How Much Profit Should A Car Dealer Make?

dino001

According to the industry insiders, the ads work (reportedly)

abraindrainer

These ads do not appeal to you and many other informed shoppers because they are meaningless, and we all know it. Unfortunately, these work on the "weakest" members of our society... A fool and his money are quickly parted...

nvbanker

As much as he can! That's the free market system - shouldn't be tampered with - it polices itself quite nicely. If the Dealer gouges people, his business will dry up, people never come back, and tell their friends. If the dealer is fair to all customers, he'll have all the business he can manage. Takes a little time to get the reputation out there - a bad reputation only takes a little while.

snakeweasel

The 1200.00 get's charged to the car. You have been told this before but this is handled as TWO seperate departments.

Yeah but its an intercompany account and washes out when the two departments are consolidated. Its a phantom cost for one department and a phantom income for the other.

boomchek

But the key here is that they're not consolidated. And it is not phantom, because in accounting the figures stay with each department.

It works like two seperate entities under one roof.

If in month A, the service dept does 100 oil changes at $40/pop, and 10 of those are for used cars to go on the lot, then the service department still did 100 oil changes, and still made $4000.

These are not some make belief numbers or imaginary figures. The only thing that's common here is that the money goes to the same owner owner. It might be a wash for him, because he lost that $40 out of the used car gross, but made it up in service (he still would have made less than $40 due to parts/labour costs).

But whether the numbers wash out or not, they are still real.

The service department profits are in no way used to cover the sales department losses and vice versa.

snakeweasel

Ah but the key here is that they do consolidate and any profit in that $1,200 disappears.

It works like two seperate entities under one roof.

It only really works that way if the two different "entities" are owned by two different unrelated people. Otherwise its all accounting smoke and mirrors and there really is no profit made on the reconditioning until the car is sold. And then the profit is the difference in the increased price of the car and the cost of the parts and labor put into it.

If in month A, the service dept does 100 oil changes at $40/pop, and 10 of those are for used cars to go on the lot, then the service department still did 100 oil changes, and still made $4000.

The service department maybe, but the dealership didn't. Since the service department is part of the dealership the $4,000 that the service department made is only on paper and doesn't really exist.

It might be a wash for him, because he lost that $40 out of the used car gross, but made it up in service (he still would have made less than $40 due to parts/labour costs).

If he lost it in one place but made it up in another its a wash and the numbers are pretty much made up for internal purposes. He could have made the oil changes $50 or $60 or $1,000,000 and the results will still be the same.

The service department profits are in no way used to cover the sales department losses and vice versa.

On the contrary since both are owned by the same entity profit or loss from one is combined with the profit or loss from the other. Hence the profit from one can be used to cover the loss from another, this is done all the time in businesses.

dino001

It works like two seperate entities under one roof.

As a customer I don't care - it's your problem (sales department's) that your costs are inflated. If you were trully a separate entity under different ownership, you'd be forced to look for someone cheaper (a local garage offers same services for 30% less). Heck - I bet you would release dogs on anybody seriously offering you $1200 price for such reconditioning.

It's just a convenient scheme to effectively double dip in the same vehicle and make the cost appear higher that it really is. It may be called the acquisition price to your department, but I don't care about inner workings of your dealership. What if your place had 10 departments and shuffle the car 20 times between them (each time with a small markup for no reason) amounting to say $5000 added "cost", whould you still claim with a straight face that is the actual cost? Of course not.

Don't get me wrong - charge for the car whatever you think you can get, but just don't tell me with a straight face that said X+$1200 is the actual COST to the dealer, because it is not.

jipster

Right, I sure wouldn't blame a dealership for charging whatever they wanted for reconditiong. But, for the consumers out there, it may be important to know that the "MSRP" price of reconditioning is similar to the "MSRP" price of a new car. Each has a high mark-up and profit built into it. And just as the MSRP price of a new car can be negotiated, so to can the price of reconditioning... that's if a dealership would throw it(cost of reconditioning) out on the table in an effort to bump up said price.

kyfdx

What difference does it make? As the dealers always say, "It is the market that determines a car's worth".

They can put whatever number they want on it... If a similar car down the street is selling for less, then it won't matter. Accounting tricks mean nothing.. only to the salesperson and manager's pay plan and bonus..

I've yet to buy a used car from a dealer, and had a line time for "re-conditioning".

1racefan

"I've yet to buy a used car from a dealer, and had a line time for "re-conditioning". "

Neither have I - HOWEVER, I have had them show me a value for my trade-in, and DEDUCT a line item for reconditioning (ie deducting the cost they would charge a person off the street for a brake job, if my trade-in was close to needing brakes).

I would bet if I had accepted their offer, they would then try to convince the next guy that came in to buy my car that the reconditioning should be worth something to him as well.

lrguy44

Real world. Any vehicle has to be priced at or near market value or it will not sell. What a dealer sells a car for has NOTHING to do with what he puts into for reconditioning. And market value for a CPO vehicle is higher than a non CPO vehicle. A sales dept (including managers) are paid on selling price - cost - pack. Cost includes any reconditioning charges from the manufacturer or service department. I can remember as a used manager buying tires from outside venders to beat the service dept charges.

jipster

Two "similar" vehicles, the dealership grabs ahold of one of them and reconditions it for resale(new tires, brakes, dings taken out,upholstery patched and destinked). Which car is worth more now? Sure market conditions play the sole factor, but improving a cars condition so that it sells at excellent condition, instead of good, is a factor that can't be overlooked.

lrguy44

It goes without saying that condition adds or detracts to market value. All I said is that a dealer must price a car at or near market value. Market value will also vary by geographical location, season, etc. It is still market value.

lrguy44

I can see where my post may have been misleading. Let us say I have 2 2004 Gutmobiles with identical color, miles and equipment. And let's say I need to put $1000 into one car and $4000 into the other to bring them to equal condition. Does that mean I can charge $3000 more for one - of course not. My gross profit may be more on one than the other depending what my ACV (actual cash value) is - but if they are equal so should the price.

abraindrainer

This is a pretty naive scenario! First, if there is such a difference in conditions, the orginal purchase price will also certainly be different. :surprise:

Furthermore, the whole point was that dealerships like to claim the vehicles are reconditioned and thus worth more than private party sale but in truth they often cut huge corners and focus on reconditioning the appearance before all else. :mad: Appearance is the last thing that will make your ride reliable...

The whole point is that used cars at the dealerships are "over-valued" compared to new ones. If the dealerships are making much more profit on used units than a new ones, (which they do) then the question is: Why? The answer is simple and consists of some or all of the following: less information and/or buyers (as well as original owners) are less informed/savvy, less competition, more "mis"-representation... Take your pick!

boomchek

Just because dealers make more money on used, why does the reason automatically have to something bad?

I mean someone trading in a car might find it more convenient to do so, and doesn't want to mess around with private selling. Maybe they even shopped around for trade numbers and they're all within a couple of hundred bucks. We take it in, check it over, recon it, and put it up for sale for what we believe is market value. If we're stuck with it cause it's not selling it's our problem.

And maybe you're referring to shady used car lots who cut corners in reconditioning, but no brand name dealer will risk their reputation by covering up a mechanical problem on a car as we have morals too, and it could be a liability.

lrguy44

I guess being in the business for 15 years makes me naive. Actually, I may have bought the one that I put 4k into for 2500 less than the car I put 1k into. Where is my best profit if I sell them for the sam price? I would invite you to my dealership to observe first hand what it costs to recon a car. Granted we are a high end dealer, but my used cars are as close to new as possible. And actually, I make more on new now than used - it's unusual but true.

snakeweasel

but no brand name dealer will risk their reputation by covering up a mechanical problem on a car

You want to bet?

boomchek

Not really. Ok, let's say MOST brand name dealers won't risk that.

abraindrainer

Just because dealers make more money on used, why does the reason automatically have to something bad?.

I never said it is "bad", I think I stated as "fact"! I gave a few reasons and some of them have nothing to do with the dealer but the ignorance of the buyer and/or original owner.

audia8q

If the dealerships are making much more profit on used units than a new ones, (which they do) then the question is: Why? The answer is simple and consists of some or all of the following: less information and/or buyers (as well as original owners) are less informed/savvy, less competition, more "mis"-representation... Take your pick!

There is no lack of information...but we all know there is a lack of informed buyers. Used cars are "one of a kind"...even if you took 5 similar used Jetta's you will find 5 individual cars...each one was driven differently, service differently and probably re conditioned differently, etc...New cars are easier to buy because these variables with used cars don't exist with new cars. Average used cars are everywhere. The super clean, no excuse used car is like discovering plutonium by accident and the prices usually reflect it..

british_rover

The super clean, no excuse used car is like discovering plutonium by accident and the prices usually reflect it..

Exactly right.

I sold a 2000 Range Rover for about 3,500 dollars OVER NADA Retail earlier in the week because it was perfect. :surprise:

The buyer knew he was paying over NADA but recognized how perfect this car was and was ok with that. Even though it is seven years old this car looks like it is brand new from the interior to the exterior. Even the engine compartment is spotless. The previous owner even detailed the wheel wells and fender liners..

tidester

I sold a 2000 Range Rover for about 3,500 dollars OVER NADA Retail earlier in the week because it was perfect.

I'm curious - did you pay OVER NADA when you acquired it?

tidester, host

exb0

If the dealerships are making much more profit on used units than a new ones, (which they do) then the question is: Why? The answer is simple and consists of some or all of the following: less information and/or buyers (as well as original owners) are less informed/savvy, less competition, more "mis"-representation... Take your pick!

I am going to stick my neck out for a moment.

I think you are missing another important reason why profit margins on used cars are higher. Generally speaking and I am sure there are many exceptions, it is the socioeconomic status of used car buyers. Let’s face it, on average used car buyers have lower income than the new car buyers. Generally it is because they have less education and worse people skills. As the result, they are not able or not willing to do better research, and they incapable of negotiating a better deal.

jipster

I'm curious...

I'm also curious... as to what the dealerships bottom line price would have been on the Rover had the buyer been a grinder. I'm assuming the buyer chose not to haggle?

jpvwaudi

I doubt they would have let the guy grind them; I know we wouldn't. With a car like that, you either make all the wood or pass. Other cars that are a dime a dozen, you take what you can get.

british_rover

Just about it needed brakes and tires all the way around so we deducted that from the value. I think we ended about 2,500 dollars above NADA Trade in which never happens.

NADA Trade in is usually thousands upon thousands of dollars higher then real value.

audia8q

Generally speaking and I am sure there are many exceptions, it is the socioeconomic status of used car buyers. Let’s face it, on average used car buyers have lower income than the new car buyers. Generally it is because they have less education and worse people skills. As the result, they are not able or not willing to do better research, and they incapable of negotiating a better deal.

I think you bring up some very valid points...In dealerships that focus on the "bad credit no credit" customers it could be right on target...but oddly enough I have seen statistics that show 35-40% of all millionaires buy used cars. (Toyota's & Ford's make up the huge percentage)....We don't run a no credit bad credit type place so we don't really see any difference between the typical new car buyer and used car buyer...I'm curious to hear from some of the other dealers on this one.

boomchek

We don't run screamer ads either, nor do we cater to bad credit people. And we see people from all walks of likfe buying used as well.

british_rover

I have sold used cars to CEOs of major corporations so...

I see all walks of life buying used cars. I have had people that were looking at new Range Rovers buy a used one because the first year depreciation is so huge.

jlawrence01

Let’s face it, on average used car buyers have lower income than the new car buyers. Generally it is because they have less education and worse people skills.

Heck, most of the successful people that I know ALWAYS buy used cars to avoid the HUGE depreciation hit on anew vehicles.

There are TWO reasons for why used cars are more profitable:

1) There are a LOT of motivated sellers. I know of fleet managers that have to remarket HUNDREDS of vehicles quickly. Their goal is to convert the fleet into cash and to move on. They DON'T hold out for the last dollar.

2) NO two used cars are exactly alike. It is hard to tell what the "true price" should be. Six identically equipped Taurus' are identical at purchase but are not when they are returned three years later.

micosilver

"The point remains that $1200 is not an actual cost of reconditioning to the dealership - it may called acquisition cost to the sales department, which gives them more motivation to sell the thing for a higher price, but it is not a real cost to the ultimate owner of the car (i.e. the dealership"

Our dealership gets a quote from OUR OWN service and then used cars manager shops it, and if we find a better deal - we use some other shop. This cost is just as real to us as it is to you.

abraindrainer

"Our dealership gets a quote from OUR OWN service and then used cars manager shops it, and if we find a better deal - we use some other shop. This cost is just as real to us as it is to you."

Fair enough! But that begs for follow up questions:
1. Does your OWN service charge you the "standard" rates for all thier work? $90/hour for labour?
2. How much do you spend (on avarage) to recondition in-house vs. out-house?
3. How do you get your units Certified with out-house work?

micosilver

1 Yes, our service charges the standard rate.
2 We spend the least possible either way.
3 We stopped doing CPO's for that particular reason - certification has to be done through our service, and it costs too much; we got stuck with CPO's for over a year. Now we'd rather fix it cheap, sell it cheap and sell warranty, which provides better coverage that the CPO warranty, and gives more control to the customer - they decide what kind of coverage they want.

british_rover

Just curious what brand do you sell?

I like comparing the different CPO programs. Over the years I have come to find that some of them are frankly junk.

jipster

This cost is just as real to us as it is to you.

It may be just as real for the sales dept, but to the dealership/owner it's taking quite a hit. It just doesn't seem very smart to be paying another "shop" $90 an hour, when your service dept. can do it for $45/hr...plus another $45 in monopoly money.

kdhspyder

Until my new Prius this is all that I bought for the reasons noted above. Good value for the buck. Typically on a Toyota or Honda it's 60% of the MSRP at 3 yrs and say 40,000 miles. Either will last another 200,000 miles with care so a 40% discount is big money.

We also sell TCUV's primarily ( more than any other single item ) but not the majority of the UC sales. Typically it will cost about $1000 to recondition and certify a 40,000 mi vehicle ( it almost always needs new shoes ).

snakeweasel

Yeah they are good buys unless you get one that the previous owner didn't take care of it because they thought "What the heck I am dumping it soon". I have known people to drive 15K miles without changing the oil because they were going to get rid of the car "soon". I wouldn't want that car.

kdhspyder

That's part of the Certified process. Not all trade ins are 'certifiable'. Potential reasons why a vehicle cannot be..
.. lack of maintenance, as you note, when the vehicle goes through the shop;
.. too much needed either in parts or repairs or service to bring the vehicle back into compliance;
.. too high a price paid for at trade/auction;
.. too many miles
.. too rough a condition, e.g. heavy smoker with burns throughout

Some of these can be caught at the time of trade appraisal or at the auction but some only can be caught when the vehicle goes through the Certification process. Each week we screen out 3-6 vehicles which we thought could be TCUV's but cannot meet the standards.

mako1a

OK, I'm over the 2006 Yellow Vette, but I wanted to find out why price was way off Edmunds numbers. I went to the dealer and asked if he would sell for $39k cash. He said No! Must have $43,600. Yeah Right! 2007 price for a used 2006...I don't think so. No wonder we didn't make a sale, this guy is in outer space with profit prices. He kept saying it was my trade. Now it comes out it was his price. Aha. I said that if the cars were reversed would he give me $44k minus profit. No way he sez. Hmmm again. This guy wants profit on both ends of the transaction. I said I don't play that game. Pick one or the other. Even on one and profit on the other or little profit on both. Still no dice. I have cash and am in no hurry, but I will wait for the going out of business sale. ps the 2005 "new" loaded Vette on a different lot with MSRP of $64k is now "on sale" for $50k and still no takers. Also the "new" 2004 GTO has a sign in the window saying "MustSell" No Kidding. You should have thought about that 3 years ago. You're stuck with that one Buddy. If first team or carmax doesn't get here soon these local dealers are going to be belly up by June. Frogs disect better than this.

abraindrainer

Dude, this guy sounds like he is a FRONT for some other less than legal... but more profitable activities.... :surprise:

At that price, you might as well buy a new one! :shades:

cobraboy1

What part of the U.S. are you looking for this vette in?
:confuse:

mako1a

Not a front. This is a big Chevy dealer with 400-600 cars and trucks on the lot. Mostly trucks (not selling well). Maybe that's why he has to get way over on cars. Or to make up for the 4 GTOs and 5 Vettes not selling on his lot. I'll bet you have to sell a lot of Geo Yugos to make up for losses on 1 Corvette. I'm at I-81 and I-77 in Virginia and dealer is 30 miles up I-77 from me. I think they're trying to sell to folks without internet until they realize everyone's hooked up. All the dealers are this way up here. I moved here from Virginia Beach and never saw old "new" cars before coming here. Maybe the families made so much $$ in the 80s-90s that they can hold out a long time. I'm betting they can't hold out much longer. That's a lot of floor plan going to waste while they sell at 1/4 volume waiting for a whale. :shades:

abraindrainer

Some small town dealers do not even know how to spell .com or Internet. Most located within a couple hours of the cities have figured out how to imporve their volume but some like yours figure that because volume is so low, they need catch a lot of whales... :sick:

You could just drive up and buy one from fitzmall.com. Even carmax sells '07 units for $500 under invioice. I am sure Carmax will ship one to you... Both places have '05s listed for under $40k.

mako1a

Roger that, ad. I love the mountain views and smooth winding roads here but they call my car a TY-O-TEE. Pick-ups are being replaced by econoboxes and high end stuff gets put in the corner for the "rich folks" to examine. If not for the off-lease units from the Statesville, NC auction (Manheim subsidiary I believe) they would be done. Change can't come quick enough.

cobraboy1

I almoat thought it might have been the area of the dealership but that turns out to not have the problem. some dealers are just nuts. they just arewaiting for that whopper, and they just don't kow when to quit. Well Isuggest that you wait untill they have their going-out-of-business sale.

micosilver

Audi and Volvo.
Now we almost don't do used Volvo, unless it's a perfect condition trade, and we don't certify Audis, the Premium is too high.

isellhondas

Aftermarket warranties for those cars are sky high too.

cobraboy1

:confuse: I took a customer who looked to be about 28, he said that he was looking for something sporty with a ouch of luxury but he did not wnat to got more than 3k over 20 grand. So I showed him a 2005 Subaru Legacy 2.5 GT limited (21,919). well anyway he loved the car drove it and loved it even more, so at the end of the test drive he looked at me and told me that he wanted to work the numbers on the vehicle.

So I took down all of his information we did a trade appraisal, and I sat down and presented him the numbers. (after his trade + taxes) it came out to something like 20k. He looks at me for about three or four seconds and says that He does not think that the vehicle is worth 22K.

So we do th KBB thing and edmunds and NADA and each time it show that we were actually below dealer retail. He still doesn't think that the vehicle is worth 22k so I ask this guy politely if he thinks it is worth 21.5 or 21? thinking about this for a few moments he then looks at me and with a straight face says that the Subaru is worth more like 17k and that he MIGHT consider it for about 18k. So I ask him how he came up with that number he says that he looks up the vehicle online and he looks for the lowest trade in value that he can find and then he adds 500 dollars to whatever that number is which is what he asks for.

So I bring out the sheet that says what went into the vehicle and how much it cost us to do it. 1.5k. we paid 18k for the vehicle by itself! he looked at the sheet and told me: "come on, you expect me to believe that that is actually what you paid for it? I would believe that you probably only paid 14k and maybe put 500 into it" Anyway it went on with me trying to tell him that these were not made up numbers, after about an hour I gave this guy an escort to the door and told him to have a good day. As he was leaving he told me that he was going to tell everyone that he knew that we rip off people.

Does anyone else have this happen to them? :confuse:

lrguy44

I have the same thing going on. Customer told me he would do a deal for 20k difference. I do it and he says he wants to research it to make sure he is getting a good deal. I do research with Kelley, NADA and TMV and show him where they say the deal should be a 24k difference. He still wants to make sure he is getting a good deal. Good-bye!