Ways Dealers and Manufacturers Deliberately Distort Selling Prices

Before 1958, there was no such thing as a manufacturer’s suggested price (MSRP) on cars. We can thank the late Senator Mike Monroney for changing this with what has become known as the Monroney Label. Congress passed this into law on July 7, 1958 with severe penalties for violating the law. A dealer or manufacturer found guilty of removal or alteration of the label can be fined up to $1,000 and/or imprisoned for up to one year. It may be removed only by the purchaser for the vehicle.

The purpose of the Monroney label was to give consumers the ability to compare prices between different dealerships on the same make, model and equipped car. If you were shopping for a new Chevy Impala with power steering, power brakes, AC and other specified options, you could compare “apples and apples” at several different Chevrolet dealerships and make your buying decision on which gave you the biggest discount from MSRP.

Unfortunately, like so many well intended consumer laws, this law is no longer enforced. I do a weekly mystery shopping investigation of competing car dealers in South Florida and I know of at least one dealer that removes his Monroney labels and replaces then with his own retail price. The regulators don’t know about this and they don’t seem to care. Virtually all of the dealers add their own label next to the Monroney label to artificially increase the suggested retail price by thousands of dollars. The dealer label is disguised to resemble the Monroney label and, being adjacent, many customers assume it’s the official MSRP. More often than not, customers never look at the Monroney label on the car they buy. This means that you probably can’t shop and compare the car you want by discounts from the retail asking price which is what the U.S. Congress intended with the Monroney label. 

But what about comparing the dealers’ profits by measuring his markup above cost? You can find out what the invoice is on the car you want to buy very easily. This information is available on the web and, strangely enough, many car dealers will gladly show you their car’s invoice. The reason the dealer will willingly show you his invoice is because it does not reflect his true cost. In fact, it reflects thousands of dollars in profit on the average. This is where the manufacturers join the conspiracy. The manufacturers add thousands of dollars to their dealers’ invoices which they subsequently “kick back” to the dealers monthly. You probably have heard the term “holdback” which was the original 1%, 2% or 3% that is added. There are many other additions now including advertising fees, dealer prep fees, interest fees, and extra holdbacks on port installed accessories. The biggest item that dealers get back monthly is “dealer cash” which is a secret rebate on different models that the consumer doesn’t know about. I’ve seen dealer cash rebates as high as $10,000. In fact, there’s a dealer cash rebate known as the “stair step incentive” which can pays the dealer as much as hundreds of thousands of dollars every month. He gets paid an amount per car retroactively on every car he sells in one month if he hits his sales objective. Theoretically, a dealer can sell one car, at or below his invoice, and make an effective profit of tens of thousands of dollars…even hundreds of thousands!

As if all of the above isn’t enough, I haven’t even mentioned dealer fees or dealer “packs”. If you read this column or know me you know that my war against the dealer fee has been going on for 14 years. The dealer fee is just more profit to the dealer that he surprises you with when you sign your paperwork to take delivery of the car. It varies from a low of around $500 to high of $2,500, but there is no legal cap in many states.

I normally wouldn’t mention the dealers “pack” because it’s not something that affects the MSRP or is kicked back from the manufacturer to the dealer. A caller to my radio show last Saturday brought this up and I’m covering it in an abundance of caution just in case others would like to understand it. However, it possibly could affect the price you pay for the car, but not in the same way distorting the sticker price and the invoice does. A “pack” is an amount the dealer subtracts from the profit a salesman makes on a car he sells. A typical pack would be $700. A salesman sells you a car on which the dealer makes a profit of $1,700 but before he pays his salesman the typical 25% commission, the dealer subtracts the pack. The salesman is paid 25% of $1,000, not $1,700 saving the dealer $175 in sales commission expense.  Years ago packs were used by dealers to trick their sales people into thinking they were earning a higher percent commission than they really were. Since then, federal wage laws have been passed that require full disclosure of packs so that sales people do know exactly what their percentage is. However, I’m sure that there are some dealers still ignoring the law and tricking their sales people just like their customers. But, packs continue to exist even though there is no good reason for them. One could argue that the salesman will sell the car for more with a pack than without one, but the dealer and the sales managers generally set the price, not the salesman.

What does all this mean for you when you buy your next new car? Nothing more than what I’ve already warned you about in previous columns. Pay no attention to dealer advertised prices, window sticker prices, or dealer invoices. Never make a buying decision on the size of a discount from “retail” or markup over “invoice”. Make your buying decision by picking the lowest selling price from at least three different dealers on the exact same make, year, model, and accessorized vehicle. Separate your trade-in valuation and financing from the purchase transaction and get at least three bids on both of these too.