models to move them out quickly.

With regard to whether specific times in the year are better than others to buy a car, the answer is maybe. On the one hand, the dealer’s minimum acceptable profit (which is relatively easy to find out) doesn’t change throughout the year. It is based on the dealer’s invoice price, the holdback, advertised and hidden rebates, and other factors. Since your goal is to buy a car at the dealer’s minimum acceptable profit, anytime is as good as any other time.

On the other hand, most dealerships have monthly and quarterly targets to meet. So going in at the end of the month or the end of the quarter puts more pressure on them to make a deal, particularly if they have not yet met their target for that time period.

Either way, you can buy the car at their bottom line, but at the end of the month or the end of the quarter it may just be a little easier to pull it off.

For information on how to find the dealer’s minimum acceptable profit and a complete roadmap on how to negotiate when buying a new car, go to the New Car Negotiating Page. It has all of the strategies, tactics and techniques that you will need to negotiate a great price on that new car.

If you have a question,  I would love to hear from you.

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New Car Negotiating Tips: Is the Holdback Really Profit for the Dealership?

Monday, March 1st, 2010

T.L. asked: “The car salesman said that the Holdback isn’t profit. He said that it’s only used to finance cars that they dealership holds in inventory. Is that true?”

The Holdback is a hidden rebate that the manufacturer pays to the dealership after the car is sold. For most US cars it is 3% of the sticker price. (Edmunds maintains a good Holdback database.)  The Holdback is a key component in calculating the dealer’s bottom-line for selling you a car.

When the salesperson whines that the price you are offering doesn’t allow them enough profit and you bring up the Holdback to show them that it does, they will always say that the Holdback isn’t profit. They will say it is used to pay the heat and light or to finance their automobile inventory or whatever. As far as they’re concerned, the Holdback is sacred and should never, ever be allowed to enter into the price negotiations.

So is the Holdback really profit?

The short answer is yes, of course it’s profit.

The long answer is that the Holdback is part of gross margin. If the dealer paid $20,000 for a car and you pay $20,600 to buy that car from the dealer (which, by the way, is a lot more than you need to pay), then the dealer’s apparent gross margin on the car is $600. But because the dealer also gets a $690 Holdback rebate (3% of the $23,000 sticker price for that car), the dealer’s real cost for the car is $19,310. Since you paid $20,600 for the car, the dealer’s real gross margin (and thus their profit on the sale) is $1,290.

If you pay $20,000 for the car, the dealer’s gross margin is $690 because the Holdback effectively reduces the dealer’s cost to $19,310. Money is money, and the Holdback is gross margin and therefore it is profit.

For more information on how to calculate the dealers bottom-line, where the Holdback fits into that calculation, and for a complete road map on how to negotiate to buy a new car, go to the New Car Negotiating Page.  It has all of the strategies, tactics and techniques that you will need to negotiate a great price on that new car.

If you have any car negotiating questions, I would love to hear from you.

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New Car Negotiating Tips: The Switcheroo

Sunday, February 28th, 2010

G.K. asked:  “What do you do when you negotiate a price with the sales person and then the sales manager comes in and reneges on it, and tells you that you have to pay more?”

Unfortunately, the “switcheroo” tactic is pretty common.  It is the flip side of the “I’ll have to go and check with my manager” tactic.  But the key to dealing with either of these tactics is to first understand the dealer’s bottom line.

As a general rule, you can expect that the minimum profit that the dealer will accept for a car is 3% .  Where the holdback is 3%, the dealer’s bottom line will be the invoice price of the car, plus delivery, plus the advertising charge, less any advertised or hidden rebates. The dealer keeps the 3% holdback.  If the holdback is 2%, you will probably need to pay an additional 1% above invoice.

Let’s say that for the car that you’re buying you have calculated the dealers bottom line at $23,424.  And let’s say that you have dragged the salesperson, kicking and screaming, down to that figure, and throughout the entire process, the salesperson has never gone to check with their manager.

You can almost guarantee that the manager will now take over, claim that they need another thousand dollars or so, and try to start the negotiation all over again with the assumption that $23,424 is just a starting point and you have to go higher to meet them somewhere in the middle.

Don’t get mad, don’t get upset.  This is as normal and as predictable as the sun rising in the morning.  Just be calm, cool and relaxed, and let the whole thing roll right off you.  Your response is “No, no, and what part of no don’t you understand?”  And just wait them out.  If after 10 or 15 minutes they have not agreed, get up and leave.  If you properly calculated their bottom line (and all the information you need to do that is easily available) they will, in almost every case, finally go back down to their bottom line of $23,424, albeit with much moaning and groaning and complaining that you’re driving them out of business because they can’t make a profit.

For a complete roadmap on how to negotiate when buying a new car and links to all the information that you need to calculate the dealers bottom-line, go to the New Car Negotiating Page.  There you’ll also find a compendium of all the strategies, tactics and techniques that you will need to negotiate a great price on that new car.

If you have any car negotiating questions, I would love to hear from you.

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