A dealer margin, or dealership profit margin, is the monetary difference between the invoice price, which is the amount that a dealership pays to acquire a vehicle, and the MSRP, which is the manufacturer suggested retail price – also known as the sticker price.
As its name suggests, the MSRP is only a suggested price, which means that the consumer can potentially lower it by negotiating with the dealer. However, there are a few caveats to the negotiation process. For instance, by naming a price below the MSRP, the consumer can easily cut into the dealer’s profit and perhaps even lose their chance of scoring a good deal.
Why is it so easy to cut into a dealer’s profit? Because dealer margins are actually very thin. In fact, the average net profit on new cars in Canada is around 2.2 per cent. Gross profits, however, are a little higher, running between 8 and 10 per cent.
For best results, the consumer’s negotiated price should be roughly between three and seven per cent above the invoice price. To find out the invoice price on your chosen vehicle, access our free dealer cost report and fill out our Drive Away Price Worksheet, as explained in this article. With this worksheet, you will be able to show the dealer exactly how much he or she will make, while also scoring a very good deal.
There are other factors that can affect a dealer’s profit margin, such as dealership overhead costs – or costs that are not directly related to acquiring vehicles. Those tend to include employee salaries, building maintenance, electricity and so on. When it comes to employees, a dealership needs at least 9 to 10 of them to keep the dealership afloat:
The true profit margin comes into effect after absolutely all costs are taken into account.
Sometimes the manufacturer may raise the invoice price but not the MSRP, forcing the dealer to pay more for the vehicle. This move leaves the dealer with a lower potential profit margin, which in turn makes it tougher for the consumer to negotiate the price down. To make sure you are not depriving the dealer of his or her profit, always check the invoice price.
If you have any additional questions, feel free to contact us at any time or access our free dealer cost report.
Updated on March 26, 2013
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