Think Pieces

Michael's thoughts on the auto industry, its products, and/or this website.

The Pricing Game

This year, GM has sought to kick the rebate habit with "value pricing." A couple of years ago, Chrysler attempted a similar strategy with the redesigned 2004 Durango by pricing it well below the 2003. Didn't work: a $5,000 rebate is currently available on the big Dodge SUV. But GM seems to be having better luck with the strategy, as rebates remain relatively low on many of its cars. This is especially surprising since its price cuts weren't nearly as large.

First off, while prices were cut by $1,000 to $1,500, rebates were also reduced by $500 to $1,000. Pretty obvious, no harm done. In many cases the net result was a $500 price cut. But the strategy also included a third, less visible element: invoice prices.

A short history of shrinking margins

Invoice prices roughly represent what the dealer pays the manufacturer for a car. Back in the 1980s, the invoice for the typical car was about 85 percent of the sticker price, with some notable exceptions. For a base trim economy car, the invoice was as much as 92 percent of MSRP. At the other extreme, a Mercedes' invoice was just 80 percent of MSRP. The most expensive 1983 Mercedes, which listed for $52,000, had a dealer margin over $10,000.

In the 1990s, domestic brand dealers reacted to soft car sales by deeply discounting prices. To reduce the resulting gap between sticker prices and transaction prices, manufacturers began cutting dealer margins by increasing invoice prices by larger amounts than they were increasing sticker prices. It didn't hurt that this increased revenues in a way largely invisible to consumers.

From 1990 to 1995 to 2000 the invoice on a Ford Taurus increased from 87 percent of MSRP, to 90 percent, and then to 92 percent. These might just seem like so many numbers, but on a $20,000 car this put an extra grand in Ford's coffers. In other words, the size of the discount you could expect from a Ford dealer shrank by about $1,000.

This reduction in dealer margins was not limited to domestic brands. Toyota dealers have enjoyed relatively large margins, but the invoice on a Camry nevertheless grew to 87.5 percent in 2000 and 89 percent in 2005. Similarly, the invoice on a Lexus LS rose from 80 percent of MSRP in 1990 to 87 percent in 2005. And Mercedes? During the 1990s its invoices rose from 80 to 87 percent of MSRP. Then in a single model year, 2000, it boosted invoices another six points to 93 percent, where they have remained. In other words, the dealer margin on a 2000 Mercedes was barely a third what it was a decade earlier. If Mercedes dealers still enjoyed 20 percent margins, the base price of the 2007 S550 would be about $99,300 rather than the $85,400 it is.

Recent margin-based pricing games

Ford's recent strategy most complicates my life. Many times over the past year it has raised invoice prices by small amounts, $20 to $75, while leaving the MSRP unchanged. Tenth by tenth, the typical Ford invoice is inching towards 93 percent of MSRP. Dealers probably complain less about a series of small cuts in their margins. And, since the sticker doesn't change, most consumers are none the wiser.

The third component of GM's "value pricing" extends the long-term trend. GM dealers enjoyed fatter margins than Ford dealers in the mid-1990s, but since at least 2000 the invoices on most GM cars have been 91.5 percent of MSRP. With "value pricing," GM took the plunge Ford has been avoiding and raised invoices to 94.5 percent of MSRP on most Chevrolet, Pontiac, and Buick cars.

The Malibu SS is typical. With value pricing, the sticker price dropped from $23,865 to $22,865, a nice, even, headline-generating $1,000. But the invoice only dropped from $22,075 to $21,608, a $467 change. With the Corvette, a $110 MSRP decrease was actually paired with a $340 increase in the invoice price.

Some changes are even more subtle. For 2006, Chevrolet started offering the TrailBlazer SUV in a high-performance SS version. The SS was technically an option package rather than its own trim line. For 2007 this is changing--the SS will now be a trim line.

Just semantics? Not in this case. Option prices have traditionally included larger dealer margins for most brands. And, perhaps in an attempt to placate upset dealers, in recent years GM and Ford have been increasing the margin on options even as they decrease it on base prices. Currently the invoice prices on the options for most GM cars are 83 percent of their sticker prices. So while the dealer margin on the base price is a scant 5.5 percent, it is 17 percent on the options.

So, by making the SS a trim line rather than an option package, GM has increased the invoice price on the lowest-priced SS by $792 while raising the sticker price only $150. In other words, they've managed to hide a $642 price increase.

Nifty trick, isn't it?

Thanks for reading.

Michael Karesh, TrueDelta

First posted: May 31, 2006
Last updated: November 16, 2006

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