Why Car Companies Allow Large Dealer Markups

Understanding Capitalism and Markups

Why are car companies and their dealers allowed to set such large markups? To comprehend this, we must delve into the principles of capitalism and how businesses operate. Companies are in business to make a profit. This is why they price their products at a markup above the cost of production or acquisition. Even though it might seem counterintuitive, this is a fundamental aspect of the market economy. For instance, think about the shoes you wear. The retailer marks them up by around 200%, and this is how capitalism functions. When it comes to new vehicles, manufacturers post a suggested Manufacturer's Suggested Retail Price (MSRP), but this price is often considered meaningless, as it does not dictate the final price at which a car can be sold.

Understanding the Selling Process

Manufacturers do not control the retail price at which dealers sell new vehicles. They provide a MSRP, which is often seen as a guideline rather than a firm price point. In fact, many consumers realize that paying MSRP or more for a new vehicle is foolish, and they do extensive research to ensure they are getting a fair deal. Often, smart buyers look at the invoice cost, which is the amount the dealership paid for the vehicle, plus any fees or add-ons. This information can be found through websites or by contacting the dealer directly. In reality, dealers aim to sell new cars at or below the invoice price. This is because of the high profit margins they can earn from their service departments. Without these high service department profits, dealerships would struggle to stay afloat.

Dealership Pricing Strategies

Dealerships do not control the price at which they can sell new vehicles. This is why the suggested list price, or MSRP, is more of a benchmark than a fixed price. Dealers adjust their prices based on market demands and other factors. This means that the final price is determined by what the market will bear. For example, a dealer may advertise a new vehicle for $199 per month for 60 months. However, if the Manufacturer's Suggested Retail Price (MSRP) is $24,000 and the invoice price is $22,000, the monthly payment should be closer to $400, not $199. Such drastic deviations from the actual payment amount are a red flag and should be avoided.

Manufacturer Policies and Market Strategies

Car manufacturers do not control the pricing strategies of dealerships. However, many manufacturers have strict policies to ensure that dealers do not overcharge for new vehicles. For instance, Toyota has a strict policy that dealers cannot ask for more than MSRP for any car, regardless of its popularity. This policy is maintained to protect their brand reputation and customer satisfaction. If a manufacturer allowed dealers to charge more than MSRP, it would likely result in negative publicity and customer dissatisfaction.

Overall, while car manufacturers and dealerships operate in a highly competitive market, they understand the importance of maintaining a fair and transparent pricing structure to build and retain customer trust. By understanding the dynamics of the car sales process, consumers can make more informed decisions and secure better deals on their new vehicles.