An open letter to the Hackr community

Good Morning!

I’m not sure what forum this fit in, so I hope it works here.

I’m a new guy here. I really like community but I see tons of misinformation on car prices and how vehicles are actually owned. I think the greatest asset in this community, is transparency so I felt it would be wise for me, an experienced guy to break this down.

I also want to say this is more of an industry issue, not a Hackr specific issue. There is a real agenda at keeping things like this out of the interwebs.

Here is a table that will give a good explanation of how a vehicle is owned and what the dealership actually makes on it.

I’ve seen numerous posts on here about what the dealerships own the vehicle for - what they make - how they make it - that they own the vehicle for 20% of MSRP - etc… all while great theories, are not inside baseball. There are deviation across brands but it’s mostly the same.

If anyone has any questions I will get to them throughout the day.

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Thanks for the useful info. I heard about a marketing fee before. Do manufacturers actually charge dealers some percentage per vehicle for this or is it some BS fee that dealers tell customers to protect more of their profits?

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Depends on the brand.

Marketing fees are definitely real.

Hi @Benedetto, do you want to make a wiki called “Lease Terminology / Glossary” or something? Not that the wikis are popular but may help pin these terms down

@ some point I probably will.

I forget that these all make sense to me :blush:

can you post the example it refers to so one can see the beakdown. Thanks for the information

Volvo charges $500 “Advertisement” fee. So my car’s “invoice” was $500 higher than shown on Edmunds.

@Ursus

That’s exactly the problem with print a price websites.

If you look at certain vehicles and their ‘rebates’ - it shows a ton of IDL or lease cash that customers think they qualify for.

In reality - it’s mostly tied to different financial companies.

I’m not going to post the example but essentially, no matter what anyone here says - Invoice less holdback is the cost of a car.

There are things dealers do to mitigate loss but the aforementioned rule, never changes.

They can play with allowances too.

Truthfully, most new car departments lose money every month.

Yeah, I knew from my friend at Volvo about that $500. I wanted him to drop it every time I leased my cars.

Shhh… Don’t mention him with “@”. He makes money every time we do :slight_smile:

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my nephew works for bmw and tells me the money maker is cars that come in for service

Fixed Ops (service, parts) can fund a store.

It’s not 100% of the case.

BMW charges a training and flat fee built-in every car. Flat $500 fee charged on every car for U.S. delivery regardless of the location of the dealer. The training fee is $180 and that’s separate from the flat fee.

I do not believe anyone is arguing that invoice less holdback is the cost of a car. With that said, you certainly brought some information forward that provides some insight into the minute numbers (+/-) that dealers are playing with on these vehicles.

With that said, if you look at this on the surface, the illusion is that dealers do not make much money on vehicles, and heaven knows, if all consumers were like us, the auto industry would probably have to completely revamp their strategies :slight_smile:

However, this only paints half the picture. The other half of the picture is that we are seeing deals going down here that would fall well below the ‘invoice less holdback threshold’ Now granted, we have factory to customer incentives and then the secretive factory to dealer incentives to provide a cushion. But I also believe that dealers take the same approach as a casino owner. There will be the handful of people who will come into the casino and plug a dollar into the slot machine and win a million dollars or the Ferrari hanging from the ceiling (that would be most of the members here), but the majority will lose hundreds, if not thousands of dollars on those same machines.

If I have 30 people come into my dealership and I sell them the car at or near MSRP and then fleece them on the back end, customer 31 and 32 can come in very well under ‘cost’ and they still come out very much on top overall.

So while I would like to make it clear that I am not alluding as some have that these vehicles are being purchased at 20% under sticker ‘cost’, I sometimes struggle with the dynamic that I have to essentially ‘break even’ with the slight gamble that I will make my profits in Repairs & Used Vehicles. I’m not saying it does not work, I would just love to see the math.

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If you mention the goof’s name, he collects $198. And two kittens die in heaven.

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That must be excluding the back end (F&I products) on both new and used cars, which reportedly make up one third of dealership profits (on average) these days.

What’s average?

I think this is where dealership staff and customers get upset with each other.

A dealership in California rarely has an average like one in Chicago.

Finance, Used Cars and New Cars are often, it not always separate companies.

New cars do lose money - it’s very common and is it usually how they drive sales.

Finance does make some good money, but again, it varies.

Same thing with used cars. You see them holding firm on a car worth x - what you don’t see is them having to wholesale 20 units for a $5,000 dollar loss.

The challenge with car buying is, there is no one all answer. I know everyone wants a simple, efficient and quick solution to the dealer problem - but it’s unlikely to happen.

All stores (excluding) Tesla (which is another argument) are franchised. Some are big groups like AutoNation or Penske. Most are small mom and pop owned locations.

They all have different financial needs and expectations. The car world is truly the wild wild west.

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That’s a pretty thought out message - I’ll try and work down it.

Frankly, most consumers do think like you. You summed it up with “we have factory to customer incentives and then the secretive factory to dealer incentives to provide a cushion.”

There isn’t a whole lot of secretive anything. It’s touched on with the table but I’ll break it down.

Do you know what that TV you’re looking at costs? I’m not saying you shouldn’t know - I just see a parallel.

Back end monies are pretty simple to explain. NVDR and SFPAP monies are paid when you sell a vehicle. They’re on average 1% of MSRP and go towards your floorplan costs and a kicker for moving the vehicle. (1% x 2 here)

These equinox deals, like the pair I’ve done as a broker, are pretty close to losing them money. It’s invoice or slightly behind invoice with a straight mf. That means no markup and only the few referral dollars the bank sends along.

The real money for these stores is tiered volume bonuses and it’s not rocket science. Sell 10 and you get X. Sell 20 and you get Y. Sell 30 and you get Z.

If they want to chase the number - they’ll lose and hopefully make it up on volume.

Very few if any stores sell vehicles at or near MSRP. I’d actually argue that almost every deal is invoice

Are there people that pay more? Yes. Is it common? No. How do you fleece someone on backend? Just curious on that statement.

Hi Bendetto,

Thanks so much for your response. I should have refrained from the word ‘fleece’ as that would be making assumptions. Generally speaking, your F&I manager is one of the best, if not the best, salesperson in the house. You can tack on some good positive cash flow on the services and bumps in rate that happen in that room.

It is challenging to find an analogy to car sales with any other static product on the market. This is because, and let’s take the TV as an example, or any other item, the standard is to double cost, which equals wholesale and then the retailer will double that cost to make it retail. Now there is certainly a +/- variance to that, and I would set a baseline of +/- 10% that can exceed on either end.

However the car industry apparently does not work that way. The car maker purchases its parts, builds their vehicles, and ships them to their ‘retailers’ for (on average) 92% of MSRP. So in a traditional scenario, if cars were like, I don’t know, soap lets say, where if soap costs 1.50 to make and you sell it wholesale to the retailer for $3.00, then the retailer will MSRP it at $6.00, then they would build a MSRP $50,000 car at $16,600 cost, sell to the dealer for around $33k, who would sell it to the customer for around $50k. But that’s not how it works. Instead, let’s take the Buick Cascada with a difference of 2% between ‘cost’ and MSRP. A lower end car perhaps? OK, then let’s go with the Alfa Romeo 4C @ 4%.

With my business, I take a very traditional approach. I make my product at cost x, i then sell it to retailers for double of x. Then the retailer sets msrp of the doubled x.

Now say I was thinking of starting an auto dealership. For arguments sake, I want to purchase a Mercedes Dealership. Now first, I need to have about 10 million liquid. I go and meet with Mercedes Representatives and tell them I would like to sell their cars in my store. They go sure thing Onyx, however your profit margin is only on average 7%. But then, wait, no one actually pays 7% over cost, so let’s say on average about 3%. Now not everyone who is 10 mil liquid is brilliant, but I have to guess that most of them are fairly smart to get to that much money. Then the rep goes, oh, but you can make money other ways as well, but really, we can’t give you definitive numbers on that. You will probably get about x amount of oil changes annually, and depending upon how well built our vehicles are, you can expect to maybe make around x. I go, ok, let me get this straight. I have to pay 93% of the vehicle’s actual price to get it on my lot, I probably won’t make any money after you factor in keeping the lights on, admins, utilities, etc, we have no definitives on the amount of used cars and service we will do. This is a GREAT business model. Where do I sign!!??

No, I would be running to the nearest McDonald’s Franchiser, going to Burger U and making at least double my money every year guaranteed. In the end, the business model that the industry is selling to the public sucks, and I would have to believe if investors and or dealer owners heard this, they would think the same.

Let’s think about this for a moment. I open up a brand new Mercedes dealership, I have to purchase say 100 cars at 93% of the total price. I have zero people coming into my dealership for oil changes or to purchase used cars (because I don’t have any) and then i have to sell most of these cars at cost? Do you know how absolutely insane that sounds? Now to top that off, 20 years ago, these same cars had an average margin between cost and MSRP of around 18% and that number has dropped more than 50% and you want me to buy into this? I’m literally laughing out loud as I type that.

OK, so I will bring up a recent deal that happened in February. HN108 I believe it is, who is one of the more experienced ‘leasehackers’ on this forum, began talking about and then teaching others, how to get around 25% off of MSRP on an Infiniti Q50 3.0t. Now there were some Factory to Customer incentive, not much. What HN108 kept saying however was that he knew there was at around 9k of cash out there that could be used towards the vehicle. Where did he get this number? It surely was not the 1% of MSRP from NVDR or SFPAP. One would think that it was just an anomaly, that was until we began to see other get very close to his numbers in different parts of the country. There is no way that could have happened without some factory to dealer ‘trunk money’ involved.

To close, please know that I am not attacking anything you are saying, and on the contrary, I welcome intelligent debate with you. However I feel as though the story is incomplete. The numbers do not add up for me, and the business model, the way it is presented.

One final thing that has always and will always confound me. No other manufacturer provides the ‘cost’ of their item so readily and openly to the public as the auto industry does. I would surely not want the actual ‘cost’ of my items to be known to the public who purchase them at MSRP or close to it. What this indicates to me is the auto industry intentionally wants us to know these numbers whether real or not, because it benefits them financially. Otherwise you would have shareholders and Dealers losing their minds about the level of transparency. It would be like me going on TV and saying…Hey, I know my product sells for $45.00 MSRP, but I actually make this stuff for only $5.00. So unless I was actually making the item for $1.00 and telling them it was $5, why in the world would I do it?

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