ALT-1 How Dealer Holdback Incentives still Ensure a Profit
A dealer holdback is a specific percentage of the manufacturer's suggested retail price (MSRP) which is credited to the dealer by the car manufacturer. This dealer incentive is over and above any gross profit derived by selling the car for more than its wholesale cost. For nearly all car manufacturers, it runs between two and three percent. Thus, in theory, even if a dealer were to sell a car at cost, there would still be a 2-3% gross 'profit'.
In most cases the dealer holdback is calculated off the MSRP. However, Hyundai, Mercedes-Benz, and Toyota calculate holdback based on the dealer invoice (wholesale cost), while Volvo gives a specific dollar values which vary by model ($700-900). Some manufacturers, such as Ford, give higher holdback incentives to their best dealers.
Receiving this incentive is not automatic. The dealer must have had a solid working relationship with the manufacturer, with regular payment of invoices, fast and reliable turnover of inventory, and a generally high level of customer satisfaction. Manufacturers have also been known to be slow in paying the holdout incentive.
Dealer holdback incentives were originally created to help the dealer keep a fairly large inventory in stock, by partly compensating them for the interest payable on the inventory operating loan. (Few indeed are the dealers who are able to pay cash-in-hand for their entire inventory outlay.) Whether or not they ever sell, the dealer must still pay for their display cars up front. The amount of the holdback is based loosely on the interest payable during the average car turnover time of 90 days. While most customers consider holdback just another source of dealer profit, the truth is that the longer the car sits on the lot, the less holdback will remain after the interest is paid.
Not all manufacturers offer a dealer holdback. Audi, Kia, Saturn, and Suzuki offer no holdback incentives at all, nor do the ultra-luxury manufacturers such as Alfa-Romeo, Porsche, and Jaguar. In these niche markets, the dealer's profit is based entirely on the difference between wholesale and retail.
In contrast, the large majority of car manufacturers who do deal in holdback incentives have also significantly raised their invoice prices, to the point where it becomes very difficult for a dealer to raise the price much further. Thus in these markets sales commissions necessarily fall, to be 'replaced' on the back end by holdback incentives. This practice gives manufacturers far more control over dealers.
Yet in today's cutthroat competitive environment, dealer holdback has become just another bargaining chip on the table. It is entirely natural for the customer to want to cut the best possible deal ... but remember to include the dealer's full expenses, including the expense of keeping an inventory in stock, in what you consider to be a fair profit. After all, if you worked well with the dealership and got a fair deal, don't you want them to still be around when it comes time to buy your next car?
