The Cost You Don’t See
The second set of numbers is what the manufacturer charges the dealer for the car and the options. This is referred to as the invoice or "tissue" cost. The difference between the MSRP and the invoice is the markup and targeted profit figure.During your test drive, find an opportunity to copy down all of the price information on the window sticker. Or if you prefer, just drop into a dealership and, should you be approached by a salesperson, announce that you are just looking. Usually that's enough to send them back to their desks, figuring that since you're not a buyer "today" you're not worth talking to. The major task here is to be sure that you write down all the key information including the dealer add-ons.You might find it convenient to make a copy of the form on the next page and use it during your visit. (You'll also find a copy in your "Checklists.") Your objective is to leave the dealership with the information in columns 1 and 2 filled in. We'll discuss how to determine the dealer costs (or invoice) in Column 3 in a moment

Determining the invoice cost
Buy the most current copy of a new-car price guide like Edmu-nd's New Car Prices or Consumer Guide Auto Series and find your car. (Consumer Guide also advertises a fax service called Price Fax that, for a fee, will supply you with pricing information.) Compare the list prices with those you've copied from the window sticker. If the figures don't match, you may have an older book. You may also find some minor variation in the options, as manufacturers will change prices rather frequently, making it difficult for a publication to stay truly current. For your purposes, the figures should be close enough to provide you with enough information to complete the chart for analysis purposes.

Using the work sheet on the preceding page, find the items in Column 1 in the price book and list the dealer prices as shown in the book in Colurrul 3. Then subtract 2 from 3 to give you the profit each item represents. When you add up the invoice-dealer cost figures, you'll know what the manufacturer is charging the dealer for the car. The total in Column 4 will show. the dealer's profit before the holdback or any factory incentives are figured in. Then add the supplemental charges or "pack." Usually, the supplemental charge can be and should be challenged and made part of the negotiation.Below, we've filled out a work sheet using figures that we obtained from a dealer offering the Volkswagen Jetta GL.

At this point you know two things:
1. The MSRP represents a profit to the dealer of $1,502.
2. His supplement or add-ons total $547. The actual cost will be hard for you to determine, but you can be sure that most of the supplement represents profit. For purposes of our illustration; we are assuming that the profit is about $500, for a total of $2,002 of profit that we know about.

The Hidden Profit
Now we have to look for the hidden profit. This comes from two potential sources:

1. Factory-to-dealer incentives
2. Dealer hold-backs

Factory-to-dealer incentives
Frequently, the manufacturers-often called "the factory" in car par¬lance-will offer their dealers incentives on certain cars in order to help move inventory. The incentives serve to lower the cost of the car to the dealer and make it possible for the dealer to offer deals, nego¬tiate deeper discounts; and generally provide a customer with the opportunity to buy a car for a lesser price. These incentives can range from several hundred dollars to four or five thousand in the luxury car range. This is information you'd like to have for your negotiation.

One good source for this information is the industry magazine lutorraotive News, a weekly publication from Crain Communications. , You can often find copies in your library, or possibly the car loan department of your bank or credit union will have a copy. In the back uf the magazine you'll usually find a section called "Incentive Watch," w-hich shows current dealer and customer incentives. In one issue we found dealer incentives ranging from $200 up to $5,000. Obviously, the uigher the retail price of the car, the higher the factory incentive. Constumer incentives ranged from $300 to $3,000. Understand that these ncentives are likely to change frequently.In the case of the Volkswagen Jetta, we found that at the time of Wis writing--and by the time you read this it will have changed-the ,ctory was offering dealers an incentive of $500. This is profit and aould be figured into your calculations.

Dealer hold-backs
is common practice today for the manufacturer to hold back 2 to 3 Percent of the dealer's profit and then pay that profit once the car is l. What this does, effectively, is give the dealer an opportunity-if so chooses-to show you an invoice that is from two to three perut higher than his actual cost. If he can talk you into giving him 3 or 4n Percent over "invoice," he could well walk away with 6 to 7 percent fit and maybe a factory incentive to boot. For purposes of your number gathering, assume that the hold-back amounts to at least 2.5 percent. In other words, if the difference between the MSRP and the invoice is 15 percent, you can safely assume that the true markup is between 17 and 18 percent.

In the case of the Jetta, the hold-back is 3 percent-again at the time of this writing-and that represents approximately $477 of additional profit to the dealer. When you total up the dealer's potential profit you find that:

Profit markup in the car and options    $1,502
Supplemental Charges-estimated profit    $500
Factory-to-dealer incentive    $500
Dealer hold-back    $477

Based on your research, you know that the Jetta could potentially produce a gross profit of approximately $2,979.
As we noted earlier, from this profit the dealer must pay interest on the car (his floor plan) and pay a commission to the salesperson. The amount of the commission is usually determined as a percent of the gross profit, but it will vary from one dealership to another. Finally, the dealer must make a contribution to the cost of his overhead. The rest is profit. This is "front-end" profit. There is also "backend" profit and profit from your trade-in and profit from the parts and services you'll buy over the period of ownership. You can almost think of the new car as the stopper in a bottle of profits that begins to flow into the dealership once you sign the buyer's order.

The Value of This Information
Consider the value of this information to your buying strategy. Most people walk into the dealership selling the VW--or any car, for that matter-look at the sticker, and assume that the bottom-line price of the car is $15,915 plus the $547 supplement, for a total of $16,462. They will probably assume that by being aggressive they can get a 10 percent discount, so they will start their negotiation by asking for a $1,600 discount off the MSRP. In most cases, after a good deal of "grinding," the dealership-pleading poverty and expressing the fear that this deal could force them out of business-will finally agree to an $800 discount, leaving the dealership with about $2,000 of profit-before they start to sell the back¬end items-e.g., the financing, insurance, extended warranties, etc.

Knowing what you now know, you can elect to begin your negotia¬tion not at the list price but at the actual price. Knowing that the dealer's cost is about $13,936 ($14,413 invoice less 3 percent hold-back of $477), you can start the negotiation by offering 3 percent over the true cost-about $418. You might even elect to agree to another $100.
Chances are, if it's the end of the month, if the dealer is loaded with inventory, and the car or truck you're buying is not in high demand, with persistence you'll make your deal.