Last Updated on January 27, 2023
Have you ever wondered about all the ways car dealerships make money? Certainly, through car sales, though that’s not the only way. In fact, that’s not how dealerships make most of their revenue.
Let’s start with what most people know. Car dealerships sell a lot of cars and new cars especially can be expensive. But, how much does a dealership make off the sale of each vehicle? That’s something most people don’t know.
There are several factors that go into determining the answer. It’s not as easy as subtracting the price the dealer paid for the car from the price at the point of sale.
First, you need to understand a few terms that reflect common practices in the car dealership industry.
5 Common Dealership Practices
1. Manufacturer’s Suggested Retail Price (MSRP)
Also known as the sticker price or list price, this is the price the customer sees when walking the dealership and is the starting point for negotiations.
2. Invoice price
The dealer’s invoice price is the amount the dealership paid the manufacturer for a vehicle.
3. Holdback
When a dealership purchases a car from a manufacturer, two to three percent of the invoice price is paid back to the dealer after a vehicle is sold, and usually paid on a quarterly basis. This contributes to how much a dealer makes from a vehicle sale. However, several luxury brands such as Cadillac, don’t use holdbacks.
4. Manufacturer-to-dealer incentives
Sometimes manufacturers incentivize dealerships to sell specific models. These are often largely advertised because the incentives are attractive to the customers. Usually, dealers will offer perks such as adding tinted windows or remote start and the vehicle may be rebated. This means customers can get more vehicle for less, and dealers are rewarded for selling the desired models.
5. Manufacturer-to-dealer sales targets
Some dealers use a high-sales volume, low-revenue-per-sale business model in order to meet aggressive sales targets set by the manufacturer. In these cases, the dealer will sell vehicles with small profit margins (only a few hundred dollars), because the sales target bonus they achieve will compensate for the reduced sale price. So, dealers are making less per vehicle sale, but can achieve large bonuses. This puts their revenue ahead of dealers who don’t participate in sales targets programs.
According to the National Automobile Dealers Association (NADA), dealerships make $1,959 per vehicle sold (on average) and $2,337 (on average) on a used vehicle. Of course, dealerships will make less than these numbers on lower cost vehicles and more than this on higher cost vehicles.
If you sold one car per week (at $2,000 average per sale), you would earn $8,000 per month and more than $100,000 per year.
A car salesperson, on the other hand, generally gets paid a base salary plus a commission on a vehicle they sold—a percentage of the vehicle’s “front-end gross profit”. This profit is the difference between invoice price and the sale price. With commission around 20 percent, salespeople make about $400 per vehicle sold (plus bonuses and incentives).
The brand of the auto manufacturer also plays a role in how much money dealers make from sales. According to YAA—an online automotive research company—the auto manufacturers with the highest estimated profit averages (built into MSRP) are Bentley (12 percent) and Maserati (10 percent). Many manufacturers are at eight percent averages, such as Acura, BMW, Chevrolet, Ford, GMC, Lincoln, Porsche, and Volvo. Others have six percent averages like Honda, Jeep, Mazda, Suburu, Toyota, and Volkswagon. The lowest estimated profit average built into MSRP is five percent and applies to Hyundai, Kia, and Mitsubishi.
As previously stated, vehicle sales are not where dealerships make most of their money. According to NADA, the new-vehicle department of a car dealership accounts for approximately 58 percent of a dealership’s total sales but less than 26 percent of a dealership’s total gross profit. And because dealerships make more money on the sale of a used vehicle, used-vehicle profit is at 25 percent, which is almost the same as new sales, despite used-vehicle sales representing only one-third (31 percent) of a dealership’s total sales.
Besides these two methods, dealerships make money from several other means.
6 Other Ways Car Dealerships Make Money
1. Financing
Financing is actually one of the largest revenue streams for car dealerships. Nearly all car dealership businesses work with either a bank or a financing/leasing company, who pays the dealership a fee (either a percentage or a lump sum) for setting up the customer with financing. The amount can be as high as half of the cost of financing. If the dealership is offering 5.0 percent financing, 2.5 percent will go to the dealer and 2.5 percent will go to the bank or financing/leasing company.
2. Accessories and Warranties
Dealerships upsell customers with features and add-ons that increase the price of the vehicle, and the profit margin on these items tends to be very high. Warranties are especially profitable, because what price dealers (or manufacturers) pay when a customer brings in a warranty-related complaint is minuscule compared to the amount of profit made on the sale of warranties.
3. Service Fees
When you buy a vehicle, you need to register it, possibly get a new license plate, and fill in other government-mandated paperwork. The dealership will do this work for you at low cost to them and at a fee for you. It’s a convenience for the customer and a great revenue stream for the dealer, since they can make hundreds of dollars per vehicle sold.
4. Insurance
If you are purchasing a new vehicle, you may need to be set up with insurance if you haven’t already taken those steps. Insurance companies partner with dealerships to provide car insurance and the dealership receives a portion of the customer’s vehicle insurance cost.
5. Trade-ins
Dealers make more money on the sale of a used vehicle, in part, because they are very good at negotiating lower trade-in vehicle prices.
6. Maintenance and Repair
Many dealers make a significant amount of revenue from auto maintenance and repair. It’s an annual income that doesn’t fluctuate as much as new car sales. And all these points of contact in between vehicle sales allows the dealer to form a relationship with the customer, so when the customer wants to purchase a new vehicle, they’re more likely to purchase it from the same dealer.
Conclusion
There’s no doubt, car dealerships have perfected their money-making strategies over the years. The more you know, the more you may be able to haggle for a better deal. Though, car dealerships are not your only option for purchasing a new vehicle. There are also online car dealerships and even online auction companies like Municibid that offer you even more of an affordable selection to choose from.