Many new car dealers run ads that say things like "We sell cars at invoice price" or "Buy this car for $100 below invoice." Consumers who see these ads may believe that the dealer is not making any profit. However, the invoice cost is just one part of the picture when it comes to determining how much money a new car dealer makes on a sale. You must know the complete picture in order to determine the real amount of profit.
A new car dealer makes a profit on the difference between the sales price of the car and its actual cost. Basic cost information is widely available on the internet at websites like Edmunds and Kelly Blue Book. These sites allow consumers to view the invoice cost of a new car, including any accessories and packages, and compare it to the manufacturer's suggested retail price. The difference between the invoice total and the selling price gives a general indication of how much money the dealer is making on a sale. However, the invoice does not represent the exact cost to the dealer. There are several other factors that play a role.
Often a new car manufacturer will offer special factory-to-dealer incentives. Unlike rebates, which are given to the consumer, this money is given to the dealer. Some dealers may choose to pass some of it along to the consumer. Others may keep all of it, boosting their profit on the new car sale even if they sell it at the invoice price.
Most manufacturers give dealers a certain amount of money, called a holdback, for each new car they sell. This is generally a percentage of the cost; the exact amount varies by manufacturer. Dealers almost never share any of the holdback with car buyers. The holdback amount raises the amount the dealer makes on the sale, even if he sells it at the invoice price.
Some new car dealers purposely build additional profit into their car prices. They may add fees to the window sticker, or they may include them on the contract. For example, some new car dealers will include a fee for vehicle preparation or a dubious acronym like "ADM," which simply stands for "Additional Dealer Markup." Some will load the window sticker with optional items that have an extremely high markup, like interior fabric coating or exterior rustproofing. All of these things will allow the dealer to make more money on the sale.
After a price has been agreed upon, many dealers will include a "documentation fee" on their contracts, pre-printed to make it look official. This is actually another way of adding directly to their profit margin.
