Understanding the Complexity of New Car Pricing in Canada
M.S.R.P.
– The Manufacturer’s suggested retail price, commonly known
as the List price or window sticker is the retail price set
by the manufacturer. This is typically the price that the
new car dealer would like you to pay. Although the
overwhelming majority of new cars are sold at less than the
M.S.R.P., some dealers will hold out for this price on a
very hot-selling vehicle that is high in demand and limited
in supply.
Dealer
invoice price
– Every manufacturer sends an invoice to the dealer for their
vehicles as soon as they are delivered to the dealer. The dealer
will typically pay for the vehicle via a prearranged line of
credit. Commonly, the dealer will start paying interest charges
from the first day onwards.
Holdback
– Most manufacturers help subsidize the interest charges and
marketing/advertising that a dealer incurs by paying the dealer
a holdback amount, after the vehicle has been sold. This amount
typically ranges from 2.0% to 2.5% of the invoice amount.
Dealers will rarely consider this when negotiating a new car
deal
Maximum
dealer margin/profit
– The difference between the M.S.R.P. and the dealer invoice
price is the maximum dealer margin/profit that the dealer has to
work with when negotiating a deal.
Dealer
and buyer goals
- The dealer’s goal is to negotiate a deal as close to M.S.R.P.
as possible and the buyer’s (your) goal is to negotiate a deal
as close as possible to the dealer invoice price.
Actual
dealer margin/profit
– The amount
over the dealer invoice price that is finally negotiated between
the dealer and the buyer (you), is the dealer’s actual dealer
profit/margin, before sales and overhead expenses.
Dealer
overhead and bottom line profit
- From the
actual dealer profit/margin amount the dealer has to cover the
sales rep and sales manager’s salaries, commissions and bonuses.
The remainder goes to the dealership to cover all other
expenses, with the final balance representing the actual net
profit to the dealership.
Factory-to-consumer incentives
– In an
effort to stimulate sales, many manufacturers will offer
incentives to the consumer (you). These incentives are commonly
advertised in the media and can consist of low rate
financing/leasing rates, such as 0%, cash rebates, such as
$2,000, or a combination of both. If a manufacturer is offering
you 0% or $2,000 cash, the emphasis is on OR;
which means that you cannot get 0% financing and $2,000. You
have to decide between the two. In some cases, you can combine
the 0% and $2,000, but not very often.
Factory-to-dealer incentives
– Commonly
referred to as hidden or secret rebates. Internally these
non-advertised dealer incentives can be known as marketing
credits, trading dollars, factory cash, dealer cash, dealer
bonuses, invoice credits, etc. Many manufacturers will use them
as additional stimulus for the dealer to sell more vehicles. In
some cases, the manufacturer may not want to advertise that they
are offering incentives to avoid tarnishing their image, where
others will use these incentives to encourage dealers to carry
more inventory and thus potentially sell more vehicles. Most
dealers will factor in these factory-to-dealer incentives when
negotiating a deal. Effectively this may allow the buyer (you)
to buy/lease a new vehicle for less than the dealer invoice
price.
Conclusion
- As you can see, new car pricing can be very complex. Knowing
what you now know, would you ever simply walk into a dealership
and negotiate a deal on your own, without having all the
information above? I would bet that your answer would be a
resounding NO!
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How to Buy a New
Car at the Best Price in 5 Easy Step
Step 1: Narrowing Down Your Choices
One of the most important steps of new car buying is deciding
exactly what type of car fits your needs. Do you want a large
vehicle with lots of room or a small car that’s very fuel
efficient? Whether you’re looking for a practical Dodge Caravan
minivan to take the kids to hockey practice or a sporty Mazda
Miata convertible to drive through the summer, it’s essential to
define your model class and price range.
Step 2: Research
Once you have defined the class and price range, the next
step is to research features, safety ratings and reviews. There
might be ten different cars in the class you are looking at,
therefore using existing analysis from expert sources to narrow
down your choices can be very useful. There are many places to
do in-depth research about new cars, including online car
magazines such as Car & Driver
www.CarandDriver.com, TheCarMagazine
www.TheCarMagazine.com, Motor Trend
www.MotorTrend.com and CanadianDriver
www.CanadianDriver.com. Some of the better Canadian car
manufacturer websites are
www.Honda.ca ,
www.Toyota.ca ,
www.Ford.ca ,
www.Nissan.ca ,
www.BMW.ca ,
www.Mazda.ca and
www.Subaru.ca. For reliability rankings try
www.Edmunds.com ,
www.JDPower.com or
www.ConsumerReports.org.
Step 3: The Test Drive
You should always thoroughly test drive all of your
prospective vehicles. No matter what the reviews say, the only
way to tell if you feel comfortable in a vehicle is to drive it
yourself. Bring the whole family and take it out for at least 20
minutes or the same types of roads that you usually use. Move
the seats around, familiarize yourself with the car’s features
and the pros and cons of each vehicle will quickly surface.
Step 4: Purchase Strategy . . . The Most Important Step!
When you are ready to make your purchase there are a few key
elements you should consider in order to have an enjoyable car
buying experience. Everyone wants to get a good deal on the car
they want. The problem is how do you know you’re getting a good
deal? This is where the anxiety really kicks in.
If
you are debating between two cars priced at $30,000, how do you
decide which one to buy? On the first car, you may only be able
to get a $500 discount. One the second car may be able to get a
$1,000 dealer discount plus a $3,000 factory cash rebate that is
not advertised. If you had this information, the decision would
be much easier.
The car salesperson’s job is to try to sell you the car for the
MSRP or Manufacturer Suggested Retail Price. In order for you to
get the best price, you need to know what the factory
invoice/wholesale price is and more importantly, you need to
know which factory rebates are available on the cars you’re
considering. All of this information is included in a
CarCostCanada Wholesale Invoice Price Report.
Take the invoice/wholesale price, deduct all applicable cash
rebates. This is the ideal place to start your negotiations,
because this is the actual price that the dealer paid for the
car from the factory. Considering the potential savings, the
cost of buying reports is minimal. It will greatly reduce
negotiation time and save you anywhere from $500 to $5000 or
more on your new vehicle purchase.
Step 5: No Hassle Purchase
After you’ve generated your price reports, make an
appointment to speak with a senior salesperson or sales manager
at one of our pre-screened dealers or your local dealership.
Most dealers will try to make a 10% profit on the car’s selling
price. For example, if you are buying a $30,000 car, the dealer
may have paid $25,000. Therefore, a 10% profit would be $2,500.
That’s a lot of your money going into the dealer’s pocket and
not towards the actual price of the car. Fortunately, most
dealers are willing to sell their cars for 3%-4% above the
invoice price and pass along all factory rebates, if and only
if, they feel they have to, when making a deal.
Looking at that same $30,000 car again, if the dealer was
willing to sell it for a 3% profit, that is only $750 to the
dealer. This translates into savings of $1,750 plus the PST and
GST on the $1,750 (at 14% tax, it is a total savings of $1,995).
That is a lot of money! Once you are in the price discussion
mode, show them the report and tell them you are willing to pay
a fair price.
This will lead to a quick and relatively painless transaction
that will make you feel great and get you boasting to your
friends about how great a negotiator you are.
Join CarCostCanada to get all the information you need
click here
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