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Most Subcompacts Are Loss Leaders for Dealers - Aug. 4, 2007
Here's a scenario that happened to a fellow dealer recently. A repeat customer (who is also a friend of the dealer) called about buying a new compact sedan for his daughter.
Six months earlier, this customer had purchased a new luxury sedan from that dealer and was happy with his car.
The car he wanted to buy for his daughter was priced in the $16,000 to $17,000 range, and the dealer mark-up on it was approximately $1,000.
I understand that $1,000 is a lot of money, but for a car dealer, it's a small profit margin, when compared to the full invoice price the dealer paid to the manufacturer.
The dealer offered his customer $350 off the Manufacturers' Suggested Retail Price (MSRP), which would effectively reduce his profit margin to $650.
The customer expressed disappointment; he felt entitled to a larger discount. Although he purchased the car, with the $350 discount applied, he felt as though he had overpaid. This created awkwardness between the dealer and his customer/friend.
The MSRP is the price seen on the window of a new car, which doesn't include freight, vehicle preparation or financing costs. Dealers are permitted to sell cars for more or less than the MSRP.
Some vehicles have thinner profit margins than others. In fact, in today's retail car market, most subcompact cars have become loss leaders for dealers, as it costs dealers $1,200 to sell that car.
That $1,200 cost is determined by calculating all the expenses a dealer pays before the car is offered for sale ? such as interest paid to the manufacturer, sales commission, hydro, lease on the building, insurance, etc.
At my dealership, we've had potential car buyers say, "Can't you afford to sell me that new car at cost?"
On one hand, I want to inform these customers that we must maintain certain profit margins on new vehicles in order to stay in business.
On the other hand, I don't want customers to think we're trying to gouge them, either.
New-car salespeople find themselves confronted with this dilemma all the time. Consumers will research dealer invoice costs and use this information when negotiating a final selling price.
I've known cases where customers have offered salespeople $100 under invoice on a $45,000 vehicle!
Imagine walking into a clothing store and selecting a new designer suit. Let's say you know the store paid $750, wholesale, for the suit and it's on sale for $1,080. That's a 44 per cent gross margin, which is not unusual in the retail clothing industry.
After trying on the suit, you offer the salesperson $1.66 less than the $750 wholesale cost (a 0.22 per cent discount equivalent to the $100 under invoice that was offered for the $45,000 SUV), for a total of $748.34. "That's my final offer," you say.
The salesperson would shake her head and say, "Sorry, we don't discount our suits. The sale price is a firm $1,080, take it or leave it."
In the retail car industry, huge discounting has become the norm. Customers shop from dealer to dealer, searching for a salesperson who will say "yes" to his offer to buy a new car at, or below, cost.
The next time you're negotiating with a car salesperson, remember that the profit margins on new cars are extremely thin, and dealers shouldn't have to lose money selling cars.
Offering to pay "cost" on a brand new vehicle (regardless of its MSRP), or offering to pay "less than cost," will surely lead to disappointment for the buyer.
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