How Much Profit Should A Car Dealer Make?
mikethecarguy
Member Posts: 3
in General
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?
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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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:
It's an imformation age, caveat emptor
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.
2014 Mini Cooper (stick shift of course), 2016 Camry hybrid, 2009 Outback Sport 5-spd (keeping the stick alive)
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.
2020 Acura RDX tech SH-AWD, 2023 Maverick hybrid Lariat luxury package.
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.
Not on my car, of course.
believer
2014 Mini Cooper (stick shift of course), 2016 Camry hybrid, 2009 Outback Sport 5-spd (keeping the stick alive)
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.
2014 Mini Cooper (stick shift of course), 2016 Camry hybrid, 2009 Outback Sport 5-spd (keeping the stick alive)
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.
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.
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.
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.
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.
Simplifying the car purchase process in the U.S. is probably the single biggest favor we could do for the consumer right now.
2014 Mini Cooper (stick shift of course), 2016 Camry hybrid, 2009 Outback Sport 5-spd (keeping the stick alive)
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
Dealers do WANT sales, don't they? So why alienate their potential customers the way they do?
2014 Mini Cooper (stick shift of course), 2016 Camry hybrid, 2009 Outback Sport 5-spd (keeping the stick alive)
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.
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.
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.
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
Mackabee
1. Our favorites - pay the price on the tag and leave with a smile.
2. Accept the 10% discount and buy. They're ok too.
3. Haggle till they are drawing blood. Maybe buy or not buy.
4. The ones looking for an air-conditioned place to hang out and pee.
All these customers get treated the same (except the # 4's who pee on the commode seat and leave it) and there is nothing deceptive in the sale to # 1 or to # 3. Our desired outcome is that the higher profit items take up some of the slack for the lower-proft or the "just break even" items. Sometimes we get items that hang around forever and you just want to sell it, free up your money and reinvest into something better (you hope). Some items, we can name our price and people will pay it. It's the law of averages.
Some businesses "suffer" a much higher overhead than others. For an antique store, we are in a very nice building - plenty of light and lots of glass for natural lighting, air-conditioning, good heating system, clean, handicapped accessible bathrooms, plenty of on-site parking....And some moron will come up to the counter and comment that he can buy item abc for half-price at the open-air flea market up the road. Well, if he doesn't die of heat stroke while shopping in the sun or catch a disease from the filthy portapot, he's made a good buy.
Someone posted earlier something to the effect of people not really understanding the cost of doing business unless they've owned a business. AMEN!! Profit and the hope of profit is the only thing that keeps the doors open. It is not a dirty word, it is the basis of our economy and our quality of life. My theory is - both parties have the right to walk away from the deal at any time - sell as high as you can or as low as you can afford!!
That reminds me. When I moved to my new apartment, I was buying some services from a local cable/internet/phone provider. I wanted cable (not digital) and internet (cable modem). I use my cell phone as my main phone. The salesperson tried to tell me that if I bought all three services (digital phone, digital cable and internet) that I'd "actually save money." So I said "REALLY." They tried to explain, in a confusing way, that I'd save "$20." After KNOWING you don't get something for nothing, I made them come out with it. I said, ok, what is your price for the two services I actually want. Ok, now what is your price for the three bundled? And guess what? It was more for the bundled. I wanted to pay the least per month, bottom line. Idiots.
My favorite trick from a salesperson is to use the inflated NADA value for a new or used car that I may be shopping for, but completely ignore any book value for the trade. There are a lot of numbers games. I think the going assumption is, if they don't "get you" during price negociation, they'll get you in F&I.
http://www.edmunds.com/advice/buying/articles/42962/article.html
A co-worker was at a local Toyota dealer looking at a Tacoma and wanted to know what they would give him for his 2002 Ford Escape. They seriously low balled him, because, according to them, they don't put domestic cars on their lot and so the quoted price is for expected wholesale. Wow. Is it me or is that NOT my co-workers problem that the local dealer is too snooty about their product?
How about an interesting analogy.... Say, for example, you are living back in the days of farmers' barter system. If you want to trade 3 of your sheep for 2 of another farmer's cows, you would probably get good value for your sheep. But if you tried to offer him some fishing equipment in exchange for his cows, you probably wouldn't get "full market value" because the farmer has no use for it. He isn't being snooty... he just doesn't need it.
They have more knowledge about used product from their own brand, too.
2014 Mini Cooper (stick shift of course), 2016 Camry hybrid, 2009 Outback Sport 5-spd (keeping the stick alive)
Any high mileage car can blow up tomorrow morning at 9 am, and some will blow up tomorrow morning at 9 am--because the design limits of the engineers have been met or exceeded.
So after 100K, anything goes.
I feel a dealer is perfectly justified in low-ballling a high mileage car.
What's "fair" to me is something- say- $500-$1000 over dealer invoice that gives the dealer a healthy profit, the salesperson a nice commission, and me a good deal.
That didn't work out on my last car though. And they couldn't take me for a ride in F&I either. I had Infiniti's 1.9APR all set up. They probably hate me down at the dealership (in the sales department at least)
I bargained hard on the sales floor and in the F&I department. I ended up walking away with a great price and a great rate.
Also suppy and demand has a lot to do with it. If I had picked a G35 instead of the I35, I probably would have had to cough up a lot more than $2K under invoice minus holdback.
Correct "A dealer should be allowed to make whatever the market allows"
If I was a dealer and you told me to "make whatever I can.", I would hold you hostage in the dealership (and it did happen to me) till you coughed up whatever number came into my head that day..........
I had to threaten to call the police to get my keys, license and other things they needed to let me "test drive" the new car and "check" my trade in.... :mad:
(dealer in Alexandria, VA, someone else complained in Edmunds about them)
Some sales will generate alot more than the avg. gross profit and some will be less. A high line dealer will have much higher numbers but a smaller non high line could be less...Essentially the folks who over pay make it possible for the ones who pay less than market values. Think of it as welfare subsidy for the smart shoppers.
I have no idea. Like you I only care about what I pay for a product or service. If the product or service represents a good value to me then I buy it. The profit isnt a consideration.
If something is a good value to me in my mind, that's all I care about!
I ignore questions like this.
My mom was negotiating a price on the car. She didn't get too far below sticker before the salesperson got up, closed the door into his office, and sat back down at the desk. He solemnly told my mom that any further money that came off the MSRP would directly affect only his commission and not the dealership's profit. He then told her he was struggling and needed all the $ he could get for his children.
He was deadly serious, did one heck of an acting job.
My mom just laughed and told him that his finaces were none of her concern (in a more polite way).
I think there are several reasons, mostly nurtured by our competitive culture:
1. Everybody likes to be a winner, all the time. If they can claim the dealer made no or little money, they can claim a victory of sorts.
2. All publications/websites, like this, pound on consumer that the way to figure a good price is to figure the dealer's cost and use some "markup scheme". Once you have the cost you go to item 1.
3. Nobody like to be a "loser" in this game. Some people feel winners just because they got a good product, others just have to be "better" than their neighbors, the guy across the hall at work, or the dealer themselves.
4. Finally, we all hear "horror" stories of people being grossly overcharged, whatever that might mean. Nobody want to be that guy on the next "ivestigative report" on TV. One way to protect themselves is to know the cost, so one may determine whether the markup is "fair" or not.
I myself tend to agree with Bobst and others that the best way around is to find out how much the product (whether the car, ext. warranty, or scotchguard, paint sealant and windows etching
2018 430i Gran Coupe