New Car Price Quotes - Tip #2

Posted on January 28, 2005

Today I’ll take a look at Dealer Holdback. Many people out there have heard of ‘dealer holdback’ but very few people actually really know what it means. Some even think they can use this as a “secret negotiating point”.

Dealer holdback is a fixed percentage of the MSRP (manufacturer suggest retail price) or Invoice price of a new vehicle that is paid back to the dealer. Manufacturers introduced ‘holdback’ a number of years ago to help supplement a dealer’s cash flow and to reduce the amount of money paid out as sales commission.

Let’s explore exactly how this works:

Through you research you’ve probably come across Dealer Invoice, and MSRP. Dealer invoice is the amount the dealer paid for the car (well, sort of) and MSRP is the suggested retail price as set by the manufacturer. Most people negotiate a final purchase price somewhere between Invoice and MSRP. When the manufactures introduced dealer holdback, they inflated the invoice price by a predetermined amount (the dealer holdback amount). The dealer pays the inflated amount when they receive the cars from the manufacturer. The manufacturer then pays the “inflated” amount back to the dealer, usually once every quarter. This is the dealer holdback, or amount of money that was “held back” by the manufacturer until the dealer was invoiced for a specific vehicle.

How does this benefit the dealer?

1. By increasing the “Invoice” price of the vehicle, dealers can reduce the amount of sales commission they pay. If a salesperson is compensated based on the gross profit of each sale, by artificially inflating the invoice amount, the resulting gross profit is much lower, and therefore the commission percentage is lower. A lot of car salesmen aren’t even aware of this!

2. Many dealers borrow money to finance cars (this is called “floor planning”). The amount of money they can borrow is based in the invoice price of the vehicles they are buying as well as those in inventory. The higher the invoice price (as well as the size of the dealers inventory) the more money they can borrow.

3. Have you ever seen a dealer advertise an “Inventory Blow Out Sale” with some vehicles priced $1 over invoice, or even some vehicles priced below invoice? Did you ever wonder how a dealer makes any money selling a car for more or less money then they paid for the vehicle? Dealer holdback!

Some large “volume” dealers take advantage of this by selling cars priced so low that smaller stores simply can’t compete. The dealers are happy to make less profit on each vehicle because they make it up in volume. They probably also have good finance managers, a busy service department and other “profit centers” in their dealership.

Some consumers think that by arming themselves with this “knowledge” they are able to negotiate a better deal - Don’t Push It! Dealers consider holdback money sacred and seldom ever share it with consumers. The only time it may be appropriate to mention dealer holdback is if you’re getting the old line about not making ANY profit on the deal. Now keep in mind that a salesman is paid a commission based on the sale price of the vehicle. The dealer can sell the vehicle at invoice price and still make money. If a salesman sells a car at invoice price they may not get any commission on the sale. Just remember that salespeople need to eat too!

A few more gems:

If you are ordering a vehicle (not buying it directly off the lot) the dealer doesn’t need to floor plan the car - the holdback is pure profit. You may be able to use the holdback amount to negotiate a lower price on the vehicle.

Don’t mention dealer holdback unless you’re told that there is no more profit in the deal (especially if you are financing the car with the dealer, have a trade-in, or are buying any aftermarket accessories). Even at invoice, the dealer is making a profit and generally the salesman is making a little bit as well (typically a flat commission of $25, $50 or even $100).

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