# How do you know you’re getting a good deal on a car? A guide to invoice pricing and dealer markup

If you are looking for a definitive answer here, we are sorry to disappoint you. To be honest, there is no way to know exactly how much room there is between what a vehicle actually costs a dealer and the manufacturer’s suggested retail price, or MSRP on the sticker glued to the window.

We can ballpark it. But simply put, factors exist that we do not know. However, we can provide information so you can develop a serious negotiating strategy.

What is a car invoice price?

If a new car is on a dealer’s lot, it was purchased from the factory. One way or another, the factory got paid for that car before the dealer added it to the inventory. What the dealer pays for that car is the car’s invoice price. Factory invoice, car invoice and dealer invoice get used somewhat interchangeably.

Don’t miss: 6 rules for buying your first car

While there could be really high-volume dealers who might get a price break up front on car invoice prices, the invoice price is typically universal among dealers for car models. It’s a fixed amount. When a dealer advertises a price as below invoice, the stated factory price is that invoice. More on this later.

What is dealer markup?

Car dealer markup is what dealerships add to jack up the price of a car. It’s above and beyond the factory MSRP.

Inventory levels can affect the average car dealer markup on new automobiles. Markup is the spread between what the dealer must pay the factory (also called the car invoice or dealer or factory invoice) for a car and amount it collects from a customer at the point of sale is the gross profit on that vehicle. Subtract expenses, such as the salesperson’s commission and so forth, and you have the net profit.

There’s your wiggle room for negotiations on that new car.

When a hot car, such as the Chevy Corvette or Audi R8 goes on sale, that’s where dealers will sometimes mark up a price over and beyond the MSRP.

Car dealer markup gets clearly stated on the window sticker, or Monroney label (see more on that below), and it’s all gravy.

While a car dealership may only be making a slim profit on each car it sells, it’s probably doing just fine. Most dealership profit is generated behind the showroom and on the used car lot.

In addition to having you sign all the paperwork to close your deal, the F&I manager will offer to sell you extras like extended warranties, gap insurance and upholstery protection. Be wary of such extras. Most people do not need these items anyway, including the upholstery protection.

Just ask lots of questions and ask the dealership to remove any unwanted extras. You see, the dealership makes a profit on every product the F&I manager sells you. Some dealers charge a document fee for filing the paperwork on such things as car title. However, shouldn’t the purchase price cover costs such as the doc fee? Consumers often think so because dealerships make a profit on each car they sell. And yet, dealers often add it anyway and it’s legal.

Learn more: How to negotiate car buying fees—and recognize the bogus ones

Bottom line: It doesn’t hurt to ask questions and negotiate on any unreasonable fee.

Just so you know, the service and parts departments also are big moneymakers. Whenever a service worker calls you later in the day to report the car you dropped off is ready, but you need new belts or tires or tie rod, that’s all going to bring more cash into the dealership.

Many parts departments not only operate a retail desk for consumers, but often sell parts to third-party garages and body shops. When a vehicle with some car dealer’s logo splashed across it drives past, it’s likely to be a parts vehicle on its way to deliver a garage’s order. CHA-ching.

What is the average markup on new cars?

Let’s face it, buying a new car gets expensive. In 2020, average transaction prices for cars, SUVs, and pickup trucks reached $39,920, compared with $38,058 in 2019, according to Kelley Blue Book research. That means average transactions last year were $1,764 below MSRP vs. $2,286 in 2019, the research shows.

In January, average transaction prices tracked even higher at $41,093, which is just $719 — or 7% — below MSRP.

The coronavirus pandemic initially halted car manufacturing causing tight car inventory for the second half of 2020.

When you use a fair market tool for car prices, you will know exactly the sales price range of what you should be paying when buying a new car.

Just don’t forget the things to consider before buying such as your monthly payment, interest, destination fees and more. (See more on that below)

What is the average markup on used cars?

Here again, we don’t know exactly the car dealer markup on used cars. Used cars, though, are a big revenue source for most new car dealerships. We can go to a site like Kelley Blue Book, our sister company, and see the book value (average value) of a used car based on a wide range of factors, such as condition, trim level, option content and so forth. We can see the average value as a trade-in and as a direct, party-to-party sale.

More: A step-by-step guide to buying a used car and Your complete guide to getting a great deal on a used car

What the dealer paid to acquire that car, is somewhere around those two numbers. It’s a way to ballpark what the dealer probably has invested in the used car.

There are other factors that may impact a used car’s value, like if it’s been in a crash, been well maintained and so on. If it’s certified preowned, the dealer (and the brand) has an even bigger investment in a car.

Some dealerships simply look at what they paid for a used car and tack on a dollar figure, like $1,500, $2,000 or whatever to that purchase cost. Others are more scientific, calculating what the local or regional average transaction price for that year, make and model car is and use computer models to assist.

What is MSRP and how do you use it?

MSRP, or manufacturer suggested retail price, is a factory-set price. The car dealer doesn’t really have anything to do with it. Because of automotive franchise laws, the dealer is free to sell the car for more or less than the MSRP. But the MSRP is the amount at which the automaker would like to see that car sold.

For you as a consumer, it’s the number you want to whittle down.

The automaker’s only real interest in the amount a car dealer charges for its car is to establish a consistent sense of value for its products. That’s not important just to sustain demand, but to motivate lenders to finance the brand’s products. Moreover, it’s in the automaker’s best interest for its dealers to remain fiscally sound.

Now for a bit of history. We know what the MSRP of a new car is because in the late 1950s, the government mandated every new car display the MSRP and other vital information on a sticker affixed to the windshield. Named for a sponsor of that Automobile Information Disclosure Act, Oklahoma Sen. Mike Monroney, the window sticker provides car buyers a wealth of information about the vehicle.

What is dealer cost vs. invoice price? 

Ah, here’s where things become seriously murky. Whatever amount you are paid by your employer each month isn’t all yours to keep, right?

As frugal as you might be, that entire amount doesn’t go into savings. You have monthly expenses. You have utility payments, rent or a mortgage, property taxes, a car payment, insurance, perhaps a kid in college and so forth.

As mentioned above, dealer cost is also the factory invoice, dealer invoice or car invoice price and the term gets used interchangeably.

What increases dealer cost?

Affecting a dealer’s actual net profit on a car are all manner of expenses. We’ve already mentioned the salesperson’s commission. Although certain other staff, like the service writers to the finance-and-insurance (F&I) managers, work, at least in part on commission, there are plenty of dealer staff who don’t.

Other expenses include everything from utilities and taxes to that floppy air sculpture waving its arms in front of the dealership. The dealer borrows the money to pay the factory for that new car you want to buy and is paying interest on that loan. All of that takes a bite out of the profit margin on a car sale.

What lowers dealer cost?

On the other hand, the car dealer invoice price often is not what the dealer winds up paying the factory for the car. Carmakers offer incentives, like zero down payment, low finance rates and cash rebates, to lure us into buying a car. They do the same to dealers to not only entice them to buy more inventory, but also to motivate them to sell more cars.

Carmakers employ several schemes to lower the dealer invoice cost after the car is sold. Sometimes it’s a dealer holdback, which is a set kickback the factory pays the dealer once the car is sold.

Check out: 10 compact SUVs with the best gas mileage

Automakers also return money to dealers in the form of monthly sales-goal bonuses. That’s why you can often get a better deal on a new car at the end of the month. If a dealership is close to hitting its monthly goal, it may sell you a car for less because hitting that goal may mean tens of thousands of dollars in bonus money.

What you should pay – how to determine the right price

Given that there are such wild variations between invoice and retail pricing, you might be wondering exactly what a car is worth and what you should pay when buying a car. This is often tricky to figure out, though Kelley Blue Book takes a crack at it by offering suggested purchase price numbers.

The way it works is fairly simple. Enter the parameters of the vehicle you’re considering — model year, options, engine choice, transmission — and Kelley Blue Book brings up a suggested purchase price based on several factors, including the car’s popularity and the spread between base price and invoice price.

You might pay a little less than KBB’s price or you might pay a little more, but it’s a fairly accurate representation of where you should expect to be.

For new cars, unless a car is in high demand, chances are there is room for negotiating.

Typically, the more expensive the vehicle, the bigger the spread between dealer invoice and the MSRP. Full-size pickups, like the Ford F-150 
F,
-1.58%
and Ram 1500, are among the vehicles with the bigger spreads, generating a healthy profit. Small entry-level sedans, like the Hyundai
HYMTF,
+4.26%
Accent or Nissan
NSANY,
-0.33%
Versa, have very slim profit margins.

It’s a good idea to do the research and hatch a negotiating plan ahead of your car dealership visit. You simply can’t know all the numbers. But armed with the difference between the dealer invoice and MSRP, you have a spread within which you can negotiate.

Also see: 10 new cars you can get for less than $300 a month

In most situations, the MSRP is the dealer’s goal and its high-end offer. The dealer isn’t really expecting you actually pay that amount. Your goal is to pay as little over dealer invoice as possible. That amount, or even a little below dealer invoice, should be your beginning offer. But be reasonable. You will pay more.

How much more depends on how willing you are to bargain and to walk away if the dealership isn’t budging. You can find the MSRP on the new car in which you are interested.

On used cars, dealers tend to make more profit per sale as compared with new ones. So, be aware of the car’s book value before attempting to negotiate. As with a new car, the sticker price is where the dealer begins negotiating. The book value or a little below is where you begin the negotiation.

Because a dealer typically has more wiggle room in selling a used car than a new one, don’t be afraid to fiercely negotiate. Remember, despite car dealer markup, the dealership wants to sell you that car as much or more than you want to buy it. Find the common ground.

Things to consider before buying a new car

• Monthly payment: Before you buy a new automobile, calculate your monthly payment to ensure its affordable. Use this tool to help you calculate how much you can afford and this one estimates your monthly car payment.

• Interest rate: While it’s always best to discuss the bottom line car price with the dealership before discussing payment options and car loan or car loan terms. You can always check manufacturer interest rates for incentives and compare it to your bank’s interest rates ahead of time. What if you want to pay in cash? Weigh your options first. Sometimes the better deal comes by way of financing.

• Destination fees: Freight charges, or destination fees range from about $900 to $1,700. Check the window sticker on the car you want to buy at the dealership to know for sure or check the manufacturer’s website and research the vehicle make and model that you’re interested in to find out the exact cost before stepping foot inside any dealership.

• Insurance costs: Before buying a new car, consider what your insurance costs will be. Check with your current insurer, using the vehicle identification number, or VIN, of the vehicle you’re interested in. Dealers will try to sell you gap insurance but it’s usually more expensive than if you obtained insurance on your own. So do your homework before completing any deal.

Learn more: 10 insider tips for getting the car you want

Considerations before buying a used car

• Vehicle history report: Check the history of the vehicle and whether it was in any accidents, past owners and service history. Dealerships typically offer a free vehicle history report from services such as AutoCheck or Carfax. You can also check the vehicle history report yourself.

• Extended warranties: Many used cars from a dealership come with an extended warranty. They’re also going to upsell you another extended warranty option. Check closely and read the fine print on the extended warranty. If the vehicle is a year or two old, it’s probably not needed. For luxury vehicles, it’s oftentimes cheaper to buy the extended warranty because of the cost of parts and labor.

• Certified preowned: When you buy a certified preowned car, the vehicle has passed a set of rigorous inspections and is in excellent condition.

This story originally ran on Autotrader.com.