What is Dealer Holdback and how does it benefit car dealers?

What is Dealer Holdback and how does it benefit car dealers?

Understanding the Basics

When you go to a car dealership to buy a car, you might notice that the price you see on the sticker isn’t always what you end up paying. This difference in price is due to something called “dealer holdback.” It’s important to understand what dealer holdback is and how it benefits car dealerships.

So, What Exactly is Dealer Holdback?

Dealer holdback is essentially a percentage of the manufacturer’s suggested retail price (MSRP) that the car manufacturer holds back or withholds from the dealer when they sell a car. This amount is typically returned to the dealer at a later time, often on a quarterly basis. In simple terms, it’s like a rebate that the dealer receives from the manufacturer.

How Does Dealer Holdback Benefit Car Dealerships?

Dealer holdback serves several purposes and provides benefits to car dealerships. Here are a few key reasons why it’s beneficial:

1. Cash Flow Management

Car dealerships have many expenses, such as paying employees, maintaining inventory, and covering operational costs. Dealer holdback allows dealerships to manage their cash flow effectively. By receiving these holdback funds periodically, dealerships can use the money to invest in various areas of their business without relying solely on car sales.

2. Buffer Against Price Negotiations

When customers negotiate the price of a car, dealerships might need to lower the selling price to satisfy the customer. However, with dealer holdback, dealerships have a buffer. They can still make a profit even if they agree to a lower price because they will receive the holdback funds from the manufacturer later.

3. Incentives for Selling Cars

Manufacturers want to motivate car dealerships to sell their vehicles. Dealer holdback provides an incentive for dealerships to move inventory, as they know they will receive a percentage of the MSRP back from the manufacturer. This encourages dealerships to promote and sell cars more actively.

4. Covering Advertising and Promotions

Dealerships often spend a significant amount of money on advertising and promotions to attract customers. Dealer holdback funds can be used to cover these expenses, allowing dealerships to create effective marketing campaigns without straining their budgets.

5. Building Profit Margin

While car dealerships make money from the sale of cars, their profit margins can be slim. Dealer holdback helps them increase their profit margin by adding additional funds back into their businesses. This extra revenue can be used to reinvest in the dealership or improve customer experience, ultimately benefiting the dealership in the long run.

Conclusion

Dealer holdback is an important concept for both car dealerships and customers to understand. By holding back a portion of the manufacturer’s suggested retail price, car manufacturers provide benefits to dealerships. Dealer holdback helps dealerships manage cash flow, buffer against price negotiations, incentivize car sales, cover advertising costs, and build profit margins. Understanding dealer holdback allows both car dealerships and customers to navigate the car buying process with more clarity and transparency.