This is part of our car buyer’s glossary series which details all the terms you need to know whether you’re buying a new or used car from a dealership.
The dealer invoice is, in theory, the price a car dealer pays to purchase a car directly from the manufacturer and appears on the manufacturer’s invoice. The reality is a bit more complicated, as we’ll reveal. But it is important to recognize that an invoice price is different from the MSRP (Manufacturer’s Suggested Retail Price) and also does not include dealer markup, destination charges, taxes, title, license or registration fees.
But what do dealerships really pay?
The price quoted as the dealer’s invoice price is almost always higher than what the dealer actually pays a manufacturer for a car due to a situation known as holdback – a murky, gray area that dealers are reluctant to discuss. with customers – and from the manufacturer to – dealer credits which are not passed on to customers.
The holdback provides some padding to the dealer’s profits by artificially increasing the paper cost (dealer bill) of a car, usually by 1-3%. The holdback is a payment from the manufacturer to the dealer that is paid at some point after the sale of the vehicle, normally quarterly. Dealerships will almost never disclose the amount of the holdback. We (and other mainstream sites) recommend that you use it for your own reference, and not as a bargaining chip in negotiations.
The thing is, this shadowy hold situation tricks buyers into thinking that paying the invoice price is getting the car at the dealership’s expense, but that’s not necessarily the case. But remember that real-world trading prices are set by supply, demand, and trading skill. Negotiating to the bill – regardless of holdback or discounts – can be a good deal or a bad deal. It all depends on the car.
How do dealers use dealer invoice price?
Sometimes dealers reveal the price charged during negotiations to show that the price they have agreed does not bring them much, if any, profit. And car dealerships are a for-profit business, after all – they have a right to make money on a transaction. Thus, the customer might think it is fair to pay the stated invoice plus a few hundred dollars so that the dealer makes minimal profit on the transaction.
As you saw above, however, with holdback and credits from the manufacturer to the dealer, the invoice price is most likely inflated. This makes their negotiation tactics more effective, as a customer may think the dealership is giving them the car at or near cost. A dealer is able to sell a car at or around the billing price and pocket the dealer holdback mentioned earlier as his profit on the car.
So, negotiating the dealer’s invoice price isn’t always in your best interest. Often, other rebates can bring your purchase price well below the actual dealer bill – in particular, ask about manufacturer-to-consumer rebates and incentives, which do not affect the bottom line. a dealership, but may bring your effective price to well below the stated invoice price.
What does this mean for your portfolio?
The invoice price is a good starting point for determining your actual price, as you can get an idea of the actual cost by estimating what the holdback might be. And by shopping around, checking your results against actual sales data (like Edmunds TMV or Autoblog’s Smart Buy Price), and applying manufacturer incentives, you could get a deal well below the listed bill.
But you shouldn’t storm into a dealership and demand to pay the dealership bill on every car. Some dealers might not be able to part with a top-selling car at close to invoice price. The hotter a car is, the less bargaining power you have. And the reverse could be true too. The invoice is a useful baseline for thinking about what you should pay, but it’s not the final word.