The Dealer Costs
Calculating dealer costs should be done before your showroom
visit. You can determine exactly what the car originally
cost the dealer. This chapter will give you guidelines to
find out how much dealers will reluctantly accept as a profit
margin for their vehicles.
First, you will need a formula. There are three ways to
find this new cost figure:
Write to a service
Do the research yourself
Calculate at the dealership using the factor
Write to a service. You can write to a service that will
quote you the dealer's cost for a vehicle with the options
you request. Services like Consumer Reports or the advertisers
in the Edmund's books charge $10 or $15 per car for this
information. The only problem with obtaining information
this way is that if you are pricing three or four different
cars with different engines and options, you can easily
spend a lot of money to be spoon-fed the figures you want.
It would be much cheaper to find these figures yourself.
Do the research yourself. Look up the information yourself
in appropriate publications, such as the annual April auto
issue of Consumer Reports or Edmund's specialty auto books.
Remember, you are paying yourself $150 per hour to do all
this research. Do this research yourself and have the peace
of mind knowing that you have accurate facts because you
got them yourself. This research will give you both the
dealer's cost and MSRP (Manufacturer's Suggested Retail
Price) for the base car and the various options. All you
need to do is add the desired options to the dealer's cost
for the base car. If this number differs from the sticker
price on the vehicle, it may be that there has been a recent
price increase by the manufacturer for the car. The MSRP
is also called the "sticker list price." This is the undiscounted,
advertised price for the vehicle as recommended by the manufacturer.
Take the factor for the car and the factor for the options,
and use them in conjunction with the figures on the sticker.
The factor is explained in detail below.
Calculate at the dealership using the factor. Another item
you should pull from the literature is the factor for the
base car and for the options. This is valuable information
and will allow you to calculate dealer's cost from the window
sticker price of the new car. The factor is typically between
.80 and .90. A factor of .85 means, for example, that the
car cost the dealer 85 percent of the sticker price on the
car. In other words, a factor of .85 means a 15 percent
profit on the car because the dealer paid 85% of the sticker
price for the car. If you want to get 25 percent off the
sticker price, you will find that the dealer will not treat
you seriously because that is 10 percent below his own cost.
If your reference books do not note the factor for the car,
but the dealer's cost is given, you can calculate the factor
yourself by dividing the dealer's cost by the published
MSRP. For example, if a sticker price is $12,000 and the
dealer's cost is $10,000, the factor is .83 (10,000/20,000).
This is pretty realistic.
Car prices may change, but the factors usually stay the
same for a given vehicle from year to year. The factor is
helpful to know as you negotiate. It will give you confidence
in your ability to critically evaluate any salesperson's
statement that he can't give you your proposed price because
it is below his costs. You will immediately know if there
is any truth to that statement.
THE STICKER PRICE
Here is how you can interpret and use the information on
the car's main sticker, which is usually on the side of
every new car for sale. In many cases, the main window sticker
may be accompanied by other smaller ones. These smaller
stickers deal with extras, such as a waxing job, special
wire wheel or some other item.
Since you did not show up at the dealership before finishing
your groundwork, you already know the factors for your car
and its options and can calculate the dealer's cost from
the sticker as follows:
Locate the main price sticker on the car.
Don't worry about the other stickers charging for special
services.
Locate the base price for the car (without any extras),
and enter the figure in (A) below. This number is usually
located on the top of the sticker.
Total all the extras you know you want, and enter this figure
in (B) below.
Write down the factor for your base car in (C) below.
Write down the factor for your extras in (D) below.
Completely disregard any charge for AMU or ADMU, which are
simple additional dealer markups (extra profit).
Disregard all charges for things you don't want, such as
a waxing job, undercoating, etc.
$______________________
$______________________
$______________________
$______________________
The dealer's cost for this car with its extras but without
the special services such as waxing and pinstripes is (A
x C) + (B x D) + transportation (from the sticker). For
example, let's evaluate the GS 16v model. The published
factor for the car is .87, and the published factor for
the extras (air-conditioning, etc.) is .82. Therefore:
List price for the base car $13,439
Air-conditioning list price $ 811
Power windows and defrost list prices $ 119
Alloy wheels list price $ 315
You can calculate the dealer's cost for the car with air-conditioning,
power windows, rear window defroster and alloy wheels as:
(car factor x MSRP for car) + (options factor x MSRP for
options) =
(.87 x $13,439) + [.82 x ($811 + $119 + $315)]
(.87 x $13,439) + (.82 x $1,245) = $11,692 + $1,021 = $12,713
Also, add destination charges (transportation) to the final
calculation. This figure is on the main sticker on the car.
On our example car, they are:
$ 343: $12,713 + $343 = $13,056.
Always add destination charges at the end of your calculations.
The factor does not affect these transportation charges.
Compare this to the total sticker price for the car, plus
the options, plus the transportation:
$13,439 + ($811 + $119 + $315) + $343 = $13,439 + $1,245
+ $343 = $15,027
If the dealer sold the car at list price, the gross profit
on this segment of the transportation would be list price
less his cost:
$15,027 - $13,056 = $1,971
Although the dealer has costs, they should not all come
out of your pocket.
CONSTRUCTING A BID
When negotiating for the above car, the price to aim for
would be the dealer's cost plus $300 profit for the dealer.
That would be $13,056 plus $300, or $13,356. In order to
end up here, initially bid $13,256 ($100 less). Now, if
this is a "hot" car, or if it is a seller's market, you
may need to pay more than this bare-bones price. But at
least you know where to start. Offering a few hundred dollars
over a dealer's base costs puts the salesperson in a terrible
predicament. Your opening price is not so ridiculous that
he can just ignore it. It is just low enough to lower his
expectations and still keep him interested.
Some dealers will try to itemize their costs for such things
as advertising and charge you for them separately on top
of the agreed-upon price. These costs are certainly a part
of the dealer's operating expenses, but whether you should
pay them as a separate item on the car is another matter.
In addition, the dealers have costs that will be deducted
from that $300 in profit you are attempting to leave them,
such as the commissions on the floor plan (financing) they
pay on the cars. But that's not your problem. It's there's.
To summarize, you can unearth exactly what vehicles cost
the dealers. You can also find the factors that will allow
you to calculate their exact costs using the window stickers
on the cars. This is useful in case there has been a price
increase, since the list you read was published. Knowing
this information is like playing a hand of poker and catching
a glimpse of your opponent's cards - it gives you a great
advantage.
From your calculations, you can begin to negotiate in order
to find out how much money over cost the dealer will accept
for the new car. Aim to limit the dealer to only $300 over
cost. As you can see from the sample figures above, this
is a substantial savings for you.
With all of your homework completed, the financing arranged,
an evaluation of your trade-in finished, and a decision
made on what to offer the dealer for your new car, you are
now ready to test drive your car.