A common assumption among auto buyers is that luxury cars are not subject to dealer markups.
The reasoning is that automobiles such as BMW, Cadillac, Jaguar, Lincoln Continental, Maserati, Mercedes-Benz and Porsche already are so expensive that there is no need for an extra charge.
A random survey of five Washington-area luxury car dealers indicates that that assumption has some basis in truth. But the survey also points up some rather costly flaws in that thinking.
A key to understanding the markup game in the auto business is the dealer discount -- the dealer profit contained in the manufacturer's suggested retail price, or MSRP.
Here, more definitions are needed.
The MSRP includes the manufacturer's base list price plus handling and other charges, such as factory-installed options. The MSRP is always higher than the "dealer invoice" price -- which is the price of the "actual" factory invoice cost to the dealer.
The term "actual" needs qualification in discussing invoice prices because those prices often include items such as "holdbacks" -- factory rebates made to a dealer who has met certain factory-established procedures in the sale of certain models.
Generally, the difference between the invoice price and the manufacturer's suggested retail price is the dealer's discount.
A dealer may increase his or her profit over the discount through "additional dealer markups" and dealer-installed option charges. These options often are sold at prices substantially higher than the dealer's option-purchase and installation costs.
Which brings us back to the luxury cars.
For Washington-area BMW and Mercedes-Benz franchises, the manufacturer's suggested retail price contains a 20 percent discount to dealers, according to factory and dealership representatives of those companies.
For example, the 1985 manufacturer's suggested retail prices on Mercedes-Benz cars range from $23,000 to $57,000. A dealer selling a $57,000 Mercedes-Benz at the manufacturer's suggested retail price would realize a 20 percent, or $11,400 profit.
Local Mercedes-Benz dealers such as Morton J. Zetlin of American Service Center Inc. in Arlington say that they generally do not boost their MSRP profit with markups.
"We don't have additional dealer markups because, in all candor, Mercedes-Benz of North America gives its dealers a sufficient discount," Zetlin said.
However, area Jaguar and Porsche dealers have, at times, put markups on their cars.
The dealer discount on the Porsches, for example, is about 16 percent of MSRP. The 1984 base MSRP on Porsches ranged from $21,440 for the Porsche 944 to $44,000 for the Porsche 928-S. Factory-installed options and destination charges could boost the manufacturer's 928-S price to $48,810.
"Not many months ago, we were adding $3,000" to the cost of the option-loaded Porsches, said Rick Brown, sales manager of Manhattan Porsche/Audi in Rockville. The reason is that the cars were in high demand and short supply in the area, Brown said.
But Brown said his dealership has discontinued the practice of marking up Porsches, largely because the new U.S. distributor of the West German sports cars, Porsche Cars of North America (PCNA), vehemently opposes the practice.
Brown said that PCNA's position makes sense. "We could take advantage of the market, but customers remember that kind of thing," Brown said. "You can burn somebody once, but you won't ever get that customer back again. I can't afford to do business that way," he said.