The dealership experience comes with many challenges, but the most intimidating part of the car buying process for many shoppers is negotiating the vehicle price. After all, car salespeople are trained in the art of negotiation. Even if you spend hours doing your research, do you really stand a chance against the professionals? The reality is that in some cases, you'll have to fork up the full sticker price, but there is wiggle room to negotiate the price on most vehicles. We cover what the dealer sticker price means, how vehicle markup is determined, and how to negotiate the best possible new car price.
What is the Dealer Sticker Price?
A sticker price is the vehicle's MSRP (Manufacturer's Suggested Retail Price) which is the factory set price displayed on the vehicle's sticker. Unlike the dealer invoice price which is the wholesale price for the dealer, the MSRP is the consumer-facing price that the manufacturer assigns for each vehicle. "Total MSRP" or "sticker price" is the base price plus the destination charge and options. The difference between the invoice price and what the dealership charges the consumer is considered the markup.
Demand is one of the factors that impact the final price a dealer will charge for a vehicle and how much you'll be able to negotiate. High demand for a vehicle can drive the price up to match or exceed MSRP, while low demand can force the price to drop.
Dealer Mark-Up on New Vehicles
Although there's no way to know the average markup for a specific vehicle or segment, it helps to understand how dealers decide what to charge. According to Autotrader, the average vehicle price was higher last year than ever before, and dealers were less likely to negotiate. The average transaction price across all vehicles reached a record high of $39,920 in 2020, compared to $38,058 in 2019. Average transactions last year were $1,764 below MSRP vs. $2,286 in 2019. Due to the impact of COVID on the auto industry, new vehicles were in short supply while demand continued to grow, prompting a bump in vehicle prices and markups.
In addition to a vehicle's demand, the average markup will also be influenced by the vehicle segment. For example, higher-priced vehicles like full-size trucks (especially popular models like the Ford F-150 and the Ram 1500) will have a higher markup, while smaller sedans like the Toyota Corolla have a smaller markup which leaves less room to negotiate.
Negotiating Tips (And When to Pay Sticker Price)
The key to smart negotiating is knowing a fair price to offer for the vehicle. While it's obvious you don't want to pay more than the MSRP for a new car, you also don't want to go too low. Offering an outrageous lowball price will make the dealer think you're not serious about buying, or that you're not prepared, making it easier for them to take advantage of you.
So where do you start? According to Auto Cheat Sheet, a good rule of thumb is to offer 3-5% over a dealer's new car cost. You can search sources like Kelley Blue Book, Consumer Reports, and Edmund's True Market Value to find the invoice price for your make and model. Although 3-5% isn't a huge profit for the dealer, it's a reasonable offer and will signal that you're an educated car shopper.
You'll want to avoid discussing the monthly payment with the salesperson and only focus on the price of the vehicle. Discussing the monthly payment muddies the waters and makes it harder for you to negotiate (and easier to overspend). Allow the salesperson to throw out a price first and make sure to counteroffer, even if the price is better than you anticipated.
When Should You Pay the Sticker Price?
There are some situations where you won't be able to get a lower price than MSRP. Some vehicles are more in demand than others. For example, the 2021 Chevy Corvette tops the list with an average of just 13.1 days to sell. The more demand there is for a new vehicle, the less likely you'll be able to negotiate the sticker price.
Edmunds warns car shoppers that they will likely have to pay the sticker price (or more) when a highly anticipated vehicle first hits showrooms, when they're looking for a very specific color and options combination, and when ordering a vehicle. Another roadblock to negotiating can arise if you're buying from an isolated dealership, especially in a wealthy area. The lack of competition gives these dealers the upper hand to charge a higher price.