“I got a great deal.”
“How do you know?” I asked?
“Well, I negotiated over $2,000 off the original price, so I’m pretty sure I made out well. Didn’t I?”
After doing this for as long as I have, it doesn’t take long to burst someone’s bubble.
“Maybe you did… I know when I was managing dealerships I told my salespeople that they needed to be ready to lower the price three time during a negotiation — the customer always likes to win three times, then they’ll buy the car.”
I don’t take pride in bursting their bubble, it just comes with the territory at times.
“So, in your case, that $2,000 you shaved off the price is certainly some hefty savings, but I’d venture it was baked into the price they initially quoted you.”
The look on my son’s friend’s face was starting to sour.
“Don’t fret though, I’m sure they only made a couple hundred or maybe a thousand dollars off your deal, it’s just there may have been more room to negotiate.”
In today’s internet era, you may feel like you know how much wiggle room there is to negotiate on a new car, but at the end of the day, as a consumer, it’s hard to really know. Sure, tools like Kelly Blue Book can help you understand what a car is worth, but KBB and others miss out on vital pieces of information (such as manufacturer incentives, how long a car has been on the lot, and more).
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When it comes to knowing how much you can negotiate on a car purchase there are 3 vital pieces of information that I always look for, and if I were you, I’d do the same.
- The window sticker
- Learn what incentives are in place for the dealer
- How long the car has been on the lot
Let’s explore each one of these.
How much can you negotiate on a new car depends on the window sticker
The window sticker is the Manufacturers Suggested Retail Price, hence MSRP. What you need to find out is the percent of margin built into that MSRP. For example, for a lot of the less expensive cars (Toyota, Hyundai, etc.) the percent of margin (markup) might be very little, as little as only 2 or 3% of the MSRP.
It’s important to understand that the dealer buys the car from the manufacturer at invoice price, and then lists the car for sale at, or near the MSRP price (and even sometimes higher, if the car is in high demand). This is the retail price.
That means a car with an MSRP of $18,000 might only have $360 of profit built into it.
Generally speaking, and as a rule of thumb, the more expensive and luxurious the car, the more margin is built into the retail price. Where an $18,000 car may only have $360 of profit built into it, a $100,000 car may have as much as $10,000 in margin.
How can you determine what the dealers mark up on a car is? Unfortunately, it isn’t an exact science because it changes from car to car and dealer to dealer. However, you can use the guideline of 2 or 3% on less expensive brands, and 5 to 10% on luxury brands as a rule of thumb.
Regardless of if you’re buying a Kia or a Mercedes, the reality is there isn’t too much room to work with when just looking at the mark up. This is where factory incentives come into play.
How much can you negotiate on a new car depends on dealer and customer incentives
Dealer incentives (also commonly referred to as factory incentives) are put in place by the manufacturer and allow for greater price flexibility because they artificially inflate the margin on any given car. The percent of margin in cars can range from a low of 2% to as high as 15% when all incentives are factored in.
The internet is a wonderful tool for finding information on incentives for particular cars. Bear in mind that there can be two types of incentives; customer incentives and dealer incentives.
Customer incentives range from rebates to special loan interest rates. Customer rebates can be as little as $500, or as much as $10,000 depending on the brand and the model. Other customer incentives can take the form of recent college graduate programs or active military or retired military and first responder programs.
There can also be hidden incentives based on who you work for or where you graduated college. Always ask the dealer about these types of programs and incentives, because it doesn’t cost them a dime! These programs and offers are usually funded by the manufacturer, so the dealer has no reason not to assist you here.
Customer incentives are relatively easy to learn about. Manufacturers actively market their recent college graduate programs, and websites like Edmunds.com keep track of constantly changing rebates and incentives.
Dealer incentives on the other hand are much harder to know about, and they can greatly affect how much you can negotiate on a new car. Manufacturers have monthly, quarterly, and even annual sales incentives for their dealers.
You need to understand that manufacturers have one objective, and that is to sell as many cars as possible. Many manufacturers are public companies. That means that each quarter they need to share their finance metrics with shareholders. Shareholders want to see that manufacturers are growing and selling more cars.
With that understanding, it’s easy to see why manufacturers put sales incentives in place for their dealers. Manufacturers need dealers to move as many cars as possible so that the manufacturer’s shareholders are excited about the brand’s growth.
Dealer incentives are quite significant. For example, a BMW dealership that hits their monthly sales incentive could be entitled to $50,000 to $200,000 or more depending on their sales volume, from the factory.
Obviously this means the dealer will be happy to lower the price on a car so that they get the kickback from the manufacturer. Use this to your advantage! Always ask the dealer how close they are to hitting their goal, if they need one or two more sales to get there, guess who just picked up some leverage? Yep, you!
How much can you negotiate on a new car depends on how long the car has been on the lot
The third criteria to know how much you can negotiate on a new car is how long the vehicle has been sitting on the dealers lot. The age of a car, and specifically how long it has been at a dealership can drastically affect a dealers willingness to discount a car.
If you’re looking for the car with the most “wiggle room,” then ask the dealer for the oldest (in terms of number of days that the vehicle has been sitting on the lot waiting to be sold) model that you’re interested in.
The reason for this is quite simple, the longer a car sits on a dealer’s lot the more it costs them (we talk about carrying costs in this post). This increases the dealers incentive to sell the car, and ultimately to save you more money.
By letting the salesperson know you’re interested in their oldest car you’ll immediately get their attention. Make it clear you’re willing to entertain the “old” car if they make the price less than a younger (a similar car that has spent very little time in inventory). I can assure you from my 42 years of experience, they’ll be happy to do this for you.
Cars, unlike fine wines, don’t necessarily get better with age. Dealers want “old” cars gone! That gives you leverage, and getting a good deal is all about leverage.
So, now that you have some inside information you should feel more comfortable negotiating your next car deal. However, if you are like the majority of people that just hate to have to deal with this type of negotiation, there is help for you. Your Auto Advocate (me) will do all of the hard stuff for you. Click here to schedule your free 15 minute consultation to see if I might be able to help.