If you're interested in buying a car, you're probably already familiar with the process: A dealership buys a car from a manufacturer or gets a trade-in, then marks it up to include some profit and sells it to a customer. But just how much markup is in each car? In other words, how much wiggle room does a dealership really have on pricing? We'll explain.

Invoice vs. Retail

When you buy a new car, it's important to understand that you'll almost always be paying an amount higher than the invoice price to make the purchase. The invoice price is what the dealer pays for the car from the manufacturer, the price you pay is called the retail price. Meanwhile, the price on the window sticker is the manufacturer's suggested retail price (MSRP), or what the manufacturer hopes the car will sell for.

What's the Spread?

What's the spread between invoice price and retail price? Unfortunately, the simple answer is: It depends. In many cases, it depends on the total price of the vehicle. A small car such as the Toyota Corolla or Mazda3, for example, will have a fairly small profit margin between invoice and retail price -- often 5 percent or less. A more expensive luxury car can have a much higher profit margin, sometimes stretching well beyond 10 percent and into even higher territory.

The profit margin can also depend on how high the demand is for the car. If it's a new model with long waiting lists -- such as the all-new Chevrolet Corvette when it first came out -- expect to see a fairly high retail price and little room for negotiation. On some in-demand new cars, you'll even sometimes expect to see a market adjustment to the MSRP where a dealer will be asking for more than the retail price. This is called "over sticker."

What Should You Pay?

Given that there are such wild variations between invoice and retail pricing, you might be wondering exactly what you should pay when you're buying a car. This is often tricky to figure out, though our friends at Kelley Blue Book take a crack at it by offering suggested purchase-price numbers.

The way it works is fairly simple. Enter the parameters of the vehicle you're considering -- model year, options, engine choice, transmission -- and Kelley Blue Book can bring up a suggested purchase price based on several factors, including the car's popularity and the spread between base price and invoice price. You might pay a little less than KBB's price or you might pay a little more, but it's a fairly accurate representation of where you should expect to be.

author photo

Doug DeMuro has a wide range of automotive industry experience, from work at a Ferrari dealership to a manager for Porsche North America. A lifelong car enthusiast, Doug's eclectic vehicle purchases include a Porsche 911 Turbo, an E63 AMG wagon, an old Range Rover and a Mercedes Benz G-wagen.

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