What Is the Markup on New Cars?

by Barb Nefer

New cars all have a sticker listing their standard and optional equipment and a price. It is known as the manufacturer's suggested retail price, or MSRP. It is usually much higher than the amount paid by the dealer. Smart consumers do not consider the MSRP in their negotiations, the Safe Car Guide website advises. They use the dealer's cost as a baseline. There is no standard markup on new cars as the amount varies by manufacturer and model. However, the number can be determined through simple research.

Invoice

Automotive websites can help you to calculate the invoice price.

The first step in determining the markup on a particular new car model is to calculate the invoice price. There is a base amount for the car and a cost attached to any optional items or equipment packages. Kelley Blue Book, Edmunds and other automotive websites (see Resources) allow consumers to look up the invoice price for virtually any vehicle. This is the starting point for figuring out the markup.

Transportation

All new car invoices list a destination charge. It usually runs several hundred dollars. This is a legitimate charge that covers the cost of transporting the vehicle from the manufacturing facility to the dealer's lot, according to the Car Buying Tips website. It is traditionally paid by the consumer and should be added in to the invoice amount when calculating the true vehicle cost and markup.

Holdback

Car manufacturers pay holdback.

Car manufacturers pay an amount called a holdback to their dealers for each new vehicle, according to Edmunds. It is usually a percentage of the MSRP or invoice cost. The exact holdback percent for a specific car brand can be found on Kelley Blue Book, Edmunds and similar websites. The holdback reduces the amount that a dealer actually pays for a car, so it should be subtracted from the invoice amount when figuring out the markup.

Incentives

Investigate any potential rebates.

Most consumers are familiar with rebates, which reduce the cost of a new car. Manufacturers sometimes give special rebates or incentives that are paid directly to the dealer rather than the buyer. These amounts are not advertised to the general public. The dealer may choose to pass along some of the money by selling vehicles at a cheaper price, or he may pocket it as additional profit. Automotive research websites typically list these amounts and their valid dates.

Calculation

The more you know the more you can negotiate with the dealer.

The new car markup is determined by tallying the invoice cost, including the destination charge, then subtracting the holdback amount and any current factory-to-dealer incentives. The difference between this number and the MSRP is the markup. You have more negotiating power when you know this information. The dealer will insist on making some profit, but you can use his cost as the starting point in your negotiations and minimize the markup amount you pay.

About the Author

Based in Kissimmee, Fla., Barb Nefer is a freelance writer with over 20 years of experience. She is a mental health counselor, finance coach and travel agency owner. Her work has appeared in such magazines as "The Writer" and "Grit" and she authored the book, "So You Want to Be a Counselor."

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