How to avoid high profit margins for car dealers

While finding a new car today can be challenging, getting a good deal is even harder. It is a seller’s market. In other words, even the fairest of dealers have no incentive to decker, so be prepared to pay the label fee.

With this bit of folk poetry in mind, you’ll want to guard against any dealers who treat today’s shortfall like a winning lottery ticket. Many earn thousands of dollars from merchant marks to the manufacturer’s suggested retail price. By law, window stickers on every new vehicle available for sale must display an MSRP.

With so many dealerships looking more empty than they did a year ago, many of the vehicles that arrive on pickup trucks are often pre-sold or at least promised. It’s a tough market for car shoppers.

In this article, we’ll explain why dealers are starting to mark up vehicle prices other than MSRP and what, if anything, you can do about it.

What does the show have to do with it?

If you start shopping for a new car, you may encounter dealers who refuse to budge on the advertised car window sticker price. In other words, they are not willing to negotiate. This is not the reckless stubbornness of many merchants, but a matter of good business.

New auto stocks remain very tight due to a shortage of semiconductor chips, supply chain disruptions, and other factors. Many common features today such as touch screens, navigation, and electrically adjustable seats require microchips.

According to data from Kelley Blue Book’s parent company Cox Automotive, current new vehicle inventory reached 1.07 million units at the beginning of March. This may sound like a lot, but inventory was 1.5 million units higher a year ago. Translated into days of supply, currently, it’s 34. It was almost double what it was last year.

Every car sold by a dealer today will not be available for sale tomorrow. This is always the case. However, today dealers can only sell a few vehicles on site with potential buyers lined up like the opening day of “Spider-Man: No Way Home.”

Car prices are determined by supply and demand

If you have never paid attention to the basic theories of economics, you may not realize that the current market functions like a Petri dish of supply and demand effects. In the open market, the price is determined by demand. The more people want (such as cars), the more they are willing to pay for it, and the higher its price. This higher price stimulates additional production of that thing, and the price eventually drops.

There are no car dealers in the business to break the tie. When you find your dream car and the dealer wants the full MSRP – or more – you can always walk away in this market. Waiting for that merchant to come back with a better offer is probably not the best use of your time. If it’s a popular model, someone else will likely grab it if you wait.

These days, don’t be deceived by the merchant demanding the full MSRP. You pay the price set by the manufacturer of that vehicle. In this economy, it’s probably a good deal.

Brands with deeper inventory may have dealers more inclined to negotiate or commit to an MSRP. The brands that currently own the most cars include Audi, Volvo VLVLY,
-2.78%And the
Ram, Jeep, Buick, Lincoln, Mazda Mazdae,
According to Cox data, Kia 000270,
+ 0.65%And the
Lexus, Toyota TM,
-1.68%And the
and Subaru FUJHF,
Fewer cars are available to shoppers.

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What is a profit margin trader?

For our purposes here, we define the dealer price as the selling price above the automaker’s MSRP. These signs often appear as a second window sticker separate from the MSRP. These marks sometimes include the cost of agent add-ons such as seat fabric protection, VIN embossing, undercoating, and pin stripping. You can often negotiate such traditional add-ons from the final transaction price. Even this is the hardest to do today.

Then there are these profit tags often referred to as “additional agent tags (ADM)” or “additional agent profit (ADP).” You may see it called “market adjustment”. It is these costs that should be looked for and avoided if possible.

The merchant places these arbitrary amounts on the MSRP to increase profits on high-demand models. Historically, you’ll find it primarily for the highly anticipated all-new or redesigned models. These brands’ prices benefit from high demand and a lack of supply in the model when it was first launched.

Read: This is the time when you can hope that the prices of new cars will start to fall

Manufacturers warn traders about profit margins

Almost all car models and brands are in high demand in today’s market. The lure of price gouging is simply too great for some traders to resist.

Manufacturers such as Ford F,
-1.67%And the
General Motors General Motors,
+ 2.53%And the
Subaru, Hyundai HYMTF,
-1.85%And the
Others have begun cracking down on dealer pricing.

Crowdsourcing website reveals how dangerous price hikes can be, providing details of agents and, in some cases, providing images to go along with markup information. Although a large number of vehicles do not show any dealer brands, many others do. We found one up to $35,000 a Maryland Ford dealer made for a new 2022 Ford F-150 Raptor.

Ford CEO Jim Farley recently warned dealers not to “slash” profit margins. “We have very good knowledge of who they are, and their future product allocation will be directly affected,” Farley said, speaking to investors on Ford’s January earnings call.

Hyundai sent warning letters to dealers and mentioned specific practices, including:

  • Advertise one price online, then set a different price when the customer starts negotiating.

  • Adhesive the branding window stickers that are included as detailed parts of the vehicle price.

“All of these practices lead to vehicles being sold at prices above MSRP, and in some cases significantly above MSRP prices,” the letter read, according to a report in Automotive News. This could “damage our brands’ long-term ability to attract new customers and retain loyal customers.”

What you can do about high profit margins on cars
  • wait: Although stocks of new cars will remain tight throughout 2022, this market will not last forever. If you do not urgently need a new car, then wait for more favorable times.

  • Contact several merchants: The more merchants you connect with, the higher your chance of scoring the best deal. To simplify the process, use the KBB tool to get a free quote from merchants in your local area.

  • Be prepared to compromiseThe Rolling Stones said it best – “You can’t always get what you want.” If you’re going to buy a lot from a dealer or from those who come on a truck, stay flexible. Chances are you won’t get exactly the color you want, with the motor you want, or with the accessories you want. Decide what’s most important and be willing to compromise on everything else. (We see: To save money on buying a new car, can I convince the dealer to remove accessories or factory options?)

  • Don’t take merchant ads at face valueNew car announcements usually come with many disclaimers and caveats regardless of market conditions. If the price of a new car sounds too good to be true, it probably is. When you see a specific model advertised, contact the dealer and make sure they are there before making the trip. When an ad claims to have several units of the same model on hand, don’t rely on them. These numbers often include vehicles that have not yet arrived, have already been talked about, or have been sold.

  • Consider ordering from the factory: Except for some electric brands like Tesla TSLA,
    The Rivian RIVN,
    -4.04%And the
    Most automakers still require you to order a vehicle through an authorized dealer. However, you can precisely select the color, model, and options you want. You will likely continue to pay the MSRP or maybe a little more. But at least you will have exactly the car you want. The problem with special order is that the car can take six to nine months to arrive. (We see: Buying a car from the factory sounds expensive, but it can actually save you money. Heres how to do it.)

  • If renting, watch out for fees. Many leases contain a vague list of fees and costs related to the initial fee and choice of purchase upon return of the lease. Check your lease agreement and know your rights. Some dealers have started charging market adjustment fees on lease contracts. Inquire about everything, shop for the best deal, and don’t pay anything not included in the contract.

This story originally ran

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