How many of you have a friend or relative who claims to have a bought a new car right at the dealer’s invoice or very close to it? Well, let me tell you. First of all, almost no one should ever buy a new car but that will be covered in another post. Second, I want you to convince me that your source (the salesman himself, Consumer Reports, a web site…wherever) for this invoice price is accurate? How do you know it’s accurate? Let’s go over the concept of dealer invoice price first.
Just like a store that sells products and keeps them on the shelves with an inventory, car dealers are no different. Basically, all of the cars you see on their lot is their inventory. And just like other retailers they buy the cars from Honda, GM, Toyota or whomever and then sell them at a profit. So, how can a dealer possibly make a profit on a car they just sold for “factory invoice” meaning the price the auto manufacturer charged the dealer for the car? Well, here’s how. Dealer incentives. When General Motors notices one of their latest models is not selling very well, they give the dealers “incentives” (i.e., cash rebates to the dealer directly) to start unloading these vehicles. GM may charge a dealer $19,000 for a new Chevy Malibu. Let’s say in a slow economy that dealer is having a hard time selling those Malibus for much higher than $19,000. What does GM do? They may send the dealer $3,000 per Malibu sold just to jump start their numbers of that model. Dealer paid $19,000, sold it for $0 profit but received $3k back from GM and the consumer thinks he got the car at “dealer invoice” price. Everyone here is a winner, right? Wrong. GM, as usual, is the financial loser here. By giving back that $3,000 to the dealer they may have actually lost money on that car. So now you can see why General Motors has been in such a financial quagmire for so long.
In addition to the car company incenting the dealer to sell those cars, the dealer and/or the car company often give cash back, 0% financing or other perks to the consumer directly. Why is this? It’s because they will always have a continual need to sell model-year cars. Do you really think GM gives cash incentives to dealers to sell used cars? Of course not! The car companies are always under tremendous pressure to hit certain sales figures per year. Why do you think the Ford Taurus and Honda Accord battled so long for the title of “best selling car in America”? That whole thing was a sham as well because Ford included fleet sales to car rental companies in their sales figures and Honda doesn’t even sell many to rental companies.
So the next time you or a friend think you just got a steal by getting a car at dealer invoice, think again.