Where Does the Car Dealer Make Money?


Where does the majority of a dealership's profit come from? It's not from car sales — at least not directly.
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Where does the majority of a dealership's profit come from? It's not from car sales — at least not directly.
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Anybody reading this post will automatically cultivate a carricatured image of these hard-working sales persons.
Here are people toiling daily not only to feed their families but also helping the economy to move along being depicted as cut-throat vermins bent on wrecking the pocket books of Americans.
To help beef up your outdated knowledge, I will like to point out to you that NOT EVERY CAR SALES PERSON IS ON COMMISSION. For example, sales persons working for the Sheehy Auto group are paid salaries, plus FLAT AMOUNTS on every car sold. The arrangment allowed the Sheehy company to usher in the concept of Sheehy Markdown where every single car is marked down below average market price.
For your information, Sheehy arrives at markdown prices uses sources like Edmunds.com, Cars.com, KBB.com, etc. Thus, for Edmunds to turn around and castigate dealers (which, of course, include Sheehy Auto company) is tantamount to saying that car buyers should not trust Edmunds.com. Talk about shooting oneself on the foot!
Also, what is so heinous about dealerships making profit ? Is Edmunds surviving on hand-outs and donations from philantropic organizations ? This drum-beat of car dealerships making profit is getting old, stale, annoying, and stupifying. Why won't Edmunds contributers write about Walmart making profit, or Exxon Mobil making profit ? PLease, if you have nothing to write about, start finding something else to do and stop painting this gargoyle-like picture of harworking and sincere sales people.
Siam Erzuah
Sheehy Honda
Alexandria, Virginia
Yes some are hones and care about the consumer. I have not met those yet!
Also, I used LeaseSmart iPhone app and caught them cheating me on the lease money factor/interest!
Commisson-based service provides a high level of attentiveness, and a commisson-based salesman provides great customer service. A commisson-based sales person has a vested interest in satisfying his/her customer, he/she is interested in repeat and referral business. If the salesman was simply collecting a salary, then he/she might not have the same level of vesting.
Do other sales people work on commisson, you bet. Keep this in mind, no sale means zero commisson. Wake up.
No one said that working on commission was inherently wrong, nor was the notion that a dealership works for profit. The economic realities are that the amounts earned over fixed expenses are the region for bargaining between any customer and supplier. Given that dealerships work long and hard to conceal that information from the consumer and seek to extract maximum profit from him, it is perfectly reasonable that the consumer work to *his* own best interests as well - and that's to *minimize* the expense from his own pocketbook.
That's the beauty of the free market - no one is compelled to purchase, no one is compelled to sell. Dealerships are at a nearly incalulable advantage over average consumers with regard to the "take price" for a given vehicle, and educating those consumers is their first, best defense against spending too much. Dealerships loathe educated consumers. Always have, always will. Up-front research will give you good information about what constitutes a good deal.
I am delighted to have learned how this dance works many years ago, and have been very satisfied in having done my research up-front, and knowing I've been able to strike new vehicle deals under *my* control, not that of the dealer. The result is one wherein they pursue my business, rather than one wherein I beg them to sell me a car.
The above claim that "In my experience...$5,500 markup on a used car would be considered a nice profit.".....NO KIDDING. If I had profit like that on just a couple of the cars that I sell each month, I would be much farther on my way to retirement.
Apparently you have not worked at a dealership lately. The dealership I work for makes money in volume. You fail to mention that a customer can find GREAT deals at places like mine....but instead, you write garbage like this....causing everyone to think that if they shop for a car, EVERYONE is looking to rip them off, and they need to negotiate THOUSANDS of dollars off used cars. Why not write an article about how people should expect to pay for great service. Why not write an article supporting the hard working salespeople at the dealership that are out to earn an honest living. We work 11-12 hours a day, 6 days a week. I guess you just feel that we should work for minimum wage. On a personal note....I have no problem selling a car for what the dealership has in it...but I don't work for free. I still deserve to get paid for the service I provide. Your article would have been relevant in the 1990's and before, but not in the internet age.
First off everything you buy has a profit in it. That does not make the product a bad choice. Secondly for a website that is geared towards cars and the "information" people seek. Your articles constantly bashing the car business is the reason why people are so guarded. When in fact if these "commissioned" sales people sold no cars you would have no job. I believe it is time for your company to write articles that dont paint a entire industry as scoundrels who are just looking to make a buck. But rather a place where services are offered to those who wish to use them and are accepting the terms of that service.
All the things you mention above no one is pushing it on the consumer.
If you dont want to pay a mark up in the service department. Solution: Fix your own car. Why should anyone show up for work and do it for free. How would the dealership afford to provide a service for free?
The dreaded "Finance Office" Solution. Arrange your own financing, there are banks on every corner. But to ask someone to once again work for free makes no sense. I think you should work for free while typing this article since the quality of it is more like a copy paste from several articles written in past times.
The salesman is entitled to get paid for assisting the customer find the right car that fits their customers needs. Any knowledgable customer appreciates this service. Which does not result in any commission getting paid until the customer agrees that the vehicle selected meets their needs.
For a company that is about cars you guys always seem to have some "inside" information from crooks themselves. These guys dont represent the entire industry. But rather crooks who have probally done time for doing illegal activities and can not find any other work. Other than "protecting" consumers from individuals that think like they do. Ask any average consumer and you will find that their experience was good and they are pleased with their decision on which car they selected regardless of who got paid. Dont sell out the industry that pays your bills. We are not in the 70's the industry is regulated and there is protection from dealerships that look to take advantage of consumers.
Find something else to discuss this is not journalism.
It used to be only real shady dealers would try this, but I have seen it almost everywhere now!
Remember, check the total loan amount and make sure it is right!
The dealers simply do not inform customers of rebates, and on the back of the contract there would be a statement that "dealer retains all rebates and factory incentives".
And then there's the infamous "dealer fees" preprinted on the contract, added after the deal was agreed to.
Most customers want to have an enjoyable shopping and buying experience in a nice facility, this means the dealer has to invest in realestate and erect a premium structure. If he is selling new vehicles the franchise (ie Ford, Toyota, Honda) will have stringent, specific guidelines for how this facility must look. Often times the franchise agreemnent requires the dealer to purchase even the fixtures (desks, kiosk displays, picture frames and the enclosed pictures) from the manufacturer. all together this requires an investment in most cases well over a million dollars many times into the tens of millions! not to mention the franchise itself which costs millions.
Next, car shoppers usually want a variety of options to choose from, in other words the new car dealer has to inventory not only several of each model offered by the manufacturer but several of each model in variuous colors with various trim levels this means he must inventory humdreds of vehicles to give his customers a variety of choices. With the average cost of a new vehicle over $20,000 inventory expense is in the tens of millions and that is not including used cars. Also most people don't want to wait for a sales person so you need to have staff, in most states there are laws which govern paperwork and procedures someone needs to handle that, more staff! the manufacturer saus you have to have a certain ammount of parts on hand for customers and the service deparetment this equalls in most cases another million dollars in inventory expense.
Now lets look at the service department, millions of dollars are spent on tools and equipment to set that up plus it is another staff intensive department!
All together this equalls, in most metropollitan markets severla hundred thousand dollard per month fixed and variable expenses!
So I ask again, how much is a fair profit margin on a vehicle?
Studies have shown people are far less likely to shop in a run down facility where the dealer offers few choises, in a bad part of town where real estate values are low. Studies have shown people do not want to wait three hours for their car to be worked on in the service department because the dealer cannot afford to have a full staff of technicians or support personel, or several days because the dealer needed to order parts!
Think about it
BULL!...You can put your money in the bank and make more with little risk compared to running a business with 2200 employees and 70 warehouses World Wide....
There is more than one set of books that track profit folks...I would say Edmond's story has truth in it but there are other complex truth's that show if a company is making money or not....Hint: If they have been in business 3 yrs or more, they are doing something right...I bought 3 pickups in a row from the same dealer and same Sales Rep. I made good deals on the new truck and they made their profit on the trade.
It's when they get greedy or are not sincere that I get bowed up.
3B
BY the way, when did being a for profit business become so hideously unacceptable? The same customer's that demand a free loaner car, or a free shuttle ride down to the mall have no problem whatsoever spending $180 on some designer jeans that were sewn by children in some 3rd world country for a tremendous profit, but all in the name of fashion, so I guess it's more socially acceptable...?
When we went into his office, I offered him a third less than the dealers price. We played the game of his going to his manager with my offers several times. After nearly two hours, I hadn't budged an inch, and he had only come down a little.
It was nearly 9pm and we all wanted to go home. So I reached in my purse and laid out only enough $100 bills to cover my offer. Then I said, "I'm tired and hungry and want to go home. Take it or leave it."
He asked, "Does that have to include taxes?"
I went home with my car and lots of money left over.
You guys add NOTHING to the value of new or used cars anymore because few of you know anything more than a "typical" car buyer who has done a little internet research.
The last 3 cars I bought none of the salesman could answer very basic questions about the vehicle without looking at the manual or on-line.
Back in the 70s and 80s ALL salesman were required to "know their products" before ever hitting the sales floor, now most dealers hire anybody they can get, ESPECIALLY so-called "Internet Managers" those people are a JOKE.
Making a living is not immoral or unethical - but with a high ticket item like a car - it can get to that point really fast - without being armed with some knowledge - the scales get tipped in favor of the seller much too easily.
If you are a first or even second time buyer or buy a car only every few years, you are a novice. The dealer and his staff do this every hour of EVERY DAY. They are professionals trained in a finely honed process to sell the products and services of the dealership. You would be amazed at just how sophisticated the process can be.
Dealers and their staffs are just like you or me. They ARE terrifically hard working and committed to their families. Having worked in the business for a while, I have come to have great respect for them in general...even those I didn't particularly like personally.
I have also been exposed to a broad array of "shenanigans" and pressure tactics, especially in the beginning. It can make a buyer feel downright uncomfortable. It's nothing personal, but it is calculated to earn as much money from you as possible. I used the term "earn" intentionally.
I want it understood that making a profit is not evil, but the manner in which many dealers go about trying to extract it can make it feel that way. An unsuspecting buyer will be giving up much more than a more seasoned or more alert and informed buyer to buy the exact same vehicle.
I think the Edmunds article is appropriate. They are informing the buying public of the process. The dealer responses here are defending it. If there is something here that the dealers at large feel isn't true, they should specifically state the issue. The so-called "blanket statements" have merit. If Edmunds has made any mis-statement, it would be appropriate to ask them to correct it. So far, it all seems good.
As a buyer, you need to know what you want, how to take control and assert yourself. Refrain from being impulsive. You will likely have to give up the keys to your trade for it to be appraised. You might have to show/surrender/allow a copy of your driver's license before test driving. BE SURE TO GET THEM BACK BEFORE YOU START NEGOTIATING, otherwise the dealer decides when you can leave.
Whether it's new or used, decide what you think is fair, but keep an open mind. Be prepared for any offer or counter-offer that you make to be "bumped". The dealer will ultimately decide if it's fair enough to make the deal at that moment. As the process proceeds, decline the services and add-ons you don't want. If the pressure gets to be too much or you need more time to think, leave and come back another time. If he can't do the deal that day, he might do it another.
Be aware that there IS such a thing as a deal being good for only that day (can depend on time of the month, season, etc.). They will do some really wild things to make a quota. If he won't do your deal at all, you have a reference point for trying another dealer or for readjusting your sights.
It will be a sad day if car buying becomes a no-haggle process. If you are uncomfortable with the process or negotiating with a dealer, take advantage of some of the surrogate services available or take an experienced friend.
Which, ironically, just confirms the premise of the article.
Dealers are not your friends. When the price of a product or service is negotiable, buyer's need to understand how to negotiate. And in the case of new cars, the days of "negotiating" are effectively over. Buying a new car today is done ONLINE. If you go into a car dealer to "negotiate" -- you've made the #1 stupid mistake.
Get your best deal online, get your financing online, sell your car on Craigslist, if you want an extended manufacturer's warranty get in online.... THEN go to the dealer to sign the papers and take delivery. And be careful they don't try to sell you a "new" car with actual demo miles on it. Specify in advance that you want your car with less than 50 miles on the odometer.
Who but the dealer can service or repair new vehicles. As far as Toyotas are concerned they require to many special tools, fluids, and training for independent shops to take on. And in the Chicago area the average visit to a independent sh
who research, it is quite laughable, while very unfortunate to those who are clueless. Now,even me, being 53 and have bought new vehicals every 3 years since I was 18, some good salesmen have even gotten me, which only means that next year I will have to start researching a few months earlier than the past.
who research, it is quite laughable, while very unfortunate to those who are clueless. Now,even me, being 53 and have bought new vehicals every 3 years since I was 18, some good salesmen have even gotten me, which only means that next year I will have to start researching a few months earlier than the past.
In my opinion, once you get your "best deal"... the real savings is in financing the car. Buyers should ALWAYS look for their own financing as a preliminary task BEFORE going to the dealership to buy. Financing is negotiable...