What Are Dealer Holdbacks?
Understanding a new car’s window sticker is key to successful negotiation, but it doesn’t contain one important bit of data: the dealer holdback. Car dealerships make money lots of ways (parts and accessory sales, service, and used car sales) but there are only three ways to profit on the sale of a new car: the back end of the deal, the front end of the deal, and the trade-in. Let’s put the complex discussion of the trade-in aside, since it isn’t affected by car dealer holdback at all. As far as the front and back ends of new car sales go, though, the dealer holdback is paramount.
When a dealership buys a car from the manufacturer, it pays the invoice price. Each car’s invoice price includes the car dealer holdback as part of the figure. Car dealer holdback used to be simply a percentage of the car’s invoice price; now, some manufacturers’ dealer holdbacks are a percentage of the manufacturer’s suggested retail price (MSRP). (Some brands, mostly premium European nameplates, don’t offer dealer holdback.) The dealership pays this amount up front as a part of the total cost of buying the car from the manufacturer. Generally, the dealership has to finance the acquisition of each new car on the lot, either through the manufacturer or through the dealer’s own line of credit at its bank. The longer a car sits on the lot, the more interest the dealer has to pay, but the inflated invoice price allows the dealership to receive a higher amount of credit. When the car is actually sold, the dealership receives the dealer holdback from the manufacturer in the form of a rebate (usually on a quarterly basis).
Dealer holdback makes that all-important figure, the invoice price, a little less transparent than most car buyers think. The invoice price is, on paper, what the dealer paid for the car. Traditional wisdom dictated that new car buyers should aim to buy a new car at or around invoice price, so such an achievement often resulted in a sense of pride at outsmarting or out-negotiating the dealer. Car dealerships are a business, though, and no business model can survive without some way to make profit. A dealership’s profit center is not the result of selling new cars – there are plenty of other ways for a dealership to make money – but still, the sale of new cars simply can’t be a loss leader to get customers through the door.
Dealer holdback is the one factor that dealerships can reliably count on to make a profit on the sale of a new car. It influences the front end of the deal because it factors into the car’s invoice and sticker prices; it affects the back end of a sale because it allows the dealership to make a profit after the fact, and customers aren’t supposed to know about it.
As recently as a few years ago, the general public wasn’t familiar with the concept of car dealer holdback (the auto industry and dealership networks had largely managed to keep it a secret) and even people who had heard the term had no way to find the actual numbers, since the manufacturers’ dealer holdback figures weren’t published online. According to a 2008 CNN article, even dealership lower-level sales staff didn’t have access to dealer holdback data, and dealership management was able to manipulate commissions and skim money off the tops of deals. Dealer holdback still serves the purpose of reducing sales commissions by fiddling with the car’s actual cost, which then increases the dealership’s costs (on paper), thus reducing profit (also on paper). Since commission on the sale of a car is generally calculated as a portion of profit (though there may be other variables at work), the dealership doesn’t have to pay as much commission to its sales staff, even though a chunk of the car’s true profit will come in at a later point.
Dealer holdback serves another purpose – it allows dealerships to play the “invoice price” game for all it’s worth: they can advertise cars at invoice price, allow customers feel smart for negotiating down to invoice price, or make customers feel guilty for demanding a sale at invoice price. As long as the customer doesn’t know about the dealer holdback, the deal feels great all around; even if the customer does know about the holdback, the invoice price is so ingrained in many buyers’ mindsets that it still seems like a terrific score. And then, on the back end, the dealership still makes some profit. In other words, dealer holdback lets the dealer claim the buyer’s getting a good deal (which is sometimes actually true) and the dealer still makes a profit.
Car dealer holdback is also an incentive from manufacturers to get the dealership to move cars quickly. A lot with a quickly rotating inventory makes the car brand look successful and desirable; the longer a particular car sits for sale, the less interesting it becomes.
Now, though, car dealer holdback is just another fairly well-known piece in the car-buying puzzle, and those who understand dealer holdback and know where to find the information have an edge when it comes time to interpret and negotiate a deal on a new car. This edge comes purely from understanding the complex details of the transaction, and from the confidence inspired by that knowledge. Merely mentioning dealer holdback as a potential point for negotiation might be enough to cause the deal to break down. At the very least, the salesperson will probably become defensive. When a sales manager comes in and says the deal’s impossible because the dealership wouldn’t be making any money, this might be the time to casually mention dealer holdback as a way to stand ground and show a firm commitment to the belief that the deal is fair. But make it clear that the amount of dealer holdback is not going to become a point of negotiation (out of respect, fairness, and a desire to get the deal done). Demonstrate the understanding that dealer holdback is the last-ditch amount of profit, and it’s a figure that dealers have come to hold sacred, and there is more likely to be a mutual understanding across the sales counter. It’s quite rare for a car dealership to compromise its dealer holdback in order to make a deal happen; it’s considered so essential to the car sales industry’s bottom line that most sales managers are more willing to let a potential customer walk out the door. Dealer holdback is, in industry belief, an entitlement.