How does a Car Dealer make money?

car dealerThe number of car lease deals keeps rising. Many people do not know how dealers make their money when they sell their cars so close to the invoice price.

But, there is money to be made from lease sales, selling of new and old cars. In the lease to earn handsomely the dealer has to accurately get the residual price right. But, that is where the challenge is. The resale value is affected by so many factors that you cannot adequately predict what value it will be in two or three years.

The market value of the car fluctuates and can either be higher than the residual value or lower. Here are some other ways the dealer makes money.

New vehicles

This is primarily where the dealer makes money. It often accounts to about 30 percent of the dealer’s profits. The dealer will buy cars from the car’s manufacturers at a discount and then sell the cars to buyers and make the price difference. In addition, there are some profits to be made through finance and insurance bundled products.

Dealers will also make some profits from the used car markets. In this instance, they can sell cars that were once on a lease but have a larger market value to residual value. Car sales from the used car market are not as great as those for new cars.

Down payment

The first part of a dealers profit is the down payment you make when you are leasing a car. Leasing enables one to drive a more expensive car while making affordable monthly payments. For businesses, it lets them have a fleet of cars without necessarily making a large capital investment.

Car pricing

For the dealer to make money they have to price their products right. When the manufacturer sells the car to a dealer there is something called the dealer holdback money. What you see being quoted by the dealer is often the invoice price. But, the manufacturer will offer a 2 or 3% of the sticker price and this enables them to make some profit even if they sell the car at or below the invoice price.

The dealer holdback money helps the dealer to remain competitive. In addition, the manufacturer may offer some bonus to the dealer so that they can move the cars off the inventory. The dealer cash is a good way to move slow-moving cars in anticipation of newer models.

Car commissions

Just like many consumable products car salesmen often earn commissions for every car sale. This is the reason you find them to be very aggressive in marketing cars to buyers. Since the commission is based on the sales price the salespeople will try to make it higher so that they can hit their sales target and get commissions and bonuses. It is imperative that you do adequate research to discover a car’s market value as this gives you a point of reference when it comes to negotiations.

In modern times some car dealers have moved from seeking a higher sales price and instead push the salespeople to sell more cars. The pay is based on the number of cars sold. Remember the dealer will still earn the dealer holdback money from the manufacturer even if they sell the car at the invoice price. Good performing salespeople will also earn some bonuses at the end of the year.

Used car market – trade-ins

If you have been driving a particular jaguar model or Mercedes Benz you will sooner realize that a better version of your car brand has been released. This new model is loaded with cool electronics. You can either sell your current model and use the funds to purchase the latest model or you can contact your dealer for a trade-in. Your dealer will offer you a price for the old model and this will reduce the price of the new model.

This is called a trade-in. In this instance, the dealer will make some profit from selling you a new car and they can also sell your old model for a profit if the market value of the car is more than the residual value. The dealer does make some profit from the sale of the old car but it is incomparable with the profits he makes from new car sales. Old car sales account for a small fraction of the dealers profit.

Car service

Your new or old car requires regular services for it to operate optimally. Servicing means changing the oil, tires and general car maintenance. Car owners are charged a service fee. While the margins are small during servicing it helps keep the dealers afloat during tough economic times. The servicemen make their money through service commissions for new clients.

Finance and Insurance

Car dealers also make money from finance and insurance. This is attached to new sales. The F&I often pushes the dealers profit to an average of $1,200 per car. In most dealerships you will find the dealer making every effort to sell you the financing option.

While the interest rates are lower the dealers do make money from large car sales. There is also money to be made from extended warranties. This have being on the rise and over 40% of new car owners bought extended warranties.

Conclusion

The dealers profit makes profit through a number of ways as we have discussed. Firstly, he makes most of his profits from the sale of new cars. The manufacturer may give the dealer holdback money which is a percentage of the sticker price. This enables the dealer to sell the car at invoice price and still make some profit. Sales people earn a commission from the sale of cars. The more you sell the more you make.

They can also be given a bonus at the end of the year. The dealer will also make some money off old cars. In this scenario, the market value of the car has to be higher than the residual value. Lastly, the dealer will make money through servicing contracts.

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