Automakers Can Reduce Dealer Markups With a Simple Policy

Most dealers are suffering from inventory shortages and this has created a market where most new cars sell for over the MSRP. We have covered cases of extreme price gouging. Although dealer franchise laws limit the leverage an automaker has to stop this, there is a relatively simple solution if the manufacturers are actually serious about putting consumers first.

It’s important to revisit this concept of the MSRP which of course is an acronym for Manufacturer Suggested Retail Price. “Suggested” is the key word here because while the automaker can “suggest” that the dealer sell at the posted price on the window sticker we all remember a time when most cars would sell for below that number because dealers needed to compete with each other. Right now some dealers are ignoring that “suggestion” because the supply and demand dynamics mean that dealerships can sell for above the sticker price.

Despite these “suggestions” on what price to sell a car for, automakers have become well aware that extreme markups are damaging to their brand. Other than some strongly worded memos to dealerships the manufacturers have, for the most part, thrown their hands up and shifted the blame to those pesky franchise laws to essentially say “We can’t tell our dealers what to do.”

While this is technically true, automakers can put in place a system that encourages dealers to sell their cars at reasonable prices. The manufacturers can tie future allocations of in-demand cars to the transaction price of currently sold units. To put it plainly, if a dealer wants more vehicles they need to sell what they have at MSRP or better.

For example, if a Ford dealer wants more Broncos, they are allowed to sell their current Broncos at whatever price they like, but if the vehicles are marked up, future Bronco allocations will be restricted. Of course, this will create a vicious cycle for the customers of that particular dealer if the store continues to sell with markups because their supply will be even lower down the road. However, those customers could simply give their money to any number of other Ford dealers who choose to sell Broncos at MSRP and will therefore get more cars.

While this is not a complicated policy it would require the automaker to track the transaction prices across hundreds of dealers across the country and then make adjustments to the allocation system. There would also need to be some contingencies in place to prevent dealers from “selling” a car to themselves at MSRP and then re-selling it on the pre-owned market with a bonkers premium.

However, what consumers need to realize is that while you are buying a car from a major automaker that sells through a franchised dealer network, you as the purchaser aren’t really the customer of that brand….the dealership is. The factory sells the cars to the dealers who in turn re-sells that car to you. The brands want to keep their customers happy, so while the automakers may give some lip service to minimizing markups and may even send a sternly worded memo, the manufacturers, for the most part, don’t want to get into the business of tracking and enforcing these policies.

Unfortunately, combating markups is really going to come down to consumer behavior. There are dealers that are willing to shun market premiums in order to play the long game and have a satisfied customer base, but this usually means a buyer waiting a long time for a factory order. There are also stores with in-stock units willing to sell for a reasonable price, but this might mean having a customer forgo overpaying for a car they “want” and purchase a car they “need.”

Tom McParland is a contributing writer for Jalopnik and runs AutomatchConsulting.com. He takes the hassle out of buying or leasing a car. Got a car buying question? Send it to Tom@AutomatchConsulting.com