How does a car dealer make money: Information and challenges

Car dealerships are a lucrative business whose profits go beyond just buying and selling cars, new or used. You must learn several things before buying a car, dealership finances being one of them. Understanding the business and revenue sources might help steer you in the right direction towards a better purchase, minimizing the risk of you getting ripped off. While most people might think car dealerships are from car sales, these sales account for around 30% of the dealerships total revenue.

But first, how much money does a dealership owner make?

The auto retail market is filled hundreds of thousands of car dealerships, clearly, it is a flourishing market. Because operators deal in both new and used cars, car dealerships fall under a wide variety of niche markets. There are several reports quoting used car dealerships having just under US400 billion dollars in annual sales. NADA (National Automobile Dealers Association) points out, about 30% of the revenue in the car dealership business come from actual car sales. Servicing and parts form a large part of the profit that dealerships receive.

Because of the fluctuation in sales in a dealership, it may be difficult to say with certainty exactly how much money a dealership can make. With a good business, the united states bureau of statistics ballparks the average salary to be just under US34 dollars. The difference in success of a business may be due to a number of factors including

The sense behind car dealerships

If you’re wondering whether it is profitable to sell cars, then the answer is yes. The automobile sales industry is not just your typical used or new car dealerships. There is a continuing demand for automobile which in turn continues to fuel the increasing car sales. Many people are not only taking advantage of the traditional dealerships, but also spreading out into niche automobile sales markets like online stores. This way, they expand their markets and increase their profits.

With the right set up, a car dealership can turn a reasonable profit even without being part of a major franchise. In fact, some findings indicate that concentration within the market had increased over the past five years, prior to 2015.

Statistics aside, the automobile sales industry is one filled with several lucrative opportunities. There are multiple ways you can mold your dealership for maximum turn out. However, no matter how well you leverage these opportunities, you must understand how dealerships make money in order to properly establish the business. Understanding how dealerships make money should be helpful in guiding you to model a proper business plan for maximum profit.

Here is how car dealerships make money directly

There are several ways in which car dealerships directly or indirectly make profits. Some dealerships for example operate as franchise dealers and you get the opportunity to make money from selling new motor vehicles. You cannot only make money off new cars but also from selling and servicing the brands of cars sold.

Independent car dealers can buy and sell on retail or wholesale levels at their own rates. There are dealers who operate on wholesale levels. This may be somewhat expensive to set up but the rate of turnover is large.

Other direct means like operating as a freelance car dealer or earning for a dealership network also add to the different ways car dealerships directly make money. Regardless of whichever method you choose to operate under, you must have the necessary license to operate the dealership. Each of these requires a specific license to legally operate.

Where do car dealerships make money?

While some dealers carry both used and new cars, these options provide different ways in which the business makes a profit.

• New cars

The term holdbacks and invoice price are thrown around a lot when it comes to new cars. These influence how cars are priced and inevitably, the dealers’ profit. Holdbacks are a part of some complicated dealership accounting that form part of dealerships profits.

• Used cars

Unlike new cars, used cars provide a higher profit when it comes to sales alone. Through trade ins alone, the dealer can make a huge profit. While some used cars need to be reconditioned, they are still quite profitable because the buyer doesn’t go in knowing what the dealer paid for it. NADA reports point out that profit margins on new vehicles are typically less than that of used cars.

• Profitable service

As I told you, dealerships profits are not solely from car sales. In fact the service and parts departments account for a large percentage of the dealerships gross profits. These services and parts sold separately unlike the car prices, come in fixed prices unlike the negotiable quoted price of the car. Many dealerships structure their businesses to make large turn outs from services that are unavoidable to the user.

Terms used in dealings are important

There are several terms used in sales for both new and used cars buyers must learn. Terms used in car pricing terms such as sticker price or invoice price that are useful in understanding how the whole buying and selling dynamic functions. In some instances these terms is especially helpful when you want to negotiate a new cars price.

How long will it take to get a car from a dealership

Purchasing and waiting for a new car to arrive from your dealer can be nerve wrecking, especially if you do not have a clue about what goes on. Understanding dealer manufacturer relations and some of the exchanges might come in handy before you make a purchase. It might also give you piece of mind while you await your new ride to arrive. You might find it helpful to go through some of the dealer-manufacturer exchanges to help you understand vehicle pricing.

According to most research, newly ordered cars or factory ordered cars usually take about 5 to 8 weeks to arrive at the dealership. This is for vehicles built in the USA. If you plan on ordering a vehicle from Europe or Westwards, then it might be 3 months, approximately.

There is a wide range of variable involved in getting the car to the dealership; it is therefore difficult for the salesman at the dealership to say with certainty which date your vehicle should arrive. If you really want to know about the arrival of your previous car, you may opt for manufacturers who offer tracking services. This way, you will know whether your order in on track or you will have to wait a little past the estimated deliver date.

This is true for factory ordered cars. Because of the specificity that goes into making a factory ordered vehicle, it takes longer as compared to stock cars. Stock cars are usually shipped directly to the dealership and often have popular items, not specifically requested parts.

The process of buying a car and how long it will take

Purchasing a vehicle doesn’t start when you walk into a dealership, or officially sign the documents. If you’re wondering how long it will take to have that swanky new ride in your driver, well it could be months. It is important that you go through each step carefully, making sure you’re making the right choices that will end in a great deal.

In terms of duration, how long will be influenced by several things. You could be going smoothly down your checklist and before you purchase your vehicle, and then you find out that the model you want is out of stock. These minor bumps add to the time and possibly extend the intended time.

Tip: If you choose to buy your vehicle from a faraway dealer or out of state, then you might have to consider shipping it to where you are, another factor that extend the waiting time.

The deal itself

Averagely, purchasing a car takes about four hours. Yes, you need enough time to talk and negotiate with the dealer for the best price possible. The dealership can’t just give you the best price upfront that is not how negotiations work. Additionally, there are other things like checking your credit, appraising the car you’re trading in (if you are trading in) or even getting your car loan approved.

How long does the car loan approval take?

The time it takes to get approved a car loan likewise depends on some factors. Customers with bad credit or no credit have issues getting their loans approved and therefore tend to take longer than those with good credit. If your credit is questioned for example, you will have to provide documents that prove you’re employed or past finances.

It is possible to pay for your vehicle and drive off in it on the same day. Go to the dealership with everything in order, this way the process is made easier and you can have your car that very day.

• Consider all the paperwork

The worst thing you can do to yourself is forgetting the paperwork on car purchase day. This could grind the entire process to a halt. In addition to carrying your driver’s license, and documents for your trading vehicle, find out the form of payment your dealership accepts. This way you are prepared with a check for a pre-approved loan, cashier’s check.

Tip: To determine the mode of payment the dealership accepts, call ahead and ask for information from the finance manager.

• Some formalities take time to prepare

Including the paper work, number plates and pre delivery services, there are various formalities that must happen before you can officially have the vehicle. Affixing the car plates for example and registering the car under its new owner might take some time if there is an issue with you documentation; say you didn’t carry your valid driver’s license that day. Variation in such circumstances makes it difficult to definitively say how long it takes to buy a car.

• For out of state purchase options

These obviously take longer than in state buys. Apart from the ordinary car purchase process, you have car delivery to worry about. It will do you well to talk to an auto shipping company beforehand. Go through all the considerations in choosing a mover or shipping company so that you won’t rush the decision come purchase day. This will also save you thee risk of choosing a bad option that might end up with a damaged vehicle.

How much do dealers pay for cars from manufacturers?

If there is one thing you must earn before walking into a dealership, it is negotiation. The only way you will be able to properly bargain for a fair price on the new ride is if you actually understand how the financing on the vehicle works. Dealers base the price of the car like upon various factors:

• Average mark up on a new car

The markup fee, which is typically around 2-5%, is the amount of money the dealer raises the vehicle price to ensure a profit. Just because the price tag says 20,000$ doesn’t mean that that is the price the dealer got the car at. It is a business after all and the end goal is to turn a profit. Mark up fee is among one of the more important terms that will guide you in making a reasonable purchase on your vehicle. However, this doesn’t mean that the dealer will not make a profit.

TIP: Terms such as MSRP Manufacturer Suggested Retail Price, mark up, invoice and other fancy finance words influence how well you can negotiate for a better price. Just because the salesperson says you’re getting a good deal does not mean they aren’t pulling one over you. Sure a new vehicle is a good investment, but don’t get taken on the purchase price because you didn’t understand some dealership lingo.

• Invoice price

This is the price on the invoice the dealer receives from the manufacturer when they get a vehicle. While some people end to confuse this as the true price of the car, it is not. Invoices are often structures to have profit marks built into them. Manufacturer incentives and dealer holdback are folded into the invoice price as part of the profit marks of the invoice price.

• Holdback

The holdback is a charge, which represents an additional profit mark for dealers. Manufacturers usually withhold around 2-3% of the total vehicle invoice, which the dealer is pain once the car is sold. The exact number varies depending on the manufacturer as does the return of this holdback. Some manufacturers pay it quarterly or depending on their practices.

• MSRP

This is the sticker price of the vehicle and often the starting point for many negotiations. By definition, the MSRP is the published amount that manufacturer’s advice the dealers to start at. Sometimes, the MSRP is not publicly advertised by your dealer. Some dealers take advantage of this and quote a higher number during negotiations.

• Dealer incentives

These are incentives offered to dealers to buy the car at reduced true costs. They are also known as factory – dealer incentives and can be potentially passed on to consumers depending on how free the dealership is with this information.

• Manufacturer incentives and rebates

These are designed to stimulate sales. They can be offered as low interest financing, cash rebates etc. Manufacturer incentives are usually passed on to consumers. They help reduce the net price of a vehicle.

Bonus words: Sticker price and TMV (True Market Value) are also common terms that surround dealership financing. Sticker price is the figure you see in advertisements for a vehicle on the car window. TMV is what others are paying for the same vehicle around your area. Most of the time, the TMV is usually between the sticker and invoice price.

Conclusion

If you intend on starting your own car dealership, there are several aspects of the business that you must get right before you can begin. How dealerships make money is the most important aspect that you must understand, otherwise you may as well be wasting your time and finances. Once you understand how you can earn revenue, then you will be able to structure out your dealership idea and establish what services you may need to set up in order to run a successful business.

FAQ

How do I start my own car dealership?

In the past anyone could venture into car sales, but today many car dealerships are more sophisticated. The first thing to start out with is to do your research. Ask yourself whether there is a market for cars in your location and what market share your competitors hold. Next, work out your profit margins. Do they make sense to you. You can choose to either own the car dealership or work out a franchise. If you plan on offering some sort of after sales services then you need to figure out which products to sell and how many employees you are going to control. Finally, determine how much the initial startup and operational costs will be.

What is the general average profit margin for car dealerships?

Firstly, know the margins for new cars is not as lucrative as some may think. Expect to make 8 to 12% gross profit margin and around 1-2% net profit margin. What really eats up profits for car dealerships is they have staff costs to pay. You will need to hire pre-qualification technicians, after sale technicians, salespersons, title clerks and properly a manager to supervise the team. Added to these is the fixed costs for running the establishment, which can be significant depending on your city and location.

What happens to cars not sold?

This is usually a significant challenge for most car dealership when they are forced to remain with slow moving cars. For one, the car manufacturer does not take the cars back because they have already sold them to the car dealer. There moments the cars may put as a service loan for a dealership employee especially if there was clearance rebate from the manufacturer. While it is the dealers problem to ensure all their cars are sold, in some instances the car manufacturer may step in to help by offering various cash back incentives.