What Does A Car Salesperson Do
Car salespeople spend their days showing cars to customers, assisting them with their purchases and negotiating sales contracts. Primary duties for a car salesperson also include:
-
Greeting and introducing themselves to potential customers
-
Consulting the dealership inventory to help clients find the best vehicle for their needs
-
Answering questions about vehicle specifications
-
Negotiating sales discussions between the dealership and the customers
-
Overseeing the signing of sales contracts
Related:Car Sales Jobs on Indeed
Buyingfrom A Private Seller Is Cheaper Right
Buying from a private seller instead of from a dealer can be cheaper, but there are good reasons why, and its not always the case anyway. As weve already established, the internet is a great resource for car buyers. The web lets you see whats available, it lets you compare with others for sale in the local area and further afield, it lets you see what you should be paying, and it also provides invaluable information for free like here on this site.
When you are buying from a private seller, you simply dont have the peace of mind of being able to take the vehicle back if it doesnt turn out to be what you hoped it was. As already mentioned, youll probably drive away from a dealership with some sort of warranty, and at least some preparation work will have been done prior to the vehicle going on sale.
A private seller might have had a few things done to make the car more saleable, but although cosmetics and noticeable faults could well have been sorted, its unlikely any looming major faults will have been addressed. In reality, they may be trying to sell privately because they hope you wont know something major is about to go wrong when a dealer probably would.
Along Comes The Internet Consumers Can Compare Car Prices
Before the start of the new millennium, car dealerships were enjoying big profits. However, as the world became more digital, car sales went online: Craigslist replaced offline classifieds and Autotrader.com, Cars.com and Cargurus.com launched to replace newspaper ads for used vehicles.
The Internet transformed the way consumers shop for new vehicles, finance and insurance. Long gone are the days of visiting multiple dealerships to compare MSRPs and find the best price of the cars. Nowadays, car shoppers conduct 59% of their research online and an average customer looks at 11 different websites before visiting an auto dealership.
The Internet offered an increased level of transparency. New car and used car price reference pages showed up and educating consumers about what a vehicle should cost before ever talking to a salesman. As a result, dealers had to give up margin to remain competitive. The bottom line: margins and gross profit on cars dropped by 20% over the last 10 years.
Read Also: Can I Take An Abandoned Car
The Car Commission Game: A Lay Of The Land
Lets start with a big-picture look at the car buying process. That will help you see exactly where a car salesman can try and steer you into something you might not need.
Broadly speaking, the car buying process consists of two phases:
The Front End: This is everything that takes place out on the lot or at the salesmans desk. It includes determining the value of your trade-in, and settling on the price of the car you want to buy or lease.
The Back End: This is everything that takes place inside the dealership at a finance managers desk. Loans and aftermarket warranties are two other places where the dealership makes money.
The Back End is the domain of a dealerships finance manager. And weve created other resources to help you through it. Check out our guides to how to get the best car loan for your credit score, and how to determine if an extended car warranty will be worth it for you.
Since this article is about how much commission a car salesman makes, well focus on the Front End. Thats where they earn their money.
To understand how things work and how your decisions will affect their pocketbook there are a few other key terms to know.
Other Ways Dealerships Can Make Money
Up to now weve covered the traditional ways car dealers make money. There are a few nontraditional ways dealers , can make money.
Savvy dealers make money from their dealership by owning the real estate that the dealership sits on. This is another way dealers can make a lot of money. Many dealers own the land they build their dealerships on, and then the dealership pays them rent each month to operate there. In my 42 years in the car business, Ive seen dealers of all sizes make money from paying themselves rent.
Im even aware of dealers who have repurposed an existing facility and rented it out to a competitor to sell a different brand. You cant underestimate the value of the real estate that a dealership sits upon, that land is a veritable gold mine.
So there you have it, those are the myriad ways car dealerships make money. If youre in the market for a car, or simply have a question about the car buying process, dont hesitate to get in touch. Call or email me today.
COVERAGE YOU CAN TRUST
Peace of mind without the markup.
Flexible terms & pricing.
Also Check: Do Car Dealers Accept Credit Cards
Itssimple To Work Out Used Car Margins Isnt It
Once again, if you think you can look at how much a used vehicle is priced and compare that against the trade-in values you see in places like trucar.com, kbb.com, and Edmunds.com, then think again. Theres a saying that goes you make your money on a car when you buy it, not when you sell it, and theres a lot of truth in that.
Those websites and others will give you a good idea of what the trade value of a used car is based on its make, model, age, mileage, options, and condition, but dont go thinking thats what a vehicle sat on a lot owes the dealer that bought it.
For example, lets say a standard 2017 Ford Escape S with 24,000 miles and in very good condition is valued at a trade-in value of $11,400. On dealer lots, theyre selling for around $15,000 or more. So, the dealer has around $3,600 profit in the escape, correct? Not necessarily so.
New Cars: Dealer Holdbacks And Dealer Cash
Car pricing is a complicated process. To simplify things, consumers learn to look at the invoice price of a car and assume that’s what the dealer paid for it. They may then wonder how a dealer is making a profit if it’s selling the car for the invoice price. This instance is where two other sources of manufacturer money come into play.
Dealer holdback: This money is from when the manufacturer pays the dealer after a car is sold. It’s typically 1% or 2% of either the invoice or the sticker price of the car. On a $20,000 car, a holdback represents $200 to $400. The holdback allows dealers to sell a car at invoice price, or even below invoice, but still receive money to cover the costs of doing business . Most manufacturers offer holdbacks to their brands’ dealers, but not all. This information is helpful to know, but don’t try to build it into your negotiations. Dealers consider this money off-limits for the purposes of price negotiation.
Dealer cash: To help move metal, a manufacturer will sometimes offer a bonus incentive to the dealer to move a vehicle off lots. That’s known as dealer cash. Dealer cash can also come into play at the end of a model year when both the dealership and the manufacturer want to clear out even popular cars to make way for incoming new vehicles. Dealer cash is rarely advertised.
Don’t Miss: How To Buy Your First Car
How Do Car Dealers Make Their Margins
Auto dealerships can only exist if they are lucrative and self-evident. Seeing rows of brand-new automobiles at a dealership may lead customers to conclude that the company is dependent on sales of these vehicles.
According to statistics from the National Automobile Dealers Association , more than half of a car dealerships overall sales come from its new-vehicle department, but a quarter of its total gross profit comes from this department.
Total earnings include the sales of new automobiles, but so are sales of financing and insurance products. Gap insurance, alarm systems, and extended warranties fall under this category.
According to NADA, a dealerships gross profit is virtually equal to that of its new-car department when it comes to its used-car division, which accounts for just around 31% of total sales.
It also includes the earnings from F& I goods offered on second-hand autos. So, where does the lions share of a dealerships revenue originate? At the very least, it is not a direct result of automobile sales. According to NADA, the remaining 49.6% of the dealerships total income comes from the service and parts department.
When it comes to sales remuneration or dealerships, nowadays they have a wide range of options.
Traditional commission-based compensation arrangements for auto salesmen are still held by some. For some dealerships, the goal is always to sell as many cars as possible, regardless of whether each one is profitable or not.
How Car Salesman Commission Is Calculated
Depending on the car dealership, a salesman can earn anywhere from 15% to 40% of the front-end gross profit, after pack.
The pack is a set amount between $250 and $750 depending on the dealer.
This money is set aside to keep the lights on at the dealership.
Basically, here is how it works:
$25,000= Agreed upon sales price.$23,250 = Dealer invoice + $750 pack.
$1,750 = Commissionable front end gross profit.
25% commission on $1,750 is $437.50 payable to the salesman.
Depending on the pay plan, some dealers will set the front-end commission at a flat 25% no matter how many cars are sold.
Other dealers may set the commission rate to something like this, 15% for the first five cars sold, then bump it to 20% at ten sold, then 25% at 15 sold, 30% at 20, and 40% for 25 cars sold or more.
Significantly few car dealerships will pay any commission on the back-end profit of a car sale. If they do, it will most likely be a tiny percentage.
Car dealers will sometimes sell a car for minimal or $0 profit to get rid of the vehicle. If a dealer gives the salesman an okay to sell a car for $0 profit , they will still receive a commission. This type of commission is called a mini or mini-commission.
This amount can range from $50 to $250 and is very common when selling a new car and is handy for the salesman when a dealer is trying to clear a lot of old inventory.
Read Also: How To Keep Car Doors From Freezing
Can You Trade In A Financed Car
Since they are the legal owner, you are not legally able to sell or trade in the car. … Before the lender lets you return the car you must have paid for half of the car’s value. This means you need to pay the outstanding monthly instalments to bring what you have paid so far up to half of the car’s value.
How Do Car Dealers Make Money
Generally, youll take a cut of the profit your dealership makes. If youre the only salesperson, youre earning money based on the sales you personally make. But as your dealership grows, your salary can grow right along with it.
As the dealership owner, you get the structure the way you pay any salespeople. Generally, youll pay a base salary and offer a commission on car sales, plus some bonuses. As youre structuring pay for any employees, make sure you leave some wiggle room so you can earn a salary yourself.
You May Like: How To Sign Over A Car Title In Texas
How Do Car Dealerships Make Money
People often assume that auto dealers primarily make money by buying vehicles from manufacturers, then selling them at a profit. But that profit margin has shrunk over the years, so dealerships have to look to other revenue sources. Fortunately, there are plenty. Here are some ways an auto dealer can make money:
Invoice vs. sale price
This is the obvious one. The amount you pay a manufacturer for a vehicle will ideally be less than what you sell it for. Youll probably part with the vehicle for less than MSRP, though, and auto dealers report that this margin has gotten smaller over the years.
Holdback
Fortunately, many manufacturers offer holdback. This means that when you sell one of their vehicles, you get a certain percentage of either the invoice price or the MSRP back from the manufacturer. If a manufacturer offers holdback, expect it to be about 2%.
You usually wont get this money at the time of the sale, though. Most manufacturers issue their holdback money once a quarter. Still, this can be a great way to earn some extra money to cover your operating expenses, including your salary. In fact, some auto dealers choose to work exclusively with manufacturers that offer holdback.
Incentives from the manufacturer
Beyond that, many manufacturers offer incentives to sell certain vehicles. For example, they might issue rebates on certain VINs if its the end of the selling season for that model. Also called dealer cash, these incentives help you pad your bottom line.
How Much Do Dealers Make On New Cars
Trust me, I know buying a car isnt easy. Believe it or not, neither is selling a car. After doing it for 43 years, I can assure you that being on either side of a car deal isnt the most pleasant experience either. This is in large part because of information asymmetry, meaning that the dealer has more information than the car buyer, and the car buyer has most likely been taken advantage of in the past by one dealer or another.
By now you know what our objective here at YAA is: we exist to support car buyers as they navigate the process. Today I wanted to share with you my best guess as to how much dealers make on new cars broken down by brand. These are estimates, and not facts. During my 43 year career I worked for a lot of OEMs , but not all of them. I dont know every brands profit margins, but I do have a good sense of what they are for most.
Want to make car buying easy? Let us do the hard stuff! Its like Honey, but for buying cars, trucks, and SUVs.
Keep in mind that profit margins are different by model and not just make. What do I mean? I mean that a Mercedes-Benz C300 is going to have less profit built into its MSRP than a G550. That being said, on average, my best guess is that Mercedes-Benz have eight percent profit built into the MSRP price. I hope that makes sense.
If you havent already, be sure to use our FREE Market Price Report which contains a suggested offer price to help you begin negotiations with any dealer on any car.
| OEM |
|---|
Also Check: Car Making Grinding Noise When Accelerating
How Much Does A New Car Dealer Make On A Deal
- MSRP and invoice difference is not dealer profit
- Dealers cash in on holdback
- Direct-to-dealer incentives help the bottom line
- Your trade may be the key to a profitable deal
Car and truck shoppers might think the money in between the sticker price and the invoice is the sole source of profit for dealers. Guess again. Its not. And its not even that big of a factor.
However, there are a wide-range of tools available to dealers to turn a profit. Heres a list of some of the commonly used terms and how each contributes to a dealers bottom line.
Invoice: When shopping for a new car or truck, the salesperson might say: This is a great deal, Im selling the car at invoice, thats dealer cost. Im not making a nickel on the deal.
The dealer may even reveal a dealer document sent by the manufacturer that shows the invoice price, the price the dealer allegedly paid to purchase that car. Sounds good except the invoice doesnt necessarily reflect the actual price the dealer paid to purchase the car from the manufacturer.
Likely missing in the conversation is the word holdback and any automaker-to dealer-incentives that result in profit for the dealer, all of which is explained below. Even at so-called invoice pricing or dealer cost, there are ways the dealer can make a profit on each sale.
Holdback
Invoice vs. sticker price
Given todays transparency in invoice and sticker prices and the narrowing margin between the two, theres not much wiggle room to negotiate a good deal.
Do Car Dealers Make Money Off Financing
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list ofour partnersandhere’s how we make money.
Auto dealerships make a lot of money off financing.
Mostly, they act as intermediaries to connect their customers with banks and credit unions, earning either a flat fee for each loan referral, a percentage of the loan amount, or a portion of the interest.
Some loans make a dealer very little, $100 or even less, but some can generate thousands of dollars in profit.
The most common way to profit off auto loans is a system known as dealer reserve. Dealers have a buy rate with each lender that represents the minimum rate the bank or credit union will accept. The dealership can mark up that rate by an agreed-upon amount, but usually 2.5 percentage points or less. That is known as the sell rate, and it is the one the dealer may show you.
About 78% of dealer-arranged loans carry marked-up interest rates, according to a 2020 analysis by the Massachusetts Institute of Technology, with an average markup of 1.08 percentage points. About 85% of new-car buyers finance their purchase, as do a little more than half of used-car buyers.
Also Check: How To Stop Calls About Car Warranty
