In the Chicagoland area, if dealers are selling Kia seltos EX AWD vehicles consistently in the $ 29K range ( in Mar 2024 ), what do you think THEIR cost was from MFR ? Bill
Virtually impossible to know the true cost of any unit. You’ve got holdback, volume bonuses/discounts, floorplan, commissions, etc, etc.
And nobody cares TBH. Look at any deal in Signed Deals & Tips — how many mention dealer cost?
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As Qbrozen notes, a customer isn’t in a position to know a dealer’s cost. The auto industry through the traditional franchised dealer model is very complex. Each manufacturer is different, and each dealership is operated differently. It’s not effective for a buyer to attempt to learn the exact “dealer cost” to try and negotiate a deal. However, for anyone generally curious about the auto industry, here’s an approximation to give you some insights.
For the purposes of this example, I am defining “dealer cost” as…
The cash value a dealer could sell a brand new vehicle sourced from the manufacturer through normal means, and break even on a incremental basis. This sale will have no aftermarket add-ons or back-end services/contracts. And this will not contemplate future service revenue or possible profit from a trade in.
I’ll use a strawman example of a vehicle that has a sticker label showing $11,000 (MSRP + Destination).
First, we back out the destination (pretend it’s $1,000). This value should be zero margin to the dealer, so let’s just remove it. So now we have $10,000. From here on I’ll call this MSRP.
Dealer Invoice is around ~5% of the MSRP. So the dealer invoice may say $9,500.
This means the dealer does have a $9,500 “invoice” and also establishes a value the dealer (or its bank) bank has to pay the manufacturer for the vehicle.
However, there’s another concept called holdback or dealer reserve. This is money the manufacturer will give the dealership once a vehicle is sold. It’s convoluted, but since this is money the dealer gets back, it will reduce the “cost” as defined in my example. Let’s pretend the holdback is 6% of MSRP. So that’s $6,000.
This means the dealer’s “variable cost before incentives” would be $8,900.
Now, consider factory to dealer incentives. These are incremental to the holdback. Sometimes the industry refers to this as “trunk money” or “manufacturer bonus incentive” or “goddamnit why can’t you MF-ers sell your goddamn inventory program.” Since these become money that goes to a dealer’s pocket, it could be conceptualized as a reduction of the dealer’s direct cost on the stock unit. Let’s just pretend the trunk money is 9% of MSRP or $900.
So with the trunk money, the dealer’s variable cost would be $8,000.
Unfortunately, if the dealer sells this car for $8,000, it’ll lose money. Why? Because the dealer has to pay other costs. I doubt you’ll ever get consensus on LH on this, but there are some costs that this unit needs to cover to be “breakeven”. Some $ are directly tied to the vehicle (eg commissions) and some $ are indirectly tied to the vehicle (dealer operations, marketing costs, interest expense on the flooring line). The indirect costs are often referred to as dealer pack.
I’m not going to get into the details about how a salesperson commission is calculated, but let’s say the commission on this $10,000 vehicle is $500 (thevolvoguy will be jealous). And the dealer pack is $300.
So now you have a “cost” of $8,800. If a buyer pays $8,800 for this unit cash, the dealership would consider it a break even.
Of course things are never this simple. Dealers have reasons to do lower margin sales to boost their inventory turn metrics or volume metrics. They may take a L on a unit they got on a dealer swap because the other side of the swap made them so much money. It’s just a giant game of whackamole. But some customer do get whacked much worse than others.
Consumer rebates (like the $7,500 EV credit or lease loyalty) completely bypass the dealer so these can’t be used to pad dealer margin.
Source: I post a lot of memes on LH.
Edit: @Dany1122 - as always, nobody on LH cares about dealer finance haha.
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