True Dealer Cost
08-27-2018, 11:52 PM
#1
Senior Member
Thread Starter
True Dealer Cost
There have been many threads posted here to assist others in purchasing vehicles. One of the questions I see often refers to the "true" or "real" dealer cost on a unit. I thought I would take a moment to explain, to the best of my knowledge, the factors that impact the final dealer cost of a new vehicle.
Everyone is familiar with the invoice price on a unit. This actually does reflect the unadjusted cost of the vehicle to the dealership. When Ford manufactures a new vehicle, the ordering dealer (or their floor-plan source) is billed for this amount.
There are many adjustments that can happen after the dealer is billed for the vehicle that will effect the final unit cost:
- Holdback: This is a portion of the vehicle price that is paid to the original invoiced dealer once the unit is sold. This amount is 3% of the MSRP for most domestic manufacturers and 2% for most import manufacturers (although one large import manufacturer uses a 2+2 approach for holdback). This adjustment is well known.
- Manufacturer incentive ("stairsteps"): These are generally a per unit incentive paid to dealers for hitting or exceeding a sales target. Depending on the timing this can be a very small amount or could be several hundred dollars per unit. Generally these per unit incentives increase as the dealers volume increases. For example it could work like this:
Everyone is familiar with the invoice price on a unit. This actually does reflect the unadjusted cost of the vehicle to the dealership. When Ford manufactures a new vehicle, the ordering dealer (or their floor-plan source) is billed for this amount.
There are many adjustments that can happen after the dealer is billed for the vehicle that will effect the final unit cost:
- Holdback: This is a portion of the vehicle price that is paid to the original invoiced dealer once the unit is sold. This amount is 3% of the MSRP for most domestic manufacturers and 2% for most import manufacturers (although one large import manufacturer uses a 2+2 approach for holdback). This adjustment is well known.
- Manufacturer incentive ("stairsteps"): These are generally a per unit incentive paid to dealers for hitting or exceeding a sales target. Depending on the timing this can be a very small amount or could be several hundred dollars per unit. Generally these per unit incentives increase as the dealers volume increases. For example it could work like this:
0% - 89% of Sales Plan: No payout
90%-100% of Sales Plan: $200 per unit retroactive to the first unit.
101%-110% of Sales Plan $300 per unit retroactive to the first unit.
110%-115% of Sales Plan $400 per unit retroactive to the first unit.
116%+ $600 per unit retroactive to the first unit.
90%-100% of Sales Plan: $200 per unit retroactive to the first unit.
101%-110% of Sales Plan $300 per unit retroactive to the first unit.
110%-115% of Sales Plan $400 per unit retroactive to the first unit.
116%+ $600 per unit retroactive to the first unit.
Some manufacturers run these incentives monthly, others quarterly. Some require the dealer to maintain a certain level of customer satisfaction to qualify. This is the primary driver why dealers seem more aggressive at the end of the month / quarter. If the dealer has 120 cars sold with one day left and they need 125 to hit 116% the dealer has $27,000 in incentives riding on selling 5 units that day. Some dealers are willing to take a loss on selling those 5 units in order to realize that $27000 gain. Even if they sold all 5 units $2000 under net cost they still wind up making an additional $17000 then if they would have not sold those 5 extra units. Now, if the dealer has maxed out or they are too far away from the next step, they would be less aggressive. If a dealer has maxed out early in the cycle, it will generally be less aggressive late in the month, or they may try to schedule your delivery early in the next cycle to get a head start (known as sandbagging in the industry).
- Floorplan Credits: Most manufactures credit dealers for a certain number of days worth of floorpan interest. This is designed to help dealers keep a fully stocked lot and defer some of the interest costs associated with that inventory. If you are a dealership that effectively manages your turn times, this can be a source of revenue for the dealership. For example, lets say that Ford's current policy pays for 91 days of foorplan interest and assumes a 5% rate (prime) on a $50,000 invoice this would equal a credit of $623.29. If a dealership sells you the vehicle on the 30th day, they will have made $417.81. This obviously works in reverse on old age units. Units that are older the interest credit period cost the dealer interest each day they are on the lot. Both of these situations create incentive for the dealer to move the metal quickly.
So lets run a scenario to illustrate how all of this could work. I go into my local Ford Store and I order a F-150. The MSRP is $55000, and the invoice is $50000. The vehicle is delivered and I pick it up the day after it arrives at the dealership. For the sake of argument lets say I agreed to pay invoice minus holdback ($48,350 Sale Price)
Here is the dealer cost breakdown:
Invoice: $50,000
Holdback: ($1650)
Starstep Incentive: ($400)
Floorplan Credit: ($616.43)
Net Dealer Cost: $47,333.57
Gross Profit on Sale: $1,016.43
Even selling you the vehicle at invoice minus holdback the dealer realizes a profit in this case. This example is a somewhat best case scenario as it is an ordered unit and it will not sit on the lot very long.
Let's look at the same unit, but this time lets say it has been in stock for 180 days.
We will use the same numbers as the basis.
Invoice: $50,000
Holdback: ($1650)
Stairstep Incentive: ($400)
Floorplan cost: $609.59
Net Dealer Cost: $48,559.59
Gross Loss on Sale: ($209.59)
As you can see the floorplan cost associated with the 180 day old unit is what makes this deal unprofitable. If this is a unit that has not had much activity or is distressed collateral (weird powertrain or optioning) this may be a good deal for the dealer to cut their losses on the unit with.
A note about dealer trades:
Lets say your ideal truck is on another dealers lot and you want your dealer to trade for it. Remember that holdback stays with the original dealership. Some dealerships have trading relationships with one another that can make this a non - issue, but in theory, each trade is negotiated individually. Owning dealers are under no obligation to release the holdback to the dealer you want to buy from. Most dealers who have good relationships with one another will trade or sell at net cost. This allows each store to retain the holdback on the traded units. If you are looking for a unique or high demand unit or the owning dealer is not on good terms with the requesting dealer the trade can be completed at a cost greater than net. Back in my days at a Chevy dealership we would only trade our Corvettes at sticker, so basically any dealer who wanted to sell one of our Corvettes had to pay us sticker before they could sell it to their customer. The floorplan credit depends on the age of the unit being traded.
These are the major adjustments that dealers have on most transactions. Other methods to reduce the dealers ultimate cost do exist. Sometimes manufactures extend floorplan credits, offer old age assistance, and can even go as far as offering a dealer specific incentive known as dealer cash. Dealer cash is essentially a rebate that is not required to be passed on to the consumer. This was a common incentive years ago but has fallen out of favor with most manufactures recently.
Please note all of my numbers are illustrative and for example only.
- Floorplan Credits: Most manufactures credit dealers for a certain number of days worth of floorpan interest. This is designed to help dealers keep a fully stocked lot and defer some of the interest costs associated with that inventory. If you are a dealership that effectively manages your turn times, this can be a source of revenue for the dealership. For example, lets say that Ford's current policy pays for 91 days of foorplan interest and assumes a 5% rate (prime) on a $50,000 invoice this would equal a credit of $623.29. If a dealership sells you the vehicle on the 30th day, they will have made $417.81. This obviously works in reverse on old age units. Units that are older the interest credit period cost the dealer interest each day they are on the lot. Both of these situations create incentive for the dealer to move the metal quickly.
So lets run a scenario to illustrate how all of this could work. I go into my local Ford Store and I order a F-150. The MSRP is $55000, and the invoice is $50000. The vehicle is delivered and I pick it up the day after it arrives at the dealership. For the sake of argument lets say I agreed to pay invoice minus holdback ($48,350 Sale Price)
Here is the dealer cost breakdown:
Invoice: $50,000
Holdback: ($1650)
Starstep Incentive: ($400)
Floorplan Credit: ($616.43)
Net Dealer Cost: $47,333.57
Gross Profit on Sale: $1,016.43
Even selling you the vehicle at invoice minus holdback the dealer realizes a profit in this case. This example is a somewhat best case scenario as it is an ordered unit and it will not sit on the lot very long.
Let's look at the same unit, but this time lets say it has been in stock for 180 days.
We will use the same numbers as the basis.
Invoice: $50,000
Holdback: ($1650)
Stairstep Incentive: ($400)
Floorplan cost: $609.59
Net Dealer Cost: $48,559.59
Gross Loss on Sale: ($209.59)
As you can see the floorplan cost associated with the 180 day old unit is what makes this deal unprofitable. If this is a unit that has not had much activity or is distressed collateral (weird powertrain or optioning) this may be a good deal for the dealer to cut their losses on the unit with.
A note about dealer trades:
Lets say your ideal truck is on another dealers lot and you want your dealer to trade for it. Remember that holdback stays with the original dealership. Some dealerships have trading relationships with one another that can make this a non - issue, but in theory, each trade is negotiated individually. Owning dealers are under no obligation to release the holdback to the dealer you want to buy from. Most dealers who have good relationships with one another will trade or sell at net cost. This allows each store to retain the holdback on the traded units. If you are looking for a unique or high demand unit or the owning dealer is not on good terms with the requesting dealer the trade can be completed at a cost greater than net. Back in my days at a Chevy dealership we would only trade our Corvettes at sticker, so basically any dealer who wanted to sell one of our Corvettes had to pay us sticker before they could sell it to their customer. The floorplan credit depends on the age of the unit being traded.
These are the major adjustments that dealers have on most transactions. Other methods to reduce the dealers ultimate cost do exist. Sometimes manufactures extend floorplan credits, offer old age assistance, and can even go as far as offering a dealer specific incentive known as dealer cash. Dealer cash is essentially a rebate that is not required to be passed on to the consumer. This was a common incentive years ago but has fallen out of favor with most manufactures recently.
Please note all of my numbers are illustrative and for example only.
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Popular Reply
08-28-2018, 12:35 PM
Senior Member
Thread Starter
Past 30 days sales: 30
Current inventory + pipeline (on the lot within the next 30 days): 25
Growth objective 10%
Number needed to maintain a 30 day supply: 28
Additional quantity needed: 8
Based on this and available production slots at the factory, the dealer receives the 8 unit allocation and is able to configure orders.
Most dealerships use what is called a pattern order for high volume vehicles. This is dealer specified based on what options are most valued by their customer base. One dealer may view an E-Locker rear end as essential, while another may view it as an added cost without added benefit. These pattern orders are what the dealership uses to quickly configure large volumes of units. Lets say out of those 8 trucks, 1 was a SCab 301A 4x4, 4 were SCrew 302A 4x4 and 3 were Lariat 502A models with the 3.5L. The dealer would most likely have the higher volume XLT and Lariat configuration pre-speced so all they had to do is specify a color and then place the order.
The factory can sometimes throw a curveball in the mix that can put dealers in a situation that is less than ideal. Certain components may have limited availability and require production constraints. In our prior example we stated that we had 8 trucks to build. We wanted 7 of them to have option packages that include SYNC3. Lets say that a supplier issue results in reduced availability of this hardware. Ford will still tell the dealer they have allocation of 8 trucks, but they may say that only 4 of them can be equipped with SYNC3. This means the dealer must decide to either spec 4 trucks without SYNC3 or risk losing the allocation for those trucks for that order period. This is one of the ways you get odd units. The other way is an inexperienced inventory manager misconfiguring units. This can happen from time to time and can result in some pretty funny builds. I was personally responsible for ordering 3 purple Cadillac CTS sedans with a light interior, small motor AND A STICK SHIFT TRANSMISSION. All three of these units had birthdays on our lot. My dealer principal made me buy them a cake and sing happy birthday to them when they turned a year old.
I mentioned allocation before and indicated that it can be discretionary. This is where the factory rep enters. The factory reps job is to make sure the production schedule stays full. This person can apply leverage to dealers to help accomplish this. On slower moving lines (think Flex or Taurus) the factory rep will approach dealers and ask them to take incremental units in order to keep the factory working. As an inducement they can move around some of the production slots for high demand units or constrained options. It could go like this.
Nhammer Ford needs 5 Super Duty trucks in addition to the 8 F-150s explained above. The dealer would like all of these units to be 6.7L diesels, but that option is constrained. The factory rep could offer to give the 5 diesels to the dealership in exchange for them taking 5 Flexs. Or they could say you can have 3 Diesels but you need to build all 8 of your F-150s without SYNC3. This gets the dealer some of their diesels and allows the factory rep to use the 4 constrained options at another dealer.
08-28-2018, 12:53 AM
#2
As you can see the floorplan cost associated with the 180 day old unit is what makes this deal unprofitable. If this is a unit that has not had much activity or is distressed collateral (weird powertrain or optioning) this may be a good deal for the dealer to cut their losses on the unit with.
Someday nhammer maybe you can elaborate on how specific vehicles are ordered that show up on dealer lots. For example, for 2019, does the dealership brass (or automotive group bigwigs if the dealership is part of a huge automotive group like Berkshire Hathaway etc) work through the 2019 order guide and pick a certain percentage of F150's with various packages and options based on previous sales history and then Ford corporate allocates the remaining percentage of trucks to the dealership with "their" thinking on packages and options? I've always wondered about those "distressed collateral" units you mentioned, the ones we've all seen from time to time on different lots - who ordered them that way? Strange towing and axle combos; a trailer brake controller fitted but no tow package, ecoboost and 5.0 engines and 10 speed trans with tow packages but also with 3.15 axles, the list goes on.
08-28-2018, 02:42 AM
#4
2018 XLT FX4
This is the kind of information that I join forums for! Excellent tutorial, nhammer! Thank you very much! I'm going negotiatin' tomorrow on my ordered and delivered truck, so talk about TIMING!t Hopefully this info can help me out! AWESOME! This should be a sticky! Toptobottom needs to see this!
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RubyFX4 (03-03-2019)
08-28-2018, 02:43 AM
#5
...and of course they always run other incentives we don't know about it.
Corvette C4 to C5 Transition Incentive - Credit for difference between MSRP and Invoice. IE Double Dealer Markup.
Corvette C5 to C6 Transition Incentive - $4,000 per Unit.
2015 F150 Dealer Incentive (When they were afraid Chevy was winning the sales race) - $400 a Unit.
Corvette C4 to C5 Transition Incentive - Credit for difference between MSRP and Invoice. IE Double Dealer Markup.
Corvette C5 to C6 Transition Incentive - $4,000 per Unit.
2015 F150 Dealer Incentive (When they were afraid Chevy was winning the sales race) - $400 a Unit.
08-28-2018, 07:22 AM
#6
Senior Member
Thread Starter
Thanks for the tutorial. I learn something new each time I'm on this forum.
Someday nhammer maybe you can elaborate on how specific vehicles are ordered that show up on dealer lots. For example, for 2019, does the dealership brass (or automotive group bigwigs if the dealership is part of a huge automotive group like Berkshire Hathaway etc) work through the 2019 order guide and pick a certain percentage of F150's with various packages and options based on previous sales history and then Ford corporate allocates the remaining percentage of trucks to the dealership with "their" thinking on packages and options? I've always wondered about those "distressed collateral" units you mentioned, the ones we've all seen from time to time on different lots - who ordered them that way? Strange towing and axle combos; a trailer brake controller fitted but no tow package, ecoboost and 5.0 engines and 10 speed trans with tow packages but also with 3.15 axles, the list goes on.
Someday nhammer maybe you can elaborate on how specific vehicles are ordered that show up on dealer lots. For example, for 2019, does the dealership brass (or automotive group bigwigs if the dealership is part of a huge automotive group like Berkshire Hathaway etc) work through the 2019 order guide and pick a certain percentage of F150's with various packages and options based on previous sales history and then Ford corporate allocates the remaining percentage of trucks to the dealership with "their" thinking on packages and options? I've always wondered about those "distressed collateral" units you mentioned, the ones we've all seen from time to time on different lots - who ordered them that way? Strange towing and axle combos; a trailer brake controller fitted but no tow package, ecoboost and 5.0 engines and 10 speed trans with tow packages but also with 3.15 axles, the list goes on.
08-28-2018, 07:25 AM
#7
Senior Member
Thread Starter
...and of course they always run other incentives we don't know about it.
Corvette C4 to C5 Transition Incentive - Credit for difference between MSRP and Invoice. IE Double Dealer Markup.
Corvette C5 to C6 Transition Incentive - $4,000 per Unit.
2015 F150 Dealer Incentive (When they were afraid Chevy was winning the sales race) - $400 a Unit.
Corvette C4 to C5 Transition Incentive - Credit for difference between MSRP and Invoice. IE Double Dealer Markup.
Corvette C5 to C6 Transition Incentive - $4,000 per Unit.
2015 F150 Dealer Incentive (When they were afraid Chevy was winning the sales race) - $400 a Unit.
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08-28-2018, 08:45 AM
#9
so if you special order the exact truck you want through your dealer, the chances of getting as goof of a deal as one where the truck has been sitting awhile are not good?
08-28-2018, 09:23 AM
#10
Senior Member
Thread Starter