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How Car Dealers Make Money

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Dont Let The Salesperson Steer You To A Vehicle You Dont Want

How Car Dealerships Make Money (And How Much Dealers Make On Cars)

Typically, a dealership is always trying to sell the vehicles it has in stock, Fuller told us. And that is not always in the best interest of the customer. If the salesperson really knows the inventory, then he or she is trying to match up the customer with something that can be sold today, Fuller said. If you are not specific and firm about what you want, the dealership will attempt to put you into a vehicle that its trying to move, even if it isnt whats best for you. Dont let yourself be sold a car.

How Much Money Can They Make

Now, to brass tacks. The amount youll make depends on the type of dealership you run. Generally, because dealers refurbish used cars in-house, they can turn a bigger profit margin on used car sales. So, how much do dealerships make on used cars? It depends on what you purchased the car for, how much work you had to put into it, and how much you can sell it for.

Average profit per new or used car

On average, how much do dealers make on used cars? The National Automobile Dealers Association reports that the average gross profit for a used car is $2,337. That same data set puts the average gross profit for new cars at $1,959.

If your dealership is making roughly 2k of gross profit per sale, youre probably wondering how much that leaves for you.

How much money do car dealership owners make?

Before we get into the numbers, some caveats. Your dealer income will depend on how well your dealership does, incentives and holdback from various manufacturers, and your sales volume, as well as your average sale price.

If your cars sell for more, will you earn more? How much does a luxury car salesman make? While luxury car dealers generally make more per vehicle, their overall sales volume is usually lower. Its really about finding the sweet spot for your dealership.

Start taking steps now and you could be well-positioned to build a booming dealership.

Bonuses From The Manufacturer

Manufacturer Bonuses Some vehicle manufacturers will pay bonuses ranging from $10 to $200 or more for selling a certain type of vehicle. These types of bonuses are not normally listed on a car salesmans pay plan and are not offered by all manufacturers. Some manufacturers require salespeople to go through certain training courses and becoming certified before qualifying for these types of programs.

Other cash spiffs and bonuses.

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Lowering The Value Of Your Car

Dealerships are in business and expect to make a profit from each sale. When you take your car for a trade-in, the dealerships appraiser will determine the value of your vehicle. You need to note that just because you have seen a car similar to yours selling at $5,600 in the market, that doesnt mean you will get the same value when you trade it in.

Dealers look at the condition of your car when coming up with the value. If your vehicle has high mileage, several dents and is not in excellent mechanical condition, its value will be negatively affected. The dealer will negotiate for a lower price, knowing that they will turn around and sell it at a profit. You will be in position to negotiate a better rate for your trade-in when you are prepared.

Dont Let The Dealership Run A Credit Check

How Factory

If you are going to finance your new car with a loan, the dealer will have to run a credit check eventually, but dont agree to this before you are well on your way to completing a deal. A full-on credit check, also known as a hard pull, can negatively affect your credit rating. There is no point okaying a credit check and risking a ding to your credit if youre a long way from buying.

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Here Are A Few Reasons Why Used Car Prices Can Vary So Much:

  • If the vehicle was a trade, did the dealer have to step up to make the deal happen? Therefore, putting more money in the car than the appraiser recommended?
  • What were the reconditioning costs? This is largely determined by how the previous owner cared for the vehicle and the vehicles original mechanical condition.
  • If the vehicle was bought at the auction, did the dealer pay too much?
  • What time of the year is is? Seasonality largely effects used car pricing so depending on when the car was bought or traded the value may be higher or lower.

Offering Loans And Earning Markup

First of all, its crucial to understand that they will make money on the loan if you finance your purchase through a dealer. Car dealerships provide you volume. Auto dealerships generally have access to loans at rates that ordinary consumers cannot afford.

Then dealers mark the loans and sell them to clients. Keep in mind that a dealer doesnt have to finance your automobile. The next time you buy a car, in addition to seeing how the dealer can quote you, consider obtaining a pre-approval for a loan from a different lender.

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Extending Specific Protection Packages Tocar Buyers

Extendedwarranties are designed to cover most of the major parts of a car. But theywont always cover things like, say, tires and wheels.

For this reason,there are also specific protection packages that you can get through cardealers when you buy a car. A good tire and wheel protection package, forexample, will offer your tires and wheels the protection they need and help youreplace them if theyre ever damaged.

Just like withextended warranties, there are some people who will tell you that you shouldntever purchase a protection package for your tires and wheels or for any otherpart of your car. Many car owners dont end up using them.

But if youreworried about a specific part of your new car, you can likely find a protectionpackage for it. And your car dealer will make money when you decide toinvest in it.

Fixed Or Set Salary Car Sales Pay Plan

How much money do used car Dealers Make

This type of pay plan pays you an hourly wage or a certain fixed amount a month. The good thing about this type of pay plan is you have security knowing youre going to receive a certain amount of money every paycheck.

The bad thing about this pay structure is if youre really good at selling cars youre not going to make any more money than what youve agreed to. To make matters worse. If you decide to sit back, collect a paycheck, and not produce any car sales. Management will not want to keep paying you and may even begin treating you poorly in an attempt to run you off.

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Don’t Discuss Your Trade

Its almost always possiblewith time and effortto sell an old car privately for more than the dealer offers in trade. Many buyers nevertheless find the convenience of driving their old car in and their new one away compelling. If thats your aim, research the value of your trade-in beforehand but decline offers or pressure to discuss it until after youve settled the price on the new car. If it turns out that youre upside down on the old carthat is, you owe more money on it than youre getting in tradeyou probably dont belong in a new-car dealership yet. At the least, the car should be sold privately to pay off the debt. Yes, the dealer will offer to roll your old debt into a new loan. But that’s not a good idea.

How Does A Car Dealership Make Money

Car dealerships seem too many to be profitable. Most individuals are afraid they will get the benefit of purchasing a car and the dealer will make hundreds of dollars of them.

In actuality, auto dealerships are much like food stores they rely mostly on volume for money and dont generate a lot of money from every single transaction. Car dealers are earning money from three main areas of business Sales, Service and Finance, and Insurance .

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How Much Money Does A Car Salesman Make Selling Cars

How much a car salesman can make depends on many factors. The #1 factor depends on each individuals attitude, determination, and ability. If a car salesman goes to work every day with the hopes of car sales falling in their lap they will ultimately fail. The salesmen that go to work and apply themselves every day will find selling cars can be a rich and enjoyable career.

Based on my experience in the car business and nationwide statistics, the following are income averages based on below, average, and top-performing car salesman.

Treat Used Cars As New Cars


We love online shopping, but about 70% of buyers still want to visit a showroom before taking the plunge. Websites dont provide face-to-face customer service or outline how good the vehicle is. If a customer runs into any problems, they know who, where, and how to contact.

Welcome customers to your showroom. Show interest in their needs and prove that your used car is the best on the market.

Offer customers a test drive. Give them a positive experience, so its harder to leave empty-handed.

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Car Dealership Service Departments

The Press-Enterprise

When car sales are slow, service departments can be a lifeline for dealerships. Cars need regular maintenance, and dealers are in a great position to provide that service. Thats why they offer perks like free oil changes or tune-ups. So when its time for the more expensive repairs, theyve already built a relationship with you. Service departments are the big moneymakers for dealerships.

Read This Before Heading To A Car Dealership To Buy A New Car

Ross Hamilton, General Manager at Apple Ford and Apple Chevrolet in Marlin, Texas says car dealerships make money in every capacity.

We sell a product and we mark up the costs, he begins, adding that cars are generally marked up from three to five percent over the invoice price the dealer paid for the car, which is not the same as the MSRP on the window sticker.

We make money on everything though, and that includes parts, service and the car sale. Industry estimates put dealership per-car profits at just over $2,000 per vehicle sold, even though dealers tend to lose about $200 per car over their cost to purchase it. How can that be? Keep reading.

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Pros Of Dealership Warranties

Consider the pros of dealership warranties to determine it its the best option for you:

  • Reliable coverage: Buying a manufacturer-backed extended warranty from a dealership can give you more comprehensive coverage than one backed by a third party. Youll have access to higher-quality service from licensed dealerships and factory-trained technicians who use factory parts for your car.
  • Benefits: Dealership warranties offer an array of benefits like roadside assistance and rental car reimbursement. Manufacturers warranties also remove the hassle of paying for services up front and having to be reimbursed later.
  • Convenient for car buyers: Buying an extended warranty at the same time you purchase your used or new vehicle eliminates the need to search for one later. Any deals youre offered during your car purchase may make warranty pricing seem more reasonable as well, and you may even be offered a reduced down payment.

Car Dealerships Make Money Selling Warranties And More

How Car Dealerships Make Money (Explained by a Former Car Dealer)

In addition to profit generated from financing or leasing a car, dealers make money from selling different insurance packages or warranties: extended warranties, tire and wheel protection, so on and so forth. With each sale of an additional item, the dealer is making some profit.

Good finance managers are like gold in the car business, and dealerships like to keep them around. Dealerships are also keen to invest in technology and software that increase their F& I margins.

Currently in the industry, a lot of dealers are investing in third party vendors to make the F& I process more pleasant for the customer. Solutions like docuPAD have been able to make the F& I process easier for the customer while simultaneously increasing the gross profit dealers receive. By empowering the customer to self select which warranties, protections, and plans they want, dealerships are realizing that they are able to sell even more products during the F& I process than ever before.

As a rule of thumb, dealerships can traditionally make much more profit on the backend of a car deal than on the frontend. Depending on the dealership, a healthy deal for the car dealer will result in $2,500 to $3,500 in frontend and backend gross profit combined. Remember very little of that will come from the actual sale of the vehicle.

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Are Dealership Warranties Worth It

It can be challenging to determine whether the additional benefits and reliable coverage of a dealership warranty are worth the higher costs. Dealership warranties offer unique advantages in terms of convenience and the high-quality service they provide through factory-trained technicians who use manufacturer-recommended parts. However, you also run the risk of not using the extended warranty to its full benefit.

Many drivers find the peace of mind that comes with knowing their vehicles are covered in the case of a mechanical breakdown worth the higher price of a dealership warranty.

To help make your decision, consider the type of coverage you would want, the average cost of repairs for the car youre buying, and potential add-ons and fees you want to avoid. Research the average extended warranty cost, types of coverage, and perks offered by third-party providers as well so you are prepared to compare those packages to the dealership offer.

Used Cars: Less Volume Higher Profit Margins

The used vehicle market is considerably different than the new market. According to NADA, used vehicles make up only 30% of sales for dealerships, but almost 25% of the gross profit. By comparison, new vehicles make up almost 60% of sales, but only 26% of gross profit .

In other words, used vehicles are almost twice as profitable as new vehicles.

Why is this the case? First, dealers have more control over the pricing of used vehicles. Used vehicles have no MSRP, so dealers can sell them for as much or as little as they want. They can also increase the value of a used vehicle by spending money on reconditioning.

Dealers also have more control over how much they pay for used cars. Whether at auction or through trade-ins, dealers can look for good deals on popular cars. They use car appraisal tools to make sure theyre buying winners and not duds.

Amazingly, used cars are not the most profitable product for dealerships, either.

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Above Average Car Salesmans Pay

$60,000 $120,000+ a year These are your very seasoned professional car salesmen, highly trained, and take car sales very seriously. These individuals have normally been at one dealership for a very long time. They have built a steady flow of repeat and referral business over time, sell-by appointment, and dont rely on walk-in traffic.

There are very few individual car salesmen in this pay range. They are very organized, stay in touch with their customers and work smart not hard.

Mostly From Service Not From Car Sales

How Car Dealerships Make Money (Explained by a Former Car ...

It goes without saying that car dealerships can’t exist unless they are profitable. That’s true for every business, from a neighborhood dry cleaner to a mega-retailer like Walmart. At auto dealerships, the rows of shiny new cars might prompt shoppers to believe that they’re where the business makes most of its money.

But that’s not the case. According to the most recent data from the National Automobile Dealers Association , the new-vehicle department of a car dealership accounts for about 58% of a dealership’s total sales but less than 26% of a dealership’s total gross profit. In addition to car sales, that figure also reflects profits from finance and insurance products sold on new cars. That means such things as gap insurance, alarm systems and extended warranties.

The new vehicle department of a car dealership accounts for about 30 percent of a dealership’s gross profits.

The used-vehicle department represents only about 31% of a dealerships total sales, but profit is close to that of the new-car department: nearly 25%. of a dealership’s gross profit, according to NADA. In addition to car sales, the figure also reflects profits from F& I products sold on used cars.

So where does the majority of a dealership’s profit come from? It’s not from car sales, at least not directly. It’s from the service and parts department, which accounts for the other 49.6% of the dealership’s gross profits, according to NADA.

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Dont Give The Dealership Your Car Keys Or Your Drivers License

It is almost as anachronistic as a pocket watch, but some dealershappily fewer than ever before, according to Christopher Sutton, vice president of automotive retail at J.D. Powerstill engage in tactics designed to keep you in the showroom until a deal is made. A couple of the tried-and-not-so-true tactics revolve around test-drive vehicles. Before a test drive, the salesperson might ask for your car keys and/or your drivers license as security. Then, when you return and want to leave without buying, the car keys or the license will go missing. We dont see it that much anymore, Sutton told us, referring to abusive dealer tactics. And I think the advent of ratings and reviews online . . . has contributed to that.

Yes, a wise dealership needs to determine that you have a valid driver’s license before allowing you to take a car out for a test spin, but they don’t need to take it from you and hold it as some sort of deposit. It should be enough for them to know your identity and your address. Since you have typically parked your own car at the dealership, there is the strong likelihood you will return. Further, when you go on the test drive, it is obviously good for you to have your driver’s license in your possession.

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