How does a car dealership really make its money?
Several ways but the price you pay for the car itself is not likely contributing much to it.
Dealerships are the most profitable in the service department. They depend on service and want to retain you as a customer. This is why you find free oil changes and “lifetime” warranties being used as promotions.
In the car deal itself, here are the profit areas:
- Car price: most dealerships pay invoice but also have a holdback that may be 2–3% of the price of the vehicle. This holdback is based on the dealership making it’s quota from the manufacturer. On a $40,000 dollar car, they may make $900.
- Financing . The dealer can make money on bringing good finance deals to lenders. However, bad credit customers cost the dealership money to finance.
- Extended Warranties and Protection Packages. These may bring 50% profit to the dealership and is an important source of income. Does that mean you shouldn’t buy it? It all depends. These warranties bring good value to the customer, if they use it.
- Accessories – dealerships make profit on the accessories they sell. Experience says about 25–40% depending on the item. Plus, if you finance it, it just increases the money they make on financing.
- Documenation Fee – not much money, but it pays the dealership to hold on to the paperwork for 7–10 years.
Knowledge Is Powerful
What makes some shoppers wary as they enter car dealerships is the fact that they don’t know what they’re going to pay for the product. Shoppers don’t expect to negotiate the cost of a quart of milk with a salesperson at the supermarket. But they do expect to negotiate car prices.
You can better navigate some of the more complex purchase negotiations by understanding some of the financial aspects of the car-selling business. Here are some examples.
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 (advertising, sales commissions, etc.). 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.
The most obvious source of used car inventory is the trade-in. These are vehicles that customers sell to dealers when they are buying another vehicle from the dealer. Selling your old car to the dealer you’re buying a brand new or another used one from is by far the easiest and most convenient way of getting rid of it and getting what it’s worth to put towards your next vehicle.
This is often the best source of the most profitable used vehicle inventory for dealers. The seller is the closest thing they are going to get to a captive audience, and the dealer gets to inspect and test drive the vehicle in a way they can’t with vehicles from some other sources. If it’s a vehicle that’s particularly attractive to the dealer they can offer a good price for it and sweeten the deal even more with discounts and offers on the vehicle the customer is looking to buy.
I know from personal experience that there are times when a dealer will go out of their way to do a deal on a new car to get a particularly desirable trade-in. Used cars are generally far more profitable than new cars, so it could even be worthwhile to break-even or lose money on the sale of a new vehicle to get a trade-in that could offer an opportunity for a big profit later on.
The role played by car dealers
Price negotiationscars parked
This is where the car dealer and the customer come to a fair price that is comfortable for both of them. This is an important role for car dealers since it ensures that both the customer and the dealership are satisfied with the outcome from the sale of a vehicle.
Organizing test drives
It is a car dealer’s job to plan and arrange for test drives for customers wishing to purchase cars from car dealerships. These test drives allow customers to ensure that the vehicle to be purchased is in a proper working condition.
Car dealers are tasked with making information about cars available to their potential customers. The information provided is usually about the features available in the car, the type of entertainment system present and the navigation controls that are in the vehicle. This information is vital in helping people choose the kind of car they would desire to purchase according to their preference.
This involves keeping their customers updated on the progress of the orders they had placed earlier and also contact potential clients to inform them of new cars and deals. When buying Kia in Bristol, car dealers also make their customers aware of additional products that they could require in the duration of car ownership. This could include terms of warranty and vehicle servicing.
Vehicle selling and purchase involves some paperwork to be processed. They have to file every order made and ensure that every car purchased has the correct paperwork done from registration plates, road tax to proper car ownership registration.
Things to Consider When Opening a Car Dealership
Opening a car dealership requires careful planning. Aspiring dealers must take into account the specific legal requirements they will need to comply with to open a dealership in their state.
You must also consider other aspects such as your local market, whether to offer new and/or used cars, what startup expenses you will be facing, and how to develop a solid business plan. You’ll need to account for all of these areas and more if you want your business to take off strong and keep going for a long time.
For a list of the most important things to consider when opening a car dealership, read on!
The location of your dealership has an impact on the number of sales and profit you make in a given year. Some states are more profitable and provide a better business climate than others. What makes a state a good place to open a dealership? Average yearly sales, the costs associated with opening the dealership, as well as average payroll costs and weekly employee salaries in your area, are all factors that you need to consider.
Type of dealership
Do you know what kind of dealership you want to open? Will you be opening a new (or franchised) vehicle dealership, or will you specialize in used vehicles—or perhaps both? You could also focus on offering electric vehicles, luxury vehicles, or primarily foreign vehicles. This is related to the location of your business and your target audience.
Some states, such as Florida, are known for their preference for Asian cars. And when it comes to used cars, while the majority of states have a clear preference for pickups, other states prefer SUVs and more compact cars instead. In other words, understanding local tastes will be essential to your success.
An additional consideration you could also have at this point is whether you would want to include a service department to offer maintenance and repair work. According to the NADA data report, dealership service and parts sales across the U.S. have nearly doubled over the last eight years, resulting in a total of $114.15 billion of sales for all new-vehicle dealerships. It could be a source of additional income for your dealership.
To open a dealership in any state, you will need to obtain a business license allowing you to sell vehicles of a particular kind. License requirements vary significantly between states. Some states have minimal requirements and few fees, whereas others have strict, lengthy and at times expensive licensing procedures.
Licensing requirements you will frequently encounter are:
- Lease or own a property for your dealership
- Comply with specific location requirements for your office and showroom
- Pass a criminal background check or personal history questionnaire requirement
- Obtain an Employee Identification Number (EIN) from the IRS
- Obtain a state tax number from your local tax department
- Provide copies of your insurance policy and your auto dealer surety bond agreement
- Provide a copy of a franchise agreement (if selling new cars)
- Pass a state-mandated dealer training course
- Pass an inspection of your dealership premises
- Complete and submit your dealer application form, along with all other required documents
- Pay all application, licensing, and dealer plate fees