Monday, January 06, 2020

Auto Manufacturers Mandate Dealers to Advertise Higher Prices

Honda was the first auto manufacturer to require their dealers to advertise prices above dealer invoice; in fact, they’ve been requiring this for over thirty years. The industry name for this is Minimum Advertised Price (MAP). This might sound like a good idea if you don’t understand what a car dealer’s invoice truly is and is not. It is NOT the true cost of the vehicle sold to the dealer by the manufacturer. The dealer invoice contains up to several thousands of dollars in profit to the dealer. The manufacturer intentionally hides various sums of money in the dealer invoice that are kicked back to the car dealer at the end of the month, quarter, or year. These amounts go by various names like holdback (typically 2% or 3% of MSRP), advertising, dealer incentives, floorplan interest incentive, and monthly-quarterly-annual incentive bonuses.

Brands with voluntary MAP pricing policies include Subaru, Honda, Acura, Nissan, Infiniti, Toyota, Mazda, and Mercedes-Benz. Interestingly, GM has a MAP pricing policy for its Chevy Performance Parts line, but not its car brands, which are Chevrolet, Buick, Cadillac, and GMC. Historically, for most car dealers, more than half of the vehicles they sell are sold for below invoice. This fact is based on supply and demand. Having a rule that a vehicle must be advertised for more than the average expected markup, simply means that the dealer cannot advertise a competitive price.

When, for many years, Honda was the only manufacturer that required their dealers to advertise higher prices, Honda dealers were the envy of the industry. Dealers of all other makes wished that their manufacturers would invoke the same rule. The reason was that setting a floor on how low advertised prices could be raised their profit margins on Hondas far above the average profit margins on almost all other makes (except luxury cars like Mercedes and BMW).

The manufacturers’ official reason for this rule is to prevent their dealers from advertising prices lower than they will sell the car for. In other words, bait and switch advertising. This sounds like a good and noble reason, but the facts are that bait, and switch advertising exists as prevalently today as it did before the rules for Minimum Advertised Price (MAP) advertised were established. What this rule accomplishes is to decrease price competition between car dealers which has the predictable consequence of increasing the price paid by the consumer.

All the manufacturers have data available to them which compares the advertised prices with the actual transaction prices. They used this data as their reason for MAP; I don’t have access to this data, but I’d bet that there has been no narrowing in the discrepancy between the advertised prices and actual transaction prices since MAP was introduced.

What this all means to you, the car buyer, is that you cannot trust advertising by either the auto manufacturers or dealers. My advice to you is to totally ignore all car dealer and auto manufacturer price advertising. They both are stacking the deck against you in their advertising. The best way to get the lowest price on a new vehicle is by shopping and comparing several dealers’ OUT-THE-DOOR price. An out-the-door price is the price you can write a check for and drive the car home…no hidden fees and no extra charges for dealer installed accessories.

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