If you are like many new car buyers, you walk into a new car dealer armed with pricing information. And key to your armament is “Factory Invoice,” that once secret but now widely available data point of what the car dealer paid the car manufacturer for the car.
You do your homework, you read the pundit’s advice – “don’t pay the sticker price, pay something above Factory Invoice– the closer to Factory Invoice the better.” So when the time comes you show the salesperson that you know his cost, and that you are willing to pay X dollars for the car, just a few hundred dollars over Factory Invoice. The Salesman protests, but the Sales Manager ultimately accepts your offer. Purchase made, you leave satisfied, you got a fair price.
But what if you didn’t? What if Factory Invoice isn’t what the dealer paid? What if the industry redefined “dealer cost” in a way that “Factory Invoice” misses?
The folks at Fighting Chance examined the ratio of Factory Invoice to MSRP over a twenty year span from 1993 to 2013. What they found was that in the early 1990s, Factory Invoice was roughly 86% of the MSRP – dealers made a 14% profit if they sold at MSRP. By 2013 the ratio was about 94%, leaving dealers with only a 6% profit.
An extrapolation of the data shows that by about 2025 Factory Invoice will exceed MSRP and dealers will lose money on each vehicle sold at MSRP!
Okay, joke made. What’s going on?
Manufacturers and dealers have figured out that consumers can obtain Factory Invoice, and use that as leverage. So, rather ingeniously, the industry has moved to keep raising the Factory Invoice ratio, but use other mechanisms (with lots of names like holdbacks, volume discounts, and many more) to funnel cash to a dealer for each car sold this post. The net effect is that while the ratio of Factory Invoice to MSRP has shot up, the ratio of a dealer’s real cost to MSRP has not. This is intentional, and while it serves several purposes, one of those purposes is to “de-fang” Factory Invoice. On many occasions, dealers are happy to sell a vehicle at Factory Invoice (at a nice profit).
For consumers who buy cars using Factory Invoice as a guide, the price paid keeps getting closer and closer to MSRP, so consumers end up paying more, happily ignorant of doing so.
My recommendation, until a better solution comes along, is to look at the many services that promise to get you a great price (sometimes called “true price,” “fair price,” or similar), and use that price as the maximum price you should pay for the vehicle – that price may be higher or lower than the Factory Invoice. You’ll be able to get the vehicle for that price or less, and you don’t need to use the service to do so.