How do dealers make money they sell below invoice? - Subaru Forester Owners Forum
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post #1 of 19 (permalink) Old 05-19-2017, 03:36 AM Thread Starter
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How do dealers make money they sell below invoice?

Thanks to what I learned in this forum, I was able to buy a Forester Premium with eyesight for $25400, or $1353 below invoice. It didn't even take much haggling. So what are the elements the go into dealer profit?

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post #2 of 19 (permalink) Old 05-19-2017, 03:44 AM
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They don't want us to know! From what I understand, invoice is sort of a non-real number - not actually what the dealer pays for the car. There are also dealer kickbacks and rewards for meeting sales goals that may reflect aggregate dealer activity rather than an individual unit sale - part of the reason for the advice to shop at the very end of a calendar month. I'm hoping to hear more details on this mystery from others!

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post #3 of 19 (permalink) Old 05-19-2017, 03:53 AM
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They get all kinds of incentives from the factory for lots of different things. They make money on add-ons. They make money on financing. They make money on up-selling you.

They make money on used cars. Lots and lots and lots of money.

In most situations, they don't make a lot of money upfront on a new car sale, but all of the factory/manufacturer incentives really help. But it's the used cars that helps them A LOT. They make money on each way for a used car. They make it on trade-in because they always under-value cars. They make it via auction. They make it with really poor financing for most used car buyers.

People that can afford it, usually go new.

They make more upsetting extended warranties and services that aren't needed.

That's how.

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post #4 of 19 (permalink) Old 05-19-2017, 03:54 AM
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Invoice isn't really dealer invoice.

It's a pseudo number coined up by a collusion of dealer and manufacturer consortiums with the likes of KBB and TrueCar.

They make a LOT on parts and service labor, whether billed to customer or back to corporate.
Used cars.
Massive profit margin for addon warranties, and paint sealant packages.
Kickback from banks for lending, especially on used cars.

Lots of ways they make money.

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post #5 of 19 (permalink) Old 05-19-2017, 05:31 AM
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Invoice is a true cost number. However, dealers make most of their money on incentives. For example, there may be a month where a dealer can receive $500 per car for the first 50 cars sold. The incentive typically increases at certain thresholds. For example, it may go up to $900 per car if they sell more than 50 cars.

The most important part is that incentives are often retroactive to the first car sold. In other words:

Sell 48 cars, get $24,000
Sell 51 cars, get $45,900

Obviously they are going to do whatever is necessary to get more than 50 sales.

And Yes as pointed out above, they make money on financing and LOTS of money on used cars. Subaru buyers special order their cars, pay cash for their cars, and purchase "Subaru Added Security" plans (Subaru-backed extended warranty) at rates higher than industry averages. Dealers make a significant per-car profit on the extended warranties. And many US dealers have introduced dealer fees over the last 20 years or so. Those fees provide a certain minimum revenue per car.
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post #6 of 19 (permalink) Old 05-19-2017, 05:51 AM
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Take it from somebody who works in the municipal fleet world... "dealer invoice" is NOT the cost of the vehicle to the dealership.
And MSRP is way off in left field compared to the actual invoice value of a vehicle on the dealer's lot.


In all honesty, if the general public actually knew what the invoice prices of some vehicles really were... they'd throw a fit.
But I'm really not at liberty to talk on behalf of the vehicle manufacturers, and I don't really want to open a can of worms with my suppliers either.


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post #7 of 19 (permalink) Old 05-19-2017, 05:58 AM
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Also, my dealer told me that Subaru expects 50% of new sales to also have an extended warranty sale (probably for an additional incentive to the dealer).

In the end, if you are happy with the purchase price, then that's all that really matters. (Dealers have to make money to stay in business!)
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post #8 of 19 (permalink) Old 05-19-2017, 06:23 AM
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Quote:
Originally Posted by Duderotomy View Post
Take it from somebody who works in the municipal fleet world... "dealer invoice" is NOT the cost of the vehicle to the dealership.
And MSRP is way off in left field compared to the actual invoice value of a vehicle on the dealer's lot.


In all honesty, if the general public actually knew what the invoice prices of some vehicles really were... they'd throw a fit.
But I'm really not at liberty to talk on behalf of the vehicle manufacturers, and I don't really want to open a can of worms with my suppliers either.

Great info and all true. Worth noting that government fleet is a different world. I manage a small government fleet myself and sit on the multi-state fleet council. The prices we pay are often really sweet. I can order a 2017 Dodge Durango that lists for about $33,500 (net invoice price of about $29,800) for a little over $22,000. We also get amazing deals on tires through our multi-state purchasing compact. We pay about $440 installed for a set of top end, state-patrol-approved, Goodyear M+S tires. My Goodyear shop always tells me this is far below their cost.
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post #9 of 19 (permalink) Old 05-19-2017, 07:27 AM
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Originally Posted by mtberman View Post
Great info and all true. Worth noting that government fleet is a different world. I manage a small government fleet myself and sit on the multi-state fleet council. The prices we pay are often really sweet. I can order a 2017 Dodge Durango that lists for about $33,500 (net invoice price of about $29,800) for a little over $22,000. We also get amazing deals on tires through our multi-state purchasing compact. We pay about $440 installed for a set of top end, state-patrol-approved, Goodyear M+S tires. My Goodyear shop always tells me this is far below their cost.
When someone tells me that something is below cost and they are suffering... Usually an indication that the are lying. If something was below cost? They wouldn't really stay in business for long. It's really at the profitability threshold and that is something completely different.
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post #10 of 19 (permalink) Old 05-19-2017, 07:49 AM
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When someone tells me that something is below cost and they are suffering... Usually an indication that the are lying. If something was below cost? They wouldn't really stay in business for long. It's really at the profitability threshold and that is something completely different.
The Goodyear guy isn't lying. The part you're missing is that my actual cost isn't the same as his actual cost.

He buys a tire for $100 and sells it for $150-$200. I buy the same tire directly from Goodyear for $90, which is below his cost. He delivers the tires to me through his retail store and earns profit on installation, but he gets nothing from the tire sale. Goodyear pulls it from his inventory and credits him his cost ($100) and then sells it to me (for $90).

This is also how we buy fleet cars: We buy from the manufacturer but local delivery is handled through a local dealer's fleet section. The dealer doesn't get much markup from the car, usually a flat per-car amount. But he also gets paid to prep and deliver it to me. It's usually called a "courtesy delivery."

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post #11 of 19 (permalink) Old 05-19-2017, 10:43 AM
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My dealer told me that when they reach a certain threshold, Subaru comps their entire advertising budget which runs into many tens of thousands.
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post #12 of 19 (permalink) Old 05-19-2017, 10:59 AM
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Here is a great article by consumer advocate, Clark Howard explaining how the system is rigged:

The eye-opening truth about dealer invoice price | Clark Howard

Part of a 5 article series. Worth the read.
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post #13 of 19 (permalink) Old 05-19-2017, 11:35 AM
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Quote:
Originally Posted by mtberman View Post
The Goodyear guy isn't lying. The part you're missing is that my actual cost isn't the same as his actual cost.

He buys a tire for $100 and sells it for $150-$200. I buy the same tire directly from Goodyear for $90, which is below his cost. He delivers the tires to me through his retail store and earns profit on installation, but he gets nothing from the tire sale. Goodyear pulls it from his inventory and credits him his cost ($100) and then sells it to me (for $90).

This is also how we buy fleet cars: We buy from the manufacturer but local delivery is handled through a local dealer's fleet section. The dealer doesn't get much markup from the car, usually a flat per-car amount. But he also gets paid to prep and deliver it to me. It's usually called a "courtesy delivery."
I hear ya and I know how it works. Hence why I said what I said. If he gets $100 from goodyear and it costs him $100, then he lost nothing, especially if you (your company) pay for the installation.

I know nothing.
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post #14 of 19 (permalink) Old 05-19-2017, 11:55 AM
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Quote:
Originally Posted by mtberman View Post
I manage a small government fleet myself and sit on the multi-state fleet council.
Quote:
Originally Posted by Duderotomy View Post
Take it from somebody who works in the municipal fleet world...
I find it amazing what the public thinks car "should" cost. The Suburban, Tahoe and Expedition government prices would make the retail purchaser cry.

Not to hijack the thread, but it is my job too. What does that say about Subaru that there are at least three municipal fleet operators here?
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post #15 of 19 (permalink) Old 05-19-2017, 03:48 PM
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Quote:
Originally Posted by mikenancy1 View Post
Thanks to what I learned in this forum, I was able to buy a Forester Premium with eyesight for $25400, or $1353 below invoice. It didn't even take much haggling. So what are the elements the go into dealer profit?
Dealer profit is mostly derived from holdback. I believe Subaru pays their dealers 2% of MSRP in holdback for every unit sold, even if the car was sold at or below "invoice."

Quote:
Dealerships have an inventory on hand so that consumers can browse and ultimately choose a vehicle. Dealerships pay for this inventory when they obtain vehicles from the manufacturer. The amount the dealer pays is the price reflected on the invoice from the manufacturer to the dealer. This is the so-called "invoice price."

Now the twist: With the introduction of holdbacks some years ago, most manufacturers inflated the invoice prices for every vehicle by a predetermined amount (2-3 percent of MSRP is typical). The dealer pays that inflated amount when it buys the car from the manufacturer. But later, at predetermined times (usually quarterly), the manufacturer reimburses the dealer for the excess amount. This is the "holdback," so named because funds are "held back" by the manufacturer and released only after the vehicle is invoiced to the dealership.
Not to mention the ancillary stuff they try to sell you on in the finance dept., such as extended warranties, service plans, paint sealant (aka $800 wax jobs), underbody rust protection packages, window etching, etc. Those are all major profit items for dealerships.

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