How to Calculate a New Car Fair Profit Offer
Calculating an offer upfront will save you time, money, and frustration.
How much should you offer to pay for a new car? You don’t want to overpay, and you also don’t want to make a lowball offer that will get you laughed out of the dealership. Your goal is to calculate a new car fair profit offer that benefits you and the dealership.
Learning how to calculate a fair profit new car offer before buying your next car will save you time, money, and frustration from haggling with a car salesman and guarantee you don’t pay too much on your next vehicle purchase.
Table of Contents
- What is a fair profit to pay for a new car?
- Considerations when figuring an offer
- How to calculate a fair profit new car offer
- The vehicle doesn’t have a rebate or incentive
- Figure an offer with an incentive
- Calculate an offer with an incentive and rebate
- What is a Destination Fee?
- How to leverage your offer
- Further tips and advice
What is a Fair Profit to Pay for a New Car?
Offering to buy a new car at an unrealistic lowball price immediately lets a dealer know you’re not well prepared.
Making a low-price offer may lead them to believe he has a better chance of taking advantage of you during the car buying process.
Even though this formula is a great way to calculate a fair price to pay for a new car for you and the dealer, many car salespeople dislike this information because it decreases their chance of making a significant commission on the deal.
After reading this article in its entirety, you’ll be able to figure out a fair profit new car offer and present it to a dealer with confidence you’re not overpaying for a vehicle.
“Ask for all of it; the dealer will!”
When it’s time to present your “offer to buy,” you’ll want to add additional pressure on the dealer by putting him on the spot.
Once the dealer investigates your figures are realistic, he’ll know that you’ve done your homework and are ready to buy a car right now.
I get emails asking me, “how much should I pay for a car?” Calculate your fair profit offer to be somewhere within this range:
3-5% Over a Dealer’s New Car Cost = Fair Profit New Car Offer
An offer of 3-5% over a dealer’s actual new car cost is acceptable when purchasing a new car.
Although it’s not a huge profit, a dealer will sell a new vehicle for a 3-5% margin any day of the week.
They know you are an educated car buyer, and they will have the opportunity to make up any lost profit on the next uneducated customer that walks through the door.
- Many dealers across the United States live on about a 3% profit margin. This margin will fluctuate minimally depending on the economy, but 3% is the overall average.
- NEVER calculate your fair profit offer from the factory invoice price. Dealers lead you to believe the invoice price is their cost, but this is false. The invoice price of a new car is what the dealer paid for the vehicle, not the dealer’s actual true cost.
Considerations When Figuring a Fair Profit New Car Offer
There are several things you should take into consideration when calculating your offer. Missing one or more of these items can keep you from savings that may be available.
- Manufacturer to customer rebate programs
- Manufacturer to dealer incentive programs
- Dealer Holdback (may or may not be negotiable, depends on the dealer)
- Special cashback or rebate programs
- Factory added options
- Dealer added options (may or may not be removed by the car dealer)
Additional Fees You Must Pay:
- Destination fee
- Tax, title, and license fees
- Any unavoidable state or government fees required by law
Some state, government, or other fees are unavoidable and your responsibility to pay. Always include these additional dealer fees after your estimated offer.
How to Calculate a Fair Profit New Car Offer
The steps for figuring out a fair profit new car offer are relatively straightforward. Rebates, incentives, special programs, and dealer holdback vary by manufacturer; this can affect the outcome of your offer. I’ll show you how to figure this out below.
The formula for finding a dealer’s actual net new car cost:
Invoice Price – (Dealer Holdback + Factory to Dealer Incentive) = Dealer’s True New Car Cost
The first thing you want to do is find a vehicle. The fastest way to do this is using free automotive websites such as Ryde Shopper and Edmunds.
These online automotive research companies provide a wealth of information to help you research, review, and compare vehicles you are interested in purchasing.
Once you find a car, request a few free quotes (I recommend at least six to eight quotes).
This will give you a good idea of the current demand and market for the vehicle in your local area. The higher the demand, the harder it will be to negotiate the price.
Quotes also contain much additional information to help you calculate your offer. Many readers tell me they’ve received deeper discounts than what they figured.
Once you’ve landed on a new car, you’re ready to proceed to the next step by figuring out the dealer’s new car cost.
- Car dealers will advertise customer rebates publicly to entice customers to buy.
- Dealers usually keep factory-to-dealer incentives a closely guarded secret.
- To correctly figure out your offer, you’ll need to know if the vehicle has any secret money attached to it. You can find the most current rebate and confidential incentive information at Edmunds. Just look up your car and check its current available incentives.
The Vehicle Doesn’t Have a Rebate or Incentive
You would like to buy a 2015 Ford Mustang coupe for this example. Go to Edmunds, look up the car, select your options and find the MSRP. The MSRP is $22,145 before the destination fee, and the invoice price is $21,093.
You can also get the dealer holdback amount here, or you can find it on my dealer holdback chart. The holdback amount is 3% of the total MSRP, which calculates to $664.35.
|No Rebate or Factory Incentive Available|
|$22,145.00||=||Sticker price of new car.|
|$21,093.00||=||Factory invoice price. (Including factory added options)|
|$664.35||-||Subtract dealer holdback. (3% of MSRP *amount varies)|
|$20,428.65||=||Dealer's true net new car cost.|
|$817.15||+||4% fair profit. (Dealer's true cost x 4%)|
|$21,245.80||=||Your calculated fair profit new car offer.|
Suppose your offer comes in over the factory invoice. Start your proposal at invoice and work up from there. The worst thing is that the dealer doesn’t accept your first offer.
Calculate a Fair Profit New Car Offer With an Incentive
Let’s say you’ve found a car you would like to buy. The vehicle’s sticker price is $31,000, and the factory invoice is $29,000. Dealer holdback on the vehicle is 3% of the invoice, which is $870.
You also find there’s a $2,500 secret factory-to-dealer incentive available. This incentive is available from the manufacturer to the dealer to help move the car off the lot to make room for the newer models. The dealer will not usually bring up these incentives unless you mention them first.
First, let’s figure out what the dealer’s true cost is:
|How to Calculate Dealer Cost|
|$31,000.00||=||Sticker price of new car.|
|$29,000.00||=||Factory invoice price. (Including factory added options)|
|$870.00||-||Subtract dealer holdback. (3% of MSRP *amount varies)|
|$2,500.00||-||Subtract factory to dealer incentive|
|$25,630.00||=||True dealer's net cost|
The goal is to not pay more than 5% profit for your new car. Using 3% first will give you a little “wiggle room” to negotiate with the dealer. If you decide to use 3%, calculate the 5% profit margin to stay within your goal.
Now let’s add the 3-5% fair profit amount to the dealer’s actual cost. I’m using 4% for my examples.
|How to Figure a New Car Offer|
|$25,630.00||=||Dealer's true net new car cost|
|$1,025.20||+||4% fair profit offer(Dealer's cost x 4%)|
|$26,655.20||=||Your total fair profit new car offer|
If you were to offer the dealer $100 over invoice on the above car, you would save $1,900. If you buy the vehicle at your fair profit offer of $26,655.20, you will save $4,344.80 off the sticker price. That difference is $2,444.80 between you reading this website or just shooting from the hip and stating, “I’ll pay $100 over invoice.” Even if you fall between the above two numbers, you’ll save more than paying $100 over the invoice.
Your offer is well below what an uneducated buyer would offer. However, intelligent car buyers like yourself need those inexperienced buyers so you can get a more significant discount when you buy a new car.
Fair Profit Offer With a New Car Rebate and Incentive
In the following example, the vehicle has both a customer rebate and a factory-to-dealer incentive.
Your Fair Profit New Car Offer = (Dealer Invoice – (Dealer Holdback + Dealer Incentive) ) * 3-5%
This time you’re looking to buy a Hyundai Elantra GLS. Go to Edmunds and enter your desired options.
You find the MSRP before the destination fee to be $19,900. The invoice price with options on the car is $16,461. Now calculate the holdback amount of 3% of the total MSRP, which is $597. Let’s see how this one breaks down.
|Incentive & Rebate Available|
|$19,900.00||=||Sticker price of new car.|
|$16,461.00||=||Factory invoice price.(Including factory added options)|
|$597.00||-||Subtract dealer holdback.(3% of MSRP *amount varies)|
|$1,000.00||-||Subtract factory to dealer incentive.|
|$14,864.00||=||Dealer's true net new car cost.|
|$594.56||+||4% fair profit.(Dealer's true cost x 4%)|
|$1,500.00||-||Subtract customer rebate|
|$13,958.56||=||Your calculated fair profit new car offer.|
The above offer saves almost $6,000 off the vehicle’s sticker price. Deals go down in dealerships like this every day; you must catch them at the right time.
What is a Destination Fee?
When calculating your offer, DO NOT INCLUDE the destination fee, state-required fees, or any other changes.
AFTER calculating your fair profit new car offer, you must apply the destination fee and any additional costs you agree to pay.
Your offer $26,655.20 + $720.00 (Destination fee) = $27,375.20
The destination fee is added to the MSRP of the vehicle by the manufacturer; it is an additional charge for shipping the car to the dealership.
You can find this fee on the big Monroney sticker on the side of the vehicle. It’s usually located right before the total price of the vehicle and is your responsibility to pay.
Keep an eye out for car dealers trying to “double-dip” you on this fee, attempting to charge you twice.
How to Use Your Fair Profit New Car Offer as Leverage
By calculating a fair profit for a new car offer, you’ll have a target goal for what you should pay for your next new car, truck, minivan, or SUV.
Figuring out the dealer’s actual new car cost and adding a fair profit will let the dealer know you’ve done your research and are ready to buy a car without any games.
In my career, I’ve sold many vehicles for a loss to guarantee the store hit a quota required by the manufacturer to hit a bonus.
For example, the reward could be $25,000 for selling 25 Nissan Sentras within a month, and I only have 23 sold with a few days left. I don’t mind losing a couple of thousand dollars to ensure the store gets the bonus.
I’ve also sold cars for a loss that have been sitting on the lot getting old. You never know what kind of mood a car dealer is in or what they might do to sell a car.
Remember negotiating is a back and forth process, and there is nothing wrong with being flexible with your offer.
Start with your lowest offer and increase it with every counteroffer until you reach the maximum amount you want to pay. It’s okay to spend a little more than what you’ve figured. It comes down to how much you want the car.
Your goal is to pay as close to your calculated amount to guarantee you pay the absolute lowest price available.
Further Tips and Advice
Further tips and advice about calculating a fair profit new car offer:
- As of 2016, dealer holdback is becoming more challenging to negotiate with dealers. However, many dealers are still prepared to give up some or all of it to sell a vehicle over one from their rivals. The old saying rings true, “If you don’t ask, you won’t receive.”
- Read the buyer’s order and contract carefully, and pay attention to any fees a dealer is presenting to you. If something doesn’t sound right, have the dealer show legal documentation or proof that it’s your responsibility to pay it.
- Your fair profit new car offer will also help you determine your cash down payment towards your new car.
- Compare your fair profit new car offer with quotes you receive from free new car quote sites available online. Doing this will not only let you know how “in demand” or “popular” the car is, but it will also tell you which local dealers in your area are currently more flexible, discounting the vehicle’s price.
- The two numbers you need to know are the dealer’s actual new car cost and your fair profit offer. Knowing these two amounts will help you determine if you’re receiving a good or bad deal on the next car you buy.
- Figure a fair profit offer on every new car you want to buy.
- Keep your figures organized and handy, so you can refer back to them if necessary.
- Although advertising and flooring fees are listed on the invoice, they will vary between manufacturers and market areas. These fees are optional, and you may be unable to negotiate them. They can be as high as 3% of the sticker price or MSRP and are not directly available to the public. When you get to the dealership, you can ask to see the invoice and have the car salesman or sales manager point them out to you.