Understanding Dealer Markup on New Cars: Key Insights and Negotiation Strategies

The concept of dealer markup on new cars is often shrouded in mystery, but it is a crucial factor to consider when making a large financial commitment. Simply put, the dealer markup is the extra profit a car dealer makes on top of the cost of the vehicle. This markup can vary widely depending on the specific model, market conditions, and negotiating skills of the salesperson.

What Affects Dealer Markup?

The amount of markup a dealer adds to a new car can vary dramatically based on several factors:

The popularity of the car model The availability and demand for the car The current market value and supply of the car The specific dealership and its pricing strategy The salesperson's negotiation skills and methods

Mark Up Can Vary Significantly

There is no universal answer to the question of dealer markup. The specific markup will depend on the model and its current market value. Some car models may have little to no markup, while others can have marked-up prices ranging from a few hundred dollars to thousands of dollars.

Types of Markup

The idea of dealer markup can be interpreted in two ways:

Theoretical Gross Profit Markup

The first interpretation refers to the theoretical gross profit, which is the difference between the invoice price and the Manufacturer's Suggested Retail Price (MSRP). In my experience selling Subaru models, this markup ranged from $850 to around $3500. For example, a base model Impreza would have a lower profit, whereas a Touring Ascent could have a much higher profit margin.

Additional Dealer Markup (ADM) Sticker

The second interpretation of dealer markup refers to the ADM sticker, which some dealers use to explicitly mark up the price. In the earlier days, we called it a 'market adjustment' and it ranged from $995 to $1995. This sticker was added to the MSRP on 'hot' models and was a powerful negotiating tool. For instance, with the Crosstrek, I offered to split the ADM with customers, allowing me to make extra money.

Historical Context and Shady Practices

The use of ADM stickers evolved over time. Initially, they were seen as a transparent way to mark up the price, making it easier for customers to understand. However, as competition increased and more dealers started using these stickers, some began to misuse them for models with less demand. Over time, ADM stickers were deemed somewhat shady and we moved away from using them.

I vividly remember my first encounter with an ADM sticker at a Chevrolet dealership for the new 'vette in 1984. The MSRP was around $22,000, which was several times what I was earning in a year. There was a little blue and white sticker next to it advertising an ADM of $6000. When I asked the salesman, he explained that this was a 'Additional Dealer Markup' and that many were willing to pay a 25% premium over the sticker price, all due to the high demand and limited availability.

Negotiation Strategies

Understanding the concept of dealer markup is crucial when negotiating the price of a new car. Here are some tips:

Do your research to understand the market value and competing models. Familiarize yourself with the specific dealer's pricing strategy and markup. Be prepared to make a counteroffer based on your research. Build a rapport with the salesperson to gain their trust and establish a negotiation. Use tools like online car valuation services to support your arguments.

By understanding the dealer markup and employing strategic negotiation techniques, you can save a significant amount of money when purchasing a new car.

Conclusion

Understanding the dealer markup on new cars is essential for making an informed decision. The markup can vary widely, influenced by the popularity and demand for a specific model, the local market conditions, and the negotiating skills of the salesperson. By researching and employing effective negotiation strategies, you can secure a better deal and save thousands of dollars on your next car purchase.