March 19, 2010

An Example of High Markup Options Sold By Car Dealers

Generally I think that buying "add-ons" at a car dealer is going to be a poor investment.    There is a long history of dealers selling "rust proofing", extended warranties and other highly marked up add-ons to cars at the end of a purchase negotiation.   This sales pitch usually seems to happen after you've agreed to buy the car and when you're going in to sign the papers and handle the purchase.  Apparently selling high profit services at the end of a sale is a common trick of car dealers to increase their profit margins.   I'm not saying that all dealers are scam artists or that all of the dealer addons are worthless.   However its very common for dealer addons to have high profit margins and some of the items sold are not really necessary.   This older CNN article covers the topic in general.   I recently ran across a good example to illustrate why these purchases aren't a good idea.

On FatWallet recently a poster asked about a "Maintenance Package" that they had been offered by the dealer on a new 2010 Ford Fusion.   They said the dealer originally offered it for $2,250 but then came down to $1,500. The fact that the dealer quickly dropped the price from $2,250 to $1,500 means that they originally had at least $750 markup so this product was at least 33% profit.   A little digging on Ford's site shows that its even worse than that.  The Ford Owner website has details on the scheduled maintenance and the Maintenance Package.  You can even get a quote on the exact same Maintenance Program at Ford's site where the cost is $1,240.  The dealers lower price of $1,500 is $260 higher than the price straight from Ford.   Thats another $260 of profit mark up for the dealer.   The dealer tried to take a product that Ford sells online for $1,240 and sell it direct to a car buyer for $2,250.   Thats a $1,010 profit markup the dealer tried to add to the car purchase.   

Whats more the actual value of the Maintenance Program does not seem worth the even the direct cost from Ford.   The contract covers 15 service visits at intervals of 5,000 miles.   If you look through the scheduled maintenance program for the Ford Fusion in question there is little more done than inspection and oil changes.   They do cover premature failure of "wear and tear" parts including break pads, spark plugs, etc.  However those parts should not fail within the first 75,000 miles.  And even if they do it doesn't really justify the extra cost of the maintenance contract.   I think the real value of the program is something closer to $500 to $750 considering it replaces 15 oil changes that should run you $30 each and provides insurance on some parts that shouldn't fail.    Basically you're getting little more than $450 worth of oil changes and Ford will charge you $1,240 for it or the dealer will gladly take $2,250 for it.   Looking at it another way that $2,250 for 15 oil changes would equate to $150 per oil change.

Other car makers offer similar plans so this is not something that Ford alone is doing.   Even if the manufacturer doesn't offer a plan its possible the car dealer may create their own service plan and try to sell it to new car buyers.  

2 comments:

  1. Sounds like it would be worth researching to find a list of common dealer upgrades, the actual value of those items and whether or not those items are factory installations already on the car.

    Great post,

    Laura Pagles
    @fatwallet

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  2. Add-ons are what make the car dealers money. If you're buying a new car, best deal is the most basic model without all the bells and whistles. But low-mileage used cars are the best bang for the buck, and you can get all the add-ons at a dramatically reduced price.

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