Pricing Basics for New-Car Buying
Understanding the Terms Will Help You Get a Great Deal
People toss around phrases like "invoice price" and "sticker price" all the time. But do you really understand what they mean? Car buying has a language of its own and you need to understand the nuances of these pricing terms if you want to get the best deal.
Three important pricing terms are commonly used in new-car buying: sticker price, invoice price and True Market Value price. Each term has its own distinct meaning and is best used in certain circumstances.
Before getting into the details, here's a quick way to remember these terms and what they are used for:
Sticker Price: This is also known as the manufacturer's suggested retail price or MSRP. It's basically the price that the dealer would like you to pay for the car.
Invoice Price: This is roughly what the dealer paid the carmaker for the vehicle. The "roughly" aspect will be discussed later.
True Market Value (TMV®): This is the price at which you can probably buy the car, according to Edmunds.com.
These prices form a bracket. Sticker price is the highest figure, invoice price is the lowest and somewhere in between is the TMV price. There are exceptions to this, such as when a car is just being released into the market. It will then sometimes sell at "over-sticker" prices. But most of the time, TMV — the price you actually pay for the car — will be between sticker and invoice.
Now that you have a little perspective, let's look a little deeper at these car pricing terms and when to use them.
Sticker Price: This figure is the most visible number on the car's window sticker. It is also the price cited in many newspaper and TV car advertisements. As mentioned, dealers would like you to pay this price for the car. And they often try to start negotiations at sticker price. In fact, when you are on the car lot, the salesman will direct all your attention to this official-looking number that's prominently displayed on this official-looking document. The number has a certain authority that's designed to influence buyers.
Invoice price: Manufacturers ship cars with invoices, which are the bills from the manufacturer to the dealer for each vehicle. Since the dealer will have to pay that amount for the car, anything over that will be the dealer's profit. In recent years, a popular car-buying strategy is to ask to see the dealer's invoice and then offer an amount "over invoice." You could say, "I'll give you $500 over invoice for the car."
Depending on the popularity of the car, you can sometimes buy a car at the invoice price. Occasionally, you can pay below invoice for a car if there are incentives such as customer cash rebates or "dealer cash." Dealer cash is unadvertised money the manufacturer pays the dealership to help it sell cars.
The invoice is actually a difficult form for consumers to read since it is filled with numbers and abbreviated terms that only automotive insiders understand. But it does have valuable information, since it lists not only what the dealer paid, but also additional fees he might have paid, such as for advertising and other regional costs. In recent years, dealers have become more open to showing customers the invoice. It's best to ask politely to see the invoice rather than demanding it as if it is your right.
Here's why the invoice price is only "roughly" what the dealer paid for the car. It's because of the "holdback" amount that most manufacturers assign to a car. The holdback is a percentage of the sticker price or invoice price. Manufacturers pay it to the dealer after he sells a car. This means that a dealer could sell a car at invoice price, tell the customer that's he not making one penny on the deal and still get a check from the manufacturer a month later for $500. For more information on holdbacks and the holdback amounts for the different manufacturers, see this article.
True Market Value (TMV) Price: Edmunds.com created the TMV price to be the one car-buying number you need to know. Edmunds analysts look at the market, examine what other cars have sold for, consider the popularity of the car within your region and set the TMV price. It is the average amount that other buyers in your area are paying for the car. Usually, TMV is less than sticker price but more than invoice price. Because it's an average, some people will pay much less than TMV and others will pay more. But by looking at TMV, you can get a rough idea how popular the car is and what you should expect to pay for it.
Kelley Blue Book Price: There's one last term car buyers often hear and that's the Kelley Blue Book price or, more simply, a car's " blue book value." It's important to understand that these two terms mainly apply to used-car shopping. Kelley lists its own used-car values, using its own method. Often, Kelley's prices differ from Edmunds.com's TMV prices. Dealerships will use Kelley prices when making offers on cars people want to trade in or when they're listing used cars for sale on their lots. For more information, read this more detailed explanation.
How Pricing Terms Affect Negotiating
The dealer would like you to negotiate using the sticker price as the starting point. The higher the dealer starts negotiations, the more room he has to reduce the price and still make a good profit. You, on the other hand, should consider making the invoice price your starting point, and work up from there. Keep your eye on TMV as being where you want to wind up. Be ready to pay TMV — but try to pay less.
The market is always changing and prices fluctuate rapidly. Therefore, it's important to shop around for the best deal. The three car pricing terms here will guide you as you get quotes and consider various offers. As you shop, you will become an expert on car pricing in your area during the period of time you're shopping for your car. And when you know the numbers behind the deal, it will make you a better negotiator.