Imagine you’ve been searching for your dream car for a long time. You did the research, so you know its MSRP. When you finally find your ride, you understandably ask the dealer how much it costs. They name a price above what you’re willing and capable to pay. But you really want that car.
Now, it’s time to negotiate the price tag. How much can you offer to pay below the MSRP to ensure you get a fair price without repelling the dealer?
What Percentage Should You Take Off MSRP on a Car?
How can you calculate a fair offer that your dealer should accept? First, you must find the following costs:
- MSRP
- Factory invoice price
- Dealer incentive
Use the formula below to calculate the true new car cost:
Factory invoice price – ( 3-5% of MSRP + dealer incentive)
Calculate 3-5% of the MSRP and add this value to the true new car cost. This formula gives you a price range that’s fair to you while also giving the dealer a sufficient profit margin.
What Is MSRP?
MSRP is the price that the manufacturer suggests dealers charge for brand-new vehicles. It includes options and packages for the car or truck.
Dealerships aren’t legally required to charge the MSRP for the vehicle. They can set the selling price above or below the manufacturer’s recommended retail price.
Most dealers charge between 3 and 5% over the MSRP for their vehicles. They might jack up the price for popular models, taking advantage of the newest model year or redesign driving interest.
What Is the Factory Invoice Price?
The factory invoice is the sum of the expenses spent by the dealer on acquiring a vehicle from the manufacturer. It will determine the minimum price tag of the car or truck. After all, the dealer wants to profit when selling the unit.
Its big ticket item is the base invoice price, the cost of the car’s base model. Other items are the following:
Cost of Options
The cost of options is very straightforward. It’s the value of the options added to the vehicle. Examples of options covered by this fee include accessories and vehicle trim. Depending on what gets added or left out, the cost of options might increase the final price far above the MSRP.
Destination Fee
Also called destination charge, the destination fee is the cost that the car manufacturer incurs to transport a vehicle from the factory to the point of sale. The manufacturer charges dealers for this. The dealer adds the fee to the factory invoice price that the consumer must pay.
The destination fee doesn’t appear in the MRSP. It’s one of those semi-hidden costs that you have to look for.
US car manufacturers set the destination fee for a vehicle by averaging the shipping cost to the closest dealership and the expense of delivering it to the furthest dealer. Save for circumstances in Alaska and Hawaii, the vehicle’s destination charge remains the same no matter where the dealer operates. Some manufacturers calculate destination fees for each model, while others apply a uniform fee for all their vehicles.
Destination charges are taxable. The manufacturer adds the destination charge to the vehicle’s price before sales tax.
Usually, you can’t avoid or negotiate destination charges. Even if you arrange to go to the manufacturer’s factory and fetch the new vehicle, you must still pay the full destination charge.
Manufacturer Fees
These are other fees that the car manufacturer charges the dealer for a purchased vehicle. For example, the manufacturer might run an advertisement campaign in the region where the dealership operates. It might charge a regional ad fee for the service.
What Is a Dealer Incentive?
Dealer incentives are reward programs from car manufacturers that spur dealers to sell more units. They come in different forms but do the same thing: Make cars cheaper for dealers to acquire.
In factory-to-dealer incentives, a car manufacturer lowers the cost paid by the dealer when the latter buys a unit. The dealer can earn more profit, possibly encouraging them to extend the savings to the consumers.
Car manufacturers might also provide cash bonuses as dealer incentives. If the dealer meets a sales target, they receive a bonus for their successful effort.
Volume bonuses are another dealer incentive. The car manufacturer gives the dealer a percentage of the profits according to how many units the dealership sold.
Dealer holdbacks are payments made to dealers for selling units. This incentive helps compensate the dealer for expenses incurred during operation.
The manufacturer can also provide marketing support, non-cash rewards, and other types of incentives to help move units out of the dealership lot and into consumers’ garages.
How Can You Find Out If the Invoice Includes Dealer Incentives and Rebates?
You can take advantage of dealer incentives and rebates to save money when buying new cars. If you know the dealership didn’t pay the full price for the vehicle, you might persuade the dealer to lower the price commensurately.
Unfortunately, new vehicle invoices don’t usually show dealer incentives and rebates. Try asking the dealer for permission to view a copy of their dealer invoice. The incentives are at the end of the document.
Of course, the dealer might refuse to show their dealer invoice. If that happens, consider approaching other dealerships that will share their information in exchange for securing a vehicle sale at a slightly lower price.
Any information provided on this Website is for informational purposes only and is not intended to replace consultation with a professional mechanic. The accuracy and timeliness of the information may change from the time of publication.