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How Much Profit Should A Car Dealer Make?

How much profit is fair for a dealer to make when they sell a car?

This is a general question. Let's say just an average car.

We all know that the principle of Economics- “Supply and Demand” dictates the market, so there are exceptions.

My question is related to just an "average car".

The reason I ask this question is because I have read many post's to this discussion board, and I am amazed at the perception that people have about buying a car, and what they should pay for a car. It seems that many people lose sight of the fact that, like any business, car dealerships have operating expenses, and balance sheets that they need to “balance” to stay in business.

I have read post's that state that some people travel across country to save a small amount of money to buy a car. It does not seem logical to go through all of the trouble to save a small amount of money. Personally, I would rather buy a car in the State, County, and City that I live in, so that the sales tax dollars generated from the sale of the car stay within my community.

With all of the information that is available to a consumer today, (such as Edmunds.com, and others), there are no secrets as to what a fair price for a car should be, but in reading many of the conversations that people are having, some people seem baffled about the car buying process.

Negotiating the price of the car should be easy, and I think, in my opinion, the dealer should be allowed to make a reasonable profit. In reading many of the posts to this board, it seems that the general public perceives giving the dealer a profit as being “ripped off”.

So, what is a fair profit for a dealer to make when they sell a car?
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Comments

  • jb_turnerjb_turner Posts: 702
    Enough at least to cover exspenses.
  • PF_FlyerPF_Flyer Pennsylvania Furnace, PAPosts: 5,860
    I want to make this point early... this is not to be a "let's bash dealers" topic. People's opinions are going to vary on this question all the way from "whatever they can make" to "they shouldn't make a dime", and both views are going to have their reasons and will clash over this.

    There also will be the temptation to drift off into a discussion of capitalism, economics, etc. If we stick to the topic, we should be able to have a resonable discussion with differing opinions that we all can learn from.

    Besides, it's too HOT to start up anything! :sick:

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  • fintailfintail Posts: 33,594
    As much as he can, within legal and/or ethical boundaries.

    It's an imformation age, caveat emptor
  • nippononlynippononly SF Bay AreaPosts: 12,687
    in the sense that there shouldn't be laws to govern it. But the process of buying a new car can be an amazing PITA, and I think all dealers would be wise to go to the no-haggle system that GM seems to be adopting.

    In general, I would say 5% is the max the dealer should make. The average new car transaction exceeds $26K now, which means that at 5% they make a very healthy $1300 profit - more than enough to cover the costs of the lights and insurance, while giving the sales person a few hundred dollars per sale.

    This would be for the"average" car.

    I think the reason people on these boards talk about getting the dealer for every last penny, is that they know all too well that for everyone who pulls that last dime out of the dealer's hand, there are two or three customers paying sticker. So let's not feel TOO bad about wheeling and dealing here - after all, that's the system dealers have set up. Go to no-haggle, and this problem goes away, not to mention you save a LOT of time on each transaction.

    2013 Civic SI, 2009 Outback Sport 5-spd (stick)

  • stickguystickguy Posts: 14,296
    as much as they can without breaking the law. Same goes for every other business. It's not like a dealer is a public monopoly of an essential good (like the water company say).

    As long as it is a competitive environment (and car sales sure is that), then market forces will keep any dealer from getting too "greedy" if they want to stay in business.

    And be careful what you wish for. If you decide that some # is good (say 1% over expenses), you may end up paying lots more for a car!

    But, from the number of dealers near me doing majore remodels/expansions (the new MB dealership by me is a palace), they must be making enough to stay in business.

    2013 Acura RDX (wife's), 2007 Volvo S40 (when daughter lets me see it), 2000 Acura TL (formerly son's, now mine again), and new Jetta SE (son's first new car on his own dime!)

  • scott1256scott1256 Posts: 531
    The dealer should make as much as possible on everything they sell.

    The buyer should pay as little as possible for everything they buy.

    There is accurate price/cost information available from many sources. Buyers just need to use it.
  • mirthmirth Posts: 1,212
    Dealers should make a ton of profit to spur job growth and local economies.

    Not on my car, of course. ;)
  • beliverbeliver Posts: 155
    Isell, give us your opinion on this. I feel the dealer should make as much as the traffic will bear. That's the free enterprise way, right ?

    believer
  • nippononlynippononly SF Bay AreaPosts: 12,687
    "free enterprise" gets people to sign on the dotted line for 26% interest (and up) car loans too, simply because they don't know better. "Should" that be fine too, seeing as it's all in the spirit of free enterprise, and "caveat emptor"?

    2013 Civic SI, 2009 Outback Sport 5-spd (stick)

  • reddogsreddogs Posts: 353
    So anything in that 20-22% for goods (not services) is the norm, but if the commidity is in great demand it can go up, but if it goes to high it will get strong resistance in the marketplace. Look up MAC's vs PC's sales history to see what happens when your product gets a bit pricy...........:0)
  • fintailfintail Posts: 33,594
    High interest is all about bad credit...it's simply risk management. If you get stuck with a 25% car loan, chances are you've done something to deserve it. I don't think people who deserve 5% terms get stuck with 20+% terms. In this case, it's only about "knowing better" in terms of knowing enough to pay your bills.
  • nippononlynippononly SF Bay AreaPosts: 12,687
    just so I understand, being a savvy consumer and thoroughly knowledgeable about every purchase is everyone's responsibility, and if someone is not and gets totally screwed, that is OK by the folks here, right?

    I'm not advocating laws to change the status quo, just asking how folks "feel" about it.

    I'm also not saying that paying sticker is getting "totally screwed". A dealer doing a hard sell on a customer with poor credit, upselling them into a big, bad SUV and then selling them a 25% loan is, IMO, screwing the customer. They will never own the vehicle, and it stands a decent chance of ruining what credit they have left, not to mention leaving them without wheels to get to a crucial job. We here may forget (or may have never been aware) just how well versed we are in the ins and outs of auto purchases and financing compared to the masses out there.

    2013 Civic SI, 2009 Outback Sport 5-spd (stick)

  • Mr_ShiftrightMr_Shiftright CaliforniaPosts: 44,619
    As long as people are not subjected to deceptive practices, dealers should make as much money as they dare. But I don't think the "if you are a sheep you deserve to be sheared" is a very good philosophy however, as this is basically how a racketeer thinks when he bilks old people out of their life savings, etc. Some business practices are very clever and difficult to understand (lease agreements for instance) and require consumer protections.

    A dealer is basically a franchisee. he buys the new car for a certain price and he can sell it for whatever he wants as long as he isn't violating his dealer agreement.

    MODERATOR

  • bdr127bdr127 Posts: 950
    As many have said, a dealer should make as much as they are able to make on a sale... After all, this is the USA! As far as people taking every penny of profit from dealers, I think 5% is a fair profit..... And before some people here object, just look at what we all pay for clothes, TVs, and jewelry. Some of these items might be marked up anywhere from 100%-1000%!!! Car sales gets the bad rap and many customers get upset with the dealer making profit, but are sometimes the same people that put a 1000% profit in the pocket of a clothing manufacturer/vendor.
  • euphoniumeuphonium Great Northwest, West of the Cascades.Posts: 3,324
    Remember -

    P R O F I T is not a four letter word.

    Some sheep deserve to be fleeced

    Only one Jag dealer in the state of Oregon & he has done so well he is not retiring.
  • isellhondasisellhondas Issaquah WashingtonPosts: 17,659
    I think ANY business whould be allowed to make as much profit as possible without being deceptive or downright cheating people.

    I admit, I get a bit annoyed but I usually keep my mouth shut here when people brag about how they squeezed the dealer for their last dime.

    And, I get a kick out the posters who decide what they think is "fair". Usually some piddly amount of money, of course.

    But, I realize most of these posters have never owned their own businesses as I have. They don't give a thought to the tremendous overhead that is required to even open the doors every month.

    They also don't think or care about where these profit dollars go. Back into the community that they live in.
  • 210delray210delray Posts: 4,722
    ...compared to everything else (except houses and land).

    1. It's the only arena where buyers and sellers routinely haggle on prices for new products.

    2. Instead of the dealer negotiating forthrightly, as "we will sell you this car for $xxx over invoice," they tack on phony charges like processing fees, cheap add-ons like pinstripes and paint sealant with huge markups, and additional market value (ADM) on plain-Jane cars like Chevy Cobalts. Then there's F&I, where you get fleeced some more for extended warranties, again with huge markups.

    I don't necessarily have a problem with paying $500 over invoice for example, if that's the best I can do, but I DO have a problem with $50 over invoice plus $200 processing fee, $300 pinstripes, and ADM of $500! If you, Mr. Dealer, have a problem paying the light bill, than include it in your basic markup over invoice!

    Now before you salespeople misunderstand, I'm not saying you shouldn't sell a car for MSRP or even above, for example, if someone is willing to pay for it. I'm saying that for someone who studies Edmunds and other sources and knows invoice and True Market Value prices, that the salesperson should negotiate forthrightly and not go below a certain amount over invoice. Period. Of course, add-ons for government-mandated fees like plates, title, and taxes are legitimate.
  • john_324john_324 Posts: 974
    I think 210delray's right on the nose re the way the market operates in car sales.

    The big 2 things that cause problems in the way this market operates are what economists call "information asymmetry" and what Scott Adams (Dilbert creator) calls (I love this) "confuseopolies".

    The Internet has greatly reduced the information asymmetry problem to the point where it's pretty minimal.

    But the confuseopoly problem still does exist...this is the way that some businesses, rather than trying to form a cartel the old-fashioned way (agreeing to keep prices at a certain level...think oil and OPEC) to keep profits high, decide instead to set up a price system that deliberatively confuses consumers into not understanding it (telecom providers, esp. the old-school ones, are hugely guilty of this) in order to get more money out of them.

    But this is fading as well, first because of the information provided by the Internet (as above), and second because with any cartel, there's always an incentive for a given member to "cheat" to capture profits from his competitors...and no-haggle, "everything-out-there-for-you-to-see" is the way to "cheat" and get more customers from one's competitors.
  • nippononlynippononly SF Bay AreaPosts: 12,687
    is when you have two dealerships in the same city, and one is adding $2-3K ADMs on the same models the other dealership is advertising at sticker. What special costs does the first dealerships have that the second doesn't? Or are they just trying to jack the customer for as much money as possible?

    Simplifying the car purchase process in the U.S. is probably the single biggest favor we could do for the consumer right now.

    2013 Civic SI, 2009 Outback Sport 5-spd (stick)

  • rroyce10rroyce10 Posts: 9,359
    ....... Some dealers use the ADM's so they can show more for the buyers trade ... even with a Kazillion tons of info out there - "how much for my trade" probably comes into 30/40% of the final decision making, and most of these folks are using the information from a website that "shows" the biggest number for their car, not real world money .......

    That said ... when "you" invest a couple hundred thousand in property, another million or so in a building, another couple of hundred thousand in floorplan, parts and advertising per month .. that's the time when Nippononly can decide when and what a "rip-off" is, right now you're just part of the conversation ...... if you've done the proper homework, know what the area is doing as far as price (give or take a few hundred) and your negotiations can't satisfy your figures, then move on and negotiate with another .... simple.



    Terry ;)
  • nippononlynippononly SF Bay AreaPosts: 12,687
    that is what goes on at Edmunds - being part of the conversation. :-)

    Dealers do WANT sales, don't they? So why alienate their potential customers the way they do?

    2013 Civic SI, 2009 Outback Sport 5-spd (stick)

  • rroyce10rroyce10 Posts: 9,359
    ........ Who's being alienated .. perhaps you..?

    Dealers can "ask" anything they want, it's their business .... just like the guy down the street can "ask" $450,000 for a home that needs $75,000 worth of work just to make it even presentable, or the Wal-Mart down ther street can "ask" $9.99 for Marine plywood and the one 3 miles away can "ask" $6.99, it's their store ..... it's my job to find what the market is and what I'm willing to pay.

    The same goes with golf clubs .. you can go to certain golf stores and pay $450 for certain drivers, or I can shop around and find the same one for $349, or perhaps the first guy will meet the price of $349 ... thats my job to find out, and if he can't/won't meet the price, then no one feels alienated, it's just business and I move on .....

    People have to be "smart shoppers" and good negotiators for just about everything in life, mortgages, closing costs, interest rates, a fair price for furniture and jewelry .... ADM's.? .. you don't know what the selling price is unless you ---- ask ..........



    Terry.
  • sls002sls002 Posts: 2,788
    The manufacturers suggested retail price has a reasonable profit margin or markup. Profit really depends on the dealers costs, which vary from dealer to dealer. The problem is that most car buyers have a used car that they need to "get rid of", and trading it in is the easy way out. So, the trick then is to make the trade-in look good to new car buyer, while actually giving them no more than it is really worth. Most new car buyers will shop around looking at the best deal. Each buyer will probably define the best deal in a different way. However, many will look at what they get for the old car as a trade-in.

    But actual profit may depend more on sales volume than anything else. For example, a dealer that charges full price (with a markup of say $2000) may sell 500 new cars per year. My old Buick dealer sold about 250. This means that this dealer will have a net income after paying for the cars of $1 million. Another dealer may charge $500 markup and sell 2000 cars. Same net income. A third dealer may go for an $800 markup and sell 1500 cars. The net here is $1.2 million. The dealer selling 500 cars will not need as many sales people as the one trying to sell 2000 cars, so his costs should be less. The third dealership will probably have more sales people than the first dealer, but not as many as the second, so he will do better than the second, but perhaps no better than the first.

    The point I am getting at is this: some dealers are going for volume sales and lower markups, while other dealers will try for higher markups. Trade-in's will never be worth more than book value, and probably they will quote auction prices. Driving your old car till its ready for the junk yard is probably the best plan, and then you can buy a new one with no trade-in.
  • 210delray210delray Posts: 4,722
    I haven't traded one in (actually it was two at the time) since 1978.

    Since then, I've only sold privately, via newspapers, bulletin board at work, penny-saver type papers, and eBay. I've never had a problem, and I know I've gotten more than I could have from a dealer. Example: '97 Camry -- dealer offered $2000-$2500 (ballpark number). I sold it on eBay for $4301, with total fees to eBay and PayPal of about $100.
  • fintailfintail Posts: 33,594
    I was offered $2600 for my 126 by a dealer. I let a few people know I was willing to let it go to a good home for $5K, and it was sold within 48 hours.
  • sls002sls002 Posts: 2,788
    I have at various times tried to sell domestic cars (Buicks) and no one has been interested. So, a lot depends on what you are selling. On the other hand, I know one or two who ended up getting one of my used Buicks who were exceeding happy with them. I take good care of my cars.
  • john_324john_324 Posts: 974
    Hey, at least Buicks are fairly loaded and have a lot of features...try selling a Chevy Beretta with the base 4 cyl. engine and a 5 spd manual. It was in near-showroom condition (I'm a fanatic about car care), but took *forever* to sell it. :(
  • rroyce10rroyce10 Posts: 9,359
    ..... **This means that this dealer will have a net income after paying for the cars of $1 million. Another dealer may charge $500 markup and sell 2000 cars. Same net income** ...

    Thats not quite how it works .... it depends on the store(s), where it's at, what they're selling and how many stores are under the same "umbrella" ...... you'd be amazed on how many of the "Mega dealers" are having some trying times because of their size, because bigger isn't always better .... you have a larger staff, more floorplan, more property tax, management structure, more advertising, and depending on the state (like California) the Workmans Comp can drive one to drink(s) .... so they're profit margins have to be larger, especially if they're a large dealer with 20/40+ stores ...

    What really got the theme of the "mega" idea going was location ..... moving closer to highways, beltways and off the corner it has been at for the last 25 years ... that said, along with the move came alot of the costly changes because of city/county taxes and the huge cost of the new building structures ..... sometimes, one store in the right location can do more than 12 stores in a 20 mile radius ... remember, the other stores will always have to carry the weaker stores and that immediately effects the margins of the other 11 ... there is a whole potpourri of things that can change the margins - big or small.





    Terry ;)
  • mackabeemackabee Posts: 4,709
    Haven't we been down this road before?
    :blush:
    Mackabee
  • Mr_ShiftrightMr_Shiftright CaliforniaPosts: 44,619
    Yes but the dealer wants to make a profit on your used car if possible, as well; furthermore, he has a much greater legal responsibility than you do when he sells the car. He's not going to pay you retail--what's the point? Or he might low ball you because he really doesn't want your car....he probably doesn't want the possible grief of selling an old high mileage car of any type. He'd just wholesale it and flip it for a couple hundred bucks I'd guess. You have to remember that lot space is valuable to him. He needs to move inventory. If he pays too high on a used unit, and has some unexpected recon, he's buried in it and with his markup he'll own it forever.

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