Have you been wondering how car dealers make their money?
Before stepping into a car dealership, shrewd car buyers are not only informed about the kind of the car they want, but also on how the car dealers are structured to make money off them. It is crucial to understand a car dealer’s thought process as it prepares you to structure your bids.
Having said that, let us dive in into the car dealership model and show you how they stay afloat.
Selling Cars
This is quite an obvious one, right?
Typically, dealerships buy cars on wholesale prices from the relevant manufacturers and then offer them to clients at a price suggested by the manufacturers themselves.
As you can imagine, this structured arrangement will not make fortunes for the dealers as the prices are predetermined. In fact, National Automobile Dealers Association (NADA) reveals that on average, a dealer makes just about 3% as profit margin from car sales.
However, most car dealerships do sell a lot of car units each year, making this model sustainable.
Car Financing
You might have wondered why car dealers always insist in getting you a loan facility for your car purchase. Well, it is because they make money this way.
When the customer acquires a car though a loan facility, part of the interest belongs to the car dealer. Say, for example, you get a facility worth $30,000 at 5% interest. The car dealership can negotiate with the bank to get the loan at 3%, making a whole 2% from this transaction. On a $30,000 loan, the dealership bags $600 in profit.
However, not all car buyers go for this arrangement. A good number of car buyers have pre-approved auto loans from their banks or credit unions. If you conduct your homework well, you will realize that financing gives better deals than most dealerships.
Servicing cars
Most dealerships have their own service departments offering maintenance and repairs services. The department is always open both the dealership customers and the general public, and the prices are often higher than those of independent repair shops.
The additional margin is intended to attract premium customers, especially those in need of major repairs.
On the other hand, dealership’s service departments are known for their top-notch services as they invest in high-trained personnel. If you are a customer and have a warranty on your car, then you will receive professional repair services at no cost.
Spare Parts Department
The parts and service department is another dealership’s cash cow. Dealerships make substantial profits selling service contracts, spare parts, and accessories.
A Service contract refers to any extended warranty covering repairs after the manufacturer’s warranty has expired. Service contracts have great margins since they have very high markups and the claims rates are usually low.
Most dealerships offer free oil changes and a few other routine maintenances for the first year or two after purchase. Since the car owner is already used to the top services the dealership provides, they continue to consume the services even after the grace period is over.
However, the competition from online retailers is causing significant revenue reduction in the spares division.
Commissions
Most auto dealer Jackson, MI make money through commission on the sale of both new and old cars. The salesperson selling you a car often gets between 3% to 5% commission on the sale price.
Most car sales accounts reveals that an average car dealership makes around 65% of its profits from sale of new cars and about 35% from sale of used cars.
Promotions and Incentives
In order to increase the sales of new cars, car dealerships often offer appealing promotions and incentives. Examples of these incentives include cash rebates, free extended warranties, and low-interest financing.
Additionally, a car dealership could offer free oil changes or tire rotation upon purchasing a used car.
For these promotions and incentives to be effective, they have to positively affect the dealership’s bottom line. The reason for this is that the promotions and incentives have to be paid for somehow, and the cost will be transferred to the final consumer.
Conclusion
Other additional ways that dealerships make money include trade-in for used cars and insurance deals. In order to survive in this competitive industry, every dealership ought to broaden their income streams.
