What is "dealer cost" and is it legitimate?

Dear Car Talk

Dear Car Talk | Jun 01, 1996

Dear Tom and Ray:

I had the agonizing experience of negotiating the buying of
a new 1995 Jeep Wrangler S. The subject of dealer cost came
up time and again during the course of our lengthy
negotiations. The sales people, including two or three
levels of management, insist that their cost was just $300
less than "list price." The vehicle had a base sticker
price of $13,300. I find it hard to believe that a $13,300
piece of hardware would command less than a 3 percent
markup. In fact, I don't believe it. I realize that the
topic of sales may be outside your area of expertise, but I
hope you'll have some insight for me. -- Harry

RAY: Well, Harry, you'll be glad to know that lack of
expertise has never stopped us from commenting before!

TOM: There are actually a number of ways to get a look at
the so-called "dealer cost" when you're buying a car.
Consumer Reports is one of the best known sources. We
happened to get our information on the Internet from a
place called AutoSite (http: //www.autosite.com).

RAY: We looked up the last price available for a 1995
Wrangler S (they are now selling mostly '96s), and found
the base price to be $12,290 plus a $500 destination fee.
Now, yours may have had dealer-added accessories (like
those all-important pin stripes) which raised the "base
price." But that's the number we got.

RAY: The dealer cost for that $12,290 Jeep Wrangler is
listed as $11,830 (plus the same destination charge). So
the dealer markup on that model appears to be just under 4

TOM: Not bad, right? Well, before you jump to the
conclusion that this poor dealer is barely squeaking by, we
should explain that the concept of "dealer cost" is a
little bit misleading. While it's true that more and more
of a dealer's profits are coming from repairs and used-car
sales, there IS more profit than there appears in new-car

RAY: There's something called a "dealer hold-back."
Essentially, the manufacturer "holds back" a small
percentage of the price of the car (usually about 3
percent) to be paid to the dealer after the car is sold.
That's why you occasionally see dealers advertising cars at
"dealer cost plus $50," or similar such things. They can do
that because there's an extra 3 percent of profit for them
that you don't know about.

TOM: So they weren't lying to you, Harry. They just weren't
telling you the truth -- if you catch my drift.

RAY: Here's what we recommend if you're buying a car.
First, get a copy of our pamphlet (How to Buy a Used Car:
Things Detroit and Tokyo Don't Want You to Know.You can
order it by sending $3 and a stamped (55 cents),
self-addressed, No.10 envelope to Used Car, PO Box 6420,
Riverton, NJ 08077-6420) and see if a used car makes more
sense for you. After reading the pamphlet, if you still
want to buy new, do your homework and get a printout of the
dealer cost.

RAY: Then shop around and see how close you can come to
that dealer-cost number (remember, you're not cutting out
the dealer's profit. He's still got the hold-back, plus
whatever he gets above the dealer cost). How close you can
come to that "dealer cost" number depends on a variety of
factors, such as how car sales are going this month and
this year.

TOM: And how popular the particular model you're buying is
at this time (you're going to come a lot closer to dealer
cost on a Ford Aspire than you are on a popular Toyota

RAY: Other factors include whether you'll take a
less-popular color (a dealer may be dying to get rid of a
hot-pink Lincoln Town Car) and how long a particular car
has been sitting on the lot (because he pays interest to
the bank every day it sits there unsold). You'll find out
how close you can come to dealer cost by comparison

TOM: But in the end, I suggest you buy the car from a
dealer that's convenient to your home or work. My brother
has found through painful experience that driving 45 miles
-- eight times -- to get the radio fixed under warranty
wasn't worth the $200 he saved by buying his car out in the

RAY: No,it isn't. Especially since my wife had to make
those trips for me, and she's never let me hear the end of

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