Buying a car is, without a doubt, one of the highest investments a person has to make. Some people even take loans to pay for their new vehicle. When they collaborate with dealerships, it is natural to wonder where each cent of their payment goes.
Due to this reason, they usually wonder how much money car dealers make. Naturally, this depends on several factors, and determining their commission can be even more complex when it comes to used cars. In this article, we will explain how they make a profit and give you tips on how to choose the best car dealer for collaboration.
How do they make a profit?
The biggest misconception is that car dealers make money by buying vehicles from manufacturers and then reselling them. This used to be true, but it is no longer profitable. However, there are several methods they use nowadays.
Firstly, there is a difference between the sale price and the invoice. Ideally, they sell a car for more money than they originally paid the manufacturer for it. Still, this has decreased significantly in the past few years, which is why this is no longer their primary source of income.
The next one is called holdback. What is it? Well, basically, when a dealer buys a car from the manufacturer and they pay the invoice, a small percentage of it is returned to them once they sell that vehicle. This percentage varies between companies, but generally speaking, it is between 2% and 3% of the invoice or MSRP (Manufacturer’s Suggested Retail Price) fee. This way, they get to earn some extra profit to cover the operational expenses. However, they do not get the money the moment they sell the car, but instead, the manufacturers usually pay them quarterly.
Next, did you know that dealers get incentives from manufacturers? These are very common nowadays, and retail companies use them to persuade customers to buy their merchandise, but it is also used in this line of work. The truth is that dealers can make anywhere between a few hundred to a few thousand dollars from these, but meeting the requirements can sometimes be challenging. For example, incentives may apply to models with specific option packages or with particular vehicle identification numbers.
In addition, they also offer sales targets. Manufacturers provide a rebate for each vehicle if the dealer manages to sell a certain number of cars that month. This rebate can go from $500 to $1500 per car or even more. In order to meet this goal and make a significant profit, dealers tend to lower the cost for the customers. Nevertheless, this can be quite risky if they don’t reach the monthly sales target.
Lastly, they build a service and parts department within their business. This way, they continue earning revenue from the same cars they sold every time the owners drive them in for regular maintenance or buy new parts.
Selling new VS used cars
Most wonder if dealers earn more money from selling new or used vehicles. Most people would say that the right answer must be the former, and in some way, they are correct. After all, these are the ones that usually attract customers, and the average gross profit is around $2000. Nevertheless, the dealers can actually lose a couple of hundred dollars when it comes to the net profit. The thing is that they have to pay numerous expenses to get and present that shiny new car to potential buyers. This is where that holdback source of income we mentioned comes in, and they use it to cover these costs.
On the other hand, they can make between $2000 and $4000 on average for a used one. Yes, they usually have to invest a few hundred dollars for cleaning and changing any parts if necessary. But, how do they determine the price? Well, things have changed a lot in the past few decades. In the past, they would consider three things. Firstly, there was they paid for the car. Secondly, there was to cost of cleaning and repairing it. Thirdly, there was the profit they would like to make. They would get the new price by simply summing up all of these three things. However, it doesn’t work like that anymore. Why? Well, people can easily find all information online, so the dealers use software that calculates the price based on several factors.
How to find the best dealership?
Now that you know everything about the different ways these professionals earn revenue, we have some tips on choosing the best one.
The very first thing you have to do is check out their inventory. There is no point in considering a specific business if they cannot sell you that car you want. Luckily, nowadays, all of them have websites, and you should be able to find an entire section dedicated to their inventory. You can see what this looks like on discoveryautogroup.com.
Moreover, once you find a potential company, you have to learn how they conduct their business, that is, how reliable and transparent they are. Once again, you can start by going over their website and focusing on their About Us page. Here, you will learn some basic details about their history, how long they have been in this line of work, what their goals are, etc.
Upon reading this section, make sure to move to the customer reviews. The trick with these is that you shouldn’t only focus on the positive or negative ones but instead observe them as a whole. Obviously, some people won’t be very satisfied with their service, while others will have only words of praise for the company. You need to understand how to filter this and decide whether you should consider working with that business or not.
Finally, if they seem like a great fit, contact them and ask all the questions they have. If they cannot provide you with the answers you need or avoid telling you certain details, they are not trustworthy, and you should look for another dealership.