New car prices are going up, but you might not notice (yet)

Automakers and dealerships can disguise price increases.

Dealers own the cars they sell

When a car sits on your local car lot, the dealership has already purchased that car from the manufacturer for the price the manufacturer set, and that price includes any tariffs the automaker has already paid.

Your local dealer might have borrowed at low interest rates to purchase that car. They might have bought it in a larger allotment for a reduced price from the manufacturer or purchased it in a pre-tariff sale, even though it’s the current model year vehicle. The automaker might even offer a rebate to the dealership if they sell a certain number of cars or specific models within a month or quarter. Regardless of the details, that dealership bought the cars at a price dictated by the manufacturer.

Once a dealership has purchased a car at a higher price than before, it has several options. First, it can keep stable prices, make less money on each vehicle and sell more vehicles to remain profitable. This scenario is unlikely at a smaller store, but it might work at a huge dealership in a big city.

Small increases

Another tactic in the car sales bag of tricks is cross-product price adjustment, a strategy employed at the manufacturer level or the dealership. Most automotive brands build a mix of cars in the U.S. and abroad. The cross-product price adjustment modestly raises the price on all vehicles in the lineup to pay for the ones with a wholesale price increase.

The Economics 101 rule of supply and demand also applies. Popular high-demand models might receive price increases since they will still sell regardless of tariff-related price increases.

Premium features: A way to charge more

Automakers can make price increases less noticeable by adding ultra-premium versions of existing models, extra features like premium leather, special labels or badges, larger wheels, unique paint and bigger touchscreens. The dealer can offer the ultra-premium vehicle at a higher price (and profit). Lower-priced cars could see modest price hikes. The automaker can remain profitable even if it sells fewer of the more profitable fancy versions versus the less fancy versions of the same model.

Credit: TNS

Credit: TNS

Dealerships can do this, too, often as customizations or added services. For example, Los Angeles’ Galpin Motors runs a large group of dealerships and has the most comprehensive automotive custom shop I’ve ever seen. The extent to which Galpin can rework or customize a new car is extreme. The dealership makes a little more profit on modified vehicles, and the customer gets exactly what they want. The work can be as simple as upgraded wheels and tires or as complex as new paint and interior reworking. In most cases, the new car warranty remains intact. If not, the dealership can offer a warranty.

Reduced feature content in cars

De-contenting is premiumization in reverse. An automaker might reduce the number of standard features, instead adding those items to an option package.

The MSRP of a vehicle might remain the same, but the cost of an optional package might increase by a few hundred dollars.

For example, a truck came standard with three-level seat heaters. A slight adjustment might be to make standard equipment a single-level seat heater, while the three-level seat heaters become part of the “Road Trip Package” that also includes a heated steering wheel and wipers. Few buyers will notice, but the automaker will reap the profits.

Incentives

Automakers can offer fewer rebates and stop offering low interest rate loans to minimize the impact of price increases on the consumer.

In recent months, incentives have made up just under 7% of the overall transaction price of a new car. Sometimes, that number can be 10% to 12%. Those incentives are money the manufacturer uses to promote a vehicle.

In a way, it’s a marketing tool. If they must spend $1,500 to sell a certain number of cars and profits rise, then it’s well spent.

The automaker might offer a promotional loan interest rate or cash back incentive, but only on that vehicle’s more expensive top trim level. Buyers might never notice a lack of incentives when purchasing a new car or truck for a reasonable price.

Destination fees and other charges

The MSRP of a new car or truck is a separate line item from tax, shipping and other related charges. Shipping is an unavoidable cost for anyone buying a car from their local dealer. You might notice a more expensive destination or shipping fee on the next new car you buy. Soon, buyers could see a tariff surcharge.

To make the most of your hard-earned money, keep an eye on the total cost of the car you want to buy. A vehicle’s MSRP is only part of the story.

Brian Moody is a senior editor of Kelley Blue Book and Autotrader and an automotive expert specializing in transportation, car shopping, electric cars, in-car technology and future vehicles.

The Steering Column is a weekly consumer auto column from Cox Automotive. Cox Automotive and The Atlanta Journal-Constitution are owned by parent company, Atlanta-based Cox Enterprises.