Car Invoice Price and Dealer Markup: Vehicle Buying Tips

Quick Tips About Invoice Price and Dealer Markup

Invoice price is what the dealer paid the factory for a car; selling the vehicle for more than that amount is potential profit.
Dealers may charge for add-ons, extras, and various fees, but these markups are often negotiable.
Find common ground when negotiating from the sticker price because the dealership wants to sell you that car as much as or more than you want to buy it.

One of the great mysteries of buying a vehicle is this: How much does a car dealer mark up a car?

That’s a great question. But the one we should be asking is: How much profit is the dealer making on a particular car? That is, how much wiggle room is there to negotiate? How do you know you’re getting a good deal on your new car?

A definitive answer might be nice to have, but unfortunately, there is no way to know how much room there is between a dealer’s vehicle cost and the manufacturer’s suggested retail price (MSRP) on the window sticker.

Simply put, factors exist that we do not know. However, we can ballpark it and provide information so you can develop a serious negotiating strategy.

What Is Car Invoice Price?
What Is Dealer Markup?
What Is MSRP and How to Use It?
What Is Dealer Cost vs. Invoice Price?
How to Determine the Right Price

What Is Car Invoice Price?

If a new car sits on a dealer’s lot, it was purchased from the factory. The dealer paid for the vehicle before it was added to the inventory. What the dealer pays for that automobile is the invoice price. Factory invoice, car invoice, and dealer invoice are terms used somewhat interchangeably.

While there could be high-volume dealers who might get a price break upfront on car invoice prices, the invoice price is typically universal among dealers for car models. It’s a fixed amount. When a dealer advertises a price as below invoice, the stated factory price is that invoice. More on this later.

What Is Dealer Markup?

Car dealer markup is the amount dealerships add to raise a car’s price above the factory MSRP.

A dealership’s gross profit on a vehicle is the difference between what it must pay the factory for a car and the amount it collects from a customer at the point of sale. Once a dealership subtracts expenses, such as the salesperson’s commission and so forth, that’s its net profit on the vehicle.

There’s your wiggle room for negotiations on that new car.

When a hot car, such as the Chevy Corvette or Audi R8, goes on sale, dealers may mark up the price above the MSRP.

Car dealer markup gets clearly stated on the window sticker or Monroney label, and it’s all gravy. While a car dealership may only make a slim profit on each car it sells, it’s probably doing just fine. Most dealership profit is generated behind the showroom and on the used car lot.

In addition to having you sign all the paperwork to close your deal, the finance manager will offer to sell you extras like extended warranties, GAP insurance (guaranteed asset protection), and upholstery protection. Be wary of such additions. Most people do not need these items anyway, including the upholstery protection.

Just ask lots of questions and ask the dealership to remove unwanted extras. The dealership makes a profit on every product the finance manager sells to you, from roof racks to vehicle identification etching. Some dealers charge a document fee for filing the paperwork on such things as a car title. However, shouldn’t the purchase price cover costs such as the doc fee? Consumers often think so because dealerships make a profit on each car they sell. And yet, dealers usually add it anyway, and it’s legal.

Bottom line: It doesn’t hurt to ask questions and negotiate on any unreasonable fee.

The service and parts departments are also big moneymakers for a dealership. Whenever a service worker calls you later in the day to report that the car you dropped off is ready but needs new belts or tires, that’s all going to bring more cash into the dealership.

Many parts departments operate a retail desk for consumers. They may also sell parts to third-party garages and body shops. When a vehicle with some car dealer’s logo splashed across it drives past, it might be a parts vehicle on its way to deliver an order to a garage. Cha-ching.

What Is the Average Markup on New Cars?

Let’s face it: buying a new car gets expensive. According to data from Cox Automotive, Autotrader’s parent company, the average transaction price for vehicles, SUVs, and pickup trucks reached $48,401 in the last week of July 2024. That price is roughly the same as a year ago but about $5,700 more than in July 2021.

While the price difference is significant, statistics show that car buyers nowadays pay slightly less than the sticker price for vehicles. For example, the average transaction price at the end of July was 97.33% of the MSRP. For comparison, in July 2023, buyers paid 99.13% of the sticker price.

If you flip back to April 2022, car shoppers paid an average of 2% above MSRP.

When you use Kelley Blue Book’s fair market range tool for car prices, you will know precisely the sales price range of what you should be paying when buying a car.

Ask the dealership to run the estimates for your monthly payment, interest rate, destination fees, and dealer fees. If you’re still browsing or don’t want to start negotiating yet, make your own calculations by using our monthly payment tool. Plug in the interest rate, taxes, and any trade-in value to get a better idea of what you’ll pay. Find the destination fees on the vehicle’s window sticker or on the manufacturer’s website for the make and model you want to purchase.

Many new or used listings on Autotrader include the monthly payment you can expect for the specific vehicle.

Then, all you need to calculate is the dealer fees. That’s where pricing gets more complicated.

What Is the Average Markup on Used Cars?

Again, we don’t know exactly the dealer markup on used cars. However, used vehicles bring a significant revenue stream for most new car dealerships. You can go to a site like Kelley Blue Book, our sister company, and see the book value (average value) of a used car based on various factors, such as condition, trim level, options, and more. You can see the average value as a trade-in and a direct, party-to-party sale.

The dealer paid to acquire that car somewhere around those two numbers. It’s a way to roughly estimate what the dealer invested in the used car.

Other factors may impact a used car’s value. For example, if the car’s owner(s) crashed the vehicle, its value would decrease. If the owner kept up with car maintenance, its value would increase, and so on. AutoCheck and Carfax reports will let you know a car’s history. If it’s certified pre-owned, the dealer (and the brand) makes a more significant investment in a vehicle.

Some dealerships look at what they paid for a used car and tack on a dollar figure, like $1,500, $2,000, or whatever, to that purchase cost. Others get more scientific, calculating the local or regional average transaction price for a vehicle’s year, make, and model, using computer models to assist.

What Is MSRP, and How to Use It?

MSRP is a factory-set price. The car dealer has nothing to do with it. Because of automotive franchise laws, the dealer is free to sell the car for more or less than the MSRP, but the MSRP is the amount at which the automaker would like to see that car sold.

As a consumer, it’s the number you want to whittle down when you can. The only issue is that the chip shortage is among the many reasons for the tight inventory of vehicles. So, instead of buyers being able to negotiate the price below MSRP, many are finding the window stickers show markups. Some dealers call it “market adjustment” costs. Some will list them as dealership fees. Those two are the dollar amounts to negotiate down. Yes, vehicles remain in short supply. But you can refuse to pay those and pit one dealer’s price against another’s to get the best deal.

The automaker’s only real interest in the amount a car dealer charges for its car is establishing a consistent sense of value for its products. That’s not important to sustain demand but to motivate lenders to finance the brand’s products. Moreover, it’s in the automaker’s best interest to remain fiscally sound for its dealers.

Now for a bit of history. Today, we know the MSRP of a new car because, in the late 1950s, the government mandated that every new vehicle display the MSRP and other vital information on a sticker affixed to the windshield. Named for Oklahoma Sen. Mike Monroney, a sponsor of the Automobile Information Disclosure Act, the window sticker provides car buyers with a wealth of information about the vehicle.

MORE: How Much Car Can I Afford?

What Is Dealer Cost vs. Invoice Price?

Here’s where things become seriously murky. Whatever amount you get paid by your employer each month isn’t all yours to keep, right?

As frugal as you might be, that entire amount doesn’t go into savings. You need to pay your monthly expenses like rent or a mortgage, utility payments, a car payment, insurance, and perhaps a kid in college, and so forth.

As mentioned above, the dealer cost is also the factory invoice. It’s also sometimes called the car invoice price. These terms are used interchangeably.

What Increases Dealer Cost?

A range of expenses affect a dealer’s actual net profit on a car. We’ve already mentioned the salesperson’s commission. Although specific other people, like the finance-and-insurance (F&I) managers, work, at least in part, on commission, plenty of dealer staff don’t.

Other expenses include everything from utilities and taxes to that floppy air sculpture waving its arms in front of the dealership. The dealer borrows the money to pay the factory for that new car you want to buy and pays interest on that loan. All of that takes a bite out of the profit margin on a car sale.

What Lowers Dealer Cost?

On the other hand, the car dealer invoice is often not what they pay the factory for the vehicle. To lure buyers, carmakers offer incentives like zero down payment, financing with low interest rates, and cash rebates. They do the same to dealers to entice them to buy more inventory and motivate them to sell more cars.

Carmakers employ several schemes to lower the dealer invoice cost after selling the car. Sometimes, it’s a dealer holdback, which is a set kickback, and the factory pays the dealer once the vehicle gets sold.

Automakers also return money to dealers in the form of monthly sales-goal bonuses. You can often get a better deal on a new car at the end of the month. If a dealership is close to hitting its monthly goal, it may sell you a car for less because it may mean tens of thousands of dollars in bonus money.

MORE: Should You Focus on the Monthly Payment When Buying a Car?

What to Pay: How to Determine the Right Price

Given the wild variations between invoice and retail pricing — and now markups — you might be wondering what a car is worth and what you should pay when buying a car. It’s tricky enough, but Kelley Blue Book helps with suggested purchase price numbers.

The process is relatively simple. Enter the parameters of the vehicle you’re considering — model year, options, engine choice, etc. — and Kelley Blue Book brings up a suggested purchase price based on several factors, including the car’s popularity and the spread between base and invoice price.

RELATED: How to Sell Your Car

You might pay a little less than the Kelley Blue Book price or pay a bit more, but it’s a relatively accurate representation of where you should expect to be. Unless a vehicle is in high demand, there is room for negotiating on new cars.

Typically, the more expensive the vehicle, the bigger the spread between the dealer invoice and the MSRP. Full-size pickups like Ford F-150 and Ram 1500 are among the cars with the bigger spreads, generating a healthy profit. Small entry-level sedans like Hyundai Accent or Nissan Versa have very slim profit margins.

It’s wise to do the research and hatch a negotiating plan ahead of your car dealership visit. You can’t know all the numbers, but armed with the difference between the dealer invoice and MSRP, you have a range within which you can negotiate.

The MSRP is the dealer’s goal and its high-end offer in most situations. That is when there are no inventory shortages, and markups are happening. Your goal is to pay as little over the dealer invoice as possible. That amount, or even a little below the dealer invoice, should be your beginning offer. But be reasonable. You will pay more.

How much more depends on how willing you are to bargain and walk away if the dealership doesn’t budge below the MSRP on a new car.

On used cars, dealers tend to make more profit per sale than on new ones. So, be aware of the car’s book value before attempting to negotiate. As with a new car, the sticker price is where the dealer begins negotiating. Where you start negotiating is the book value or a little below it.

Don’t be afraid to negotiate fiercely because a dealer typically has more wiggle room selling a used car than a new one. Remember, despite markups, the dealership wants to sell you that car as much or more than you want to buy it. Find common ground.

Things to Consider Before Buying a New Car

Monthly payment: Before buying a new automobile, estimate your monthly payment to ensure it’s affordable. Use this tool to help you calculate how much you can afford.
Interest rate: It’s usually best to discuss the out-the-door bottom line price with the dealership before discussing payment options and car loan terms. However, buying a car online allows you to start with the monthly payment. You might also shop for your interest rate online with the dealership, other banks, and credit unions, including Autotrader listings. You can always check manufacturer interest rates for incentives and compare them to your bank’s interest rates ahead of time. What if you want to pay in cash? Weigh your options first. Sometimes, the better deal comes by way of financing.
Destination fees: Freight charges or destination fees range from about $1,000 for some small cars, like the Mini Cooper, to around $2,000 for large vehicles, including the Ford F-150 Lightning and Cadillac Escalade. Check the window sticker on the car you want to buy while at the dealership to know for sure. Check the manufacturer’s website and research the vehicle make and model you’re interested in to determine the exact cost before heading to any dealership. The advertised price often excludes a new car’s destination charge.
Insurance costs: Before buying a new car, consider your insurance costs. Check with your current insurer using the vehicle identification number, or VIN, of the vehicle you’re interested in. Dealers will try to sell you GAP insurance, but it’s usually more expensive than obtaining insurance independently. So, do your homework before completing any deal.

Considerations Before Buying a Used Car

Vehicle history report: You’ll want to check the vehicle’s history to determine whether it was in any accidents, the number of past owners, and the car’s service history. Obtain a vehicle history report, but ask the dealer for one before you buy one yourself.
Extended warranties: Many used cars from a dealership come with an extended warranty. They’ll also try to upsell you another extended warranty option. Check closely and read the fine print. If the vehicle is a year or two old, it’s probably unnecessary. For luxury vehicles, it’s often cheaper to buy an extended warranty because of the cost of parts and labor.
Certified pre-owned: When you buy a CPO car, the vehicle has passed rigorous inspections and is in excellent condition.

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Editor’s Note: This article has been updated since its initial publication.