HOW DEALERS SELL: THE 7 PROFIT CENTRES

Did you know that a dealer could give you a "very good price" on the new car….even in a transaction where you pay far more than you need to?

The dealership wants the car buyer to believe that buying a new car is one smooth transaction. In that transaction, the buyer is going to get "a good deal" and the dealer is going to make "a fair profit." But the name of the game is profits, not profit.

In the most common car-buying transaction, trading in an old car and financing the new, there are seven areas of potential profit for the dealer. That means there may be seven areas where the buyer must make an important decision, and seven areas where the buyer must know what is going on and what to do.

PROFIT CENTRE # 1: THE NEW CAR
When a dealer sells a car for more than it cost, then the dealer makes money. This is the profit centre most of us feel we know. But dealers and the manufacturers have found ways to increase their profit potential in ways the consumer may not know.

Consider "invoice prices." Many dealers are fond of holding "invoice sales." For example, "Today only, $100 over invoice!" How do they do that and stay in business? First, built into the invoice of almost every new car is a hidden profit centre for the dealer called a "holdback." The holdback artificially raises the cost of the new car. The dealer orders from the factory a car that will cost $9,400 to build. The factory bills the dealer $9,800, and the dealer pays the higher amount. The manufacturer then sends the dealer a cheque for the amount held back. Sometimes, dealers that participate in special promotions are required to contribute some or all of the holdback profit to the manufacturer.

What is the implication? Many dealers will then try to make up that lost profit in one of the other profit centres.

The invoice also has other things built into it, for example a $50 to $75 charge for advertising costs. Most invoices also contain money for the dealer to service the car.

Dealers can be very inventive with the things they put on their stickers. They can add anything they want, as long as the customer accepts it. Consider the following example:

Manufacturers Suggested Retail Price - $14,000
Rustproof & Undercoat (actual cost $30) - $250
Glazing (actual cost $30) - $150
Deluxe décor Package including bodyside moulding, body coloured Bumpers,striping, and wheel covers (actual cost $140) - $770
TOTAL ON DEALER STICKER - $15,170

The "sticker" price has risen by $1,170 while the "invoice" cost has risen by $200. The dealer's potential profit has just gone up $970!!!!!

PROFIT CENTRE #2: YOUR TRADE-IN
If money means a lot to you, always sell your old car rather than trade it. When you trade a car, a dealer must give you "wholesale"for it---an amount low enough for the car to be resold at a profit to them. Sell the car yourself and you may be able to get the profit.

In the real world, however, most people trade anyway. It's less work.

How can you trade but get the maximum dollar for the trade? "Look it up in one of those books---you know, the blue or black or red ones that tell you the value of used cars." If that is what you would do, it's the wrong answer.

There is an old saying in the car business; books can't write cheques. Books are not, therefore, the way to determine what a trade is worth. The only way to know a car's value is to shop it---ask some dealers what they'll pay for it.

PROFIT CENTRE # 3: FINANCING
The finance office contains the best, most sophisticated salespeople at any dealerships. And though their titles may be fancy and loaded with implied fiscal responsibility ("financial counsellor" for instance), their job security depends on two things: 1) trying to get every customer to finance with the dealership even if they don't want to, and 2) "raising" financing income, regardless of the consequences to the customer. Many finance managers, incidentally, are paid on commission. (For more details on loan cost, see Fact Sheet #5.)

PROFIT CENTRE # 4: INSURANCE
Life, accident and health insurance on your loan usually costs far more at a dealership than they do at a financial institution. Shopping for insurance can almost always save you money.

PROFIT CENTRE # 5: ADD-ONS
What are add-ons? The extras listed on the sample dealers list price (refer back to Profit Centre #1). Each "extra" or "option" that you purchase will have a very hefty---and negotiable---profit margin. Some of the add-ons (e.g., rustproofing, fabric conditioning ) are also available from other suppliers at a lower cost, if you feel you really need them.

PROFIT CENTRE # 6: EXTENDED WARRANTIES & SERVICE AGREEMENTS
This can be a valuable addition to the value of your new car, but remember to stay in the driver's seat when you negotiate the price!

PROFIT CENTRE # 7: FEES
Just when you thought it was safe to sign on the dotted line! You've negotiated and arrived at an agreeable price, but you notice that the salesperson filling out your paperwork hasn't stopped at the bottom line. Why? Processing fees, dealer preparation fees, and any others the dealer can dream up can be added on if you are not careful.