Q: What is Dealer Cost?

December 17, 2013 12:53 PM

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Most new car buyers try to get the best possible purchase price from a dealer through negotiation. In order to make a good counteroffer to the car's posted sticker price, it's helpful to know the dealer cost of the vehicle: the actual price that the dealer paid to the manufacturer for the car. As a soft rule of thumb, this dealer cost is as low as the dealer can sell the car without losing money and represents the minimum car value. It is difficult for anyone but the dealer to know this cost, as it changes according to a number of variables that differ from dealer to dealer.

When determining the dealer cost, you should begin by ignoring all posted prices for the vehicle except the dealer invoice price. The invoice price serves as a starting point for researching the cost, as it lists the price based on the make and model of the car and the listed features. However, it does not include any payments or discounts provided to the dealer for selling the car to a buyer.

The first payment that will change the listed dealer invoice price is the dealer incentive. This is a cash payment provided directly to the dealer for a sale. It's the equivalent of a dealer-side car rebate and reduces the cost that the dealer has to pay for the vehicle. Many dealers also receive a dealer holdback, an amount of money that the manufacturer provides to offset the cost of stocking and advertising new cars.

Some dealers will also save on the cost of vehicles through manufacturer bonus programs. A dealer can receive a bonus for selling vehicles that the manufacturer is especially interested in moving, or by selling a large number of vehicles. Dealers may even be encouraged to sell a car at a low financing rate arranged by the manufacturer that takes the place of a dealer rebate. In this case, the saved rebate amount is subtracted from the total dealer cost of the car.

Each small payment from the manufacturer lowers the dealer cost of the car, and these savings can be passed on to the buyer as an incentive to purchase. A buyer should keep in mind that while the purchase price of the car represents it current value on that car lot, it loses a large chunk of that value through car depreciation the moment it is driven off the lot.

Dealer cost is nearly impossible for anyone other than the dealer to determine. You have to know precisely what payback deals the car dealer has made with the manufacturer in order to know the dealer cost. With each program that you can identify, you come closer to the actual price. Just start with the dealer invoice, and subtract any dealer incentives that you come across. This will give you a good base price that you can use to begin a negotiation that can lead to significant savings from the posted sticker price on the car window.

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