How car dealerships make money

July 22, 2020 adminaccelerate

Considering new car sales, used car sales, parts & service, and financing, how do you think car dealerships make the lion’s share of their money?  If you answered parts & service, you’d be correct. In fact, in some large dealerships, up to 90% of their profits come from parts and service.  Understanding this, let us take a quick peek at the breakdown:

New Car Sales: depending on dealership volume, new car sales could actually cost the dealership money.  When inventory shows up at the dealership, it costs them money.  While they don’t necessarily pay invoice at the time it shows up, it does cost them interest every month.  With the advent of the internet and savvy buyers, many dealerships are forced to sell at or below invoice.  While holdback, customer incentives, and manufacturer incentives to dealers help make the losses up, new car sales are not main profit margin for dealerships.

Used Car Sales: Dealerships typically profit more per unit from used car sales than they do from new car sales.  This is because dealerships can offer lower than whole sale pricing for trade-ins and make a significant profit.  While they aim to sell the vehicle within 90 days, if it goes far beyond that, they will simply take the vehicle to auction and sell for wholesale value.  Certified Used Car Programs significantly add to the profit margin on used vehicle sales.

Financing: Many dealerships offer financing through third parties, to include manufacturer captive lending.  Many times, these third-party lending institutions will offer the dealer a special rate since they furnish so many customers (volume).  In turn, the dealership may add a percentage onto their rate to the consumer.  This additional rate is pure profit to the dealer.  Moreover, all of the extended warranties, GAP insurance, low-jack, leather treatment, etc are huge profit centers for the dealership.  If interested in any of these products, don’t be afraid to negotiate.  Some of these products are marked up significantly.

Parts & Service:  This is typically a dealerships largest profit center.  Not only does the dealership have a captive audience for all of the manufacturers’ vehicles that are under warranty, but they typically have a captive audience for much of the brand.  While customers do not pay for warranty repairs, manufacturers do and they pay at book value.  Most new OEM parts are sold through the manufacturers’ dealer network (hint: monopoly, of some sorts).

1 Comment on “How car dealerships make money

  1. I concur. This blog is 100% correct. I work for BMW North America in Aftersales and the big money is in Parts & Service. Specifically, warranty/maintenance part sales and wholesale part sales to collision centers and mechanical shops. Along with the labor rates, parts & service is the cash cow for the dealership.

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