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How Do Car Dealerships Make Money?

How Do Car Dealerships Make Money?

If you know one thing about Americans, it’s that they love their cars. That’s one reason why there are at least 16,676 car dealerships in the US, and some are more profitable than others. Fortunately, the key to their success is not secret information!

So, how do car dealerships make money, and are there any strategies to increase profitability? Let’s talk about that.

What Is a Car Dealership?

While this may sound like a silly question at first, it’s important to define what separates a car dealership from a private sale on Craigslist. A car dealership, by law, is a business that sells new or used vehicles at the consumer level, often in accordance with a dealership contract with an automaker or its sales subsidiary. It may also sell a variety of certified pre-owned vehicles.

In most cases, they will employ car salespeople, potentially car mechanics, and likely other employees to maintain, wash, or drive vehicles in their inventory.

Selling Cars

It should come as no surprise that car dealerships make a portion of their money from, well, dealing cars. While this is the business model of a typical car dealership, you may be surprised to know that this usually doesn’t generate profit. There are so many dealerships near every city in the US, and it’s often a “race to the bottom” on price.

Of course, they will make some money off of a sale, but only if they know how. Typically, dealerships will only profit around $1,959 off of a new car, and slightly more off of a used car. This is because of the high profit margins of trade-in costs to resale value.

What that means is that, when many customers buy a new car, they will often trade in their current vehicle to help with the down payment or to lower their new monthly car payment. While they would earn more with a private sale, this is a convenient way to get the car off of their hands, and it generates a greater profit for the dealer as well.

However, this profit usually isn’t enough to keep the lights on. Car dealerships need employees to maintain their inventory, salespeople to sell cars, run paperwork at the DMV, and they need a lot of land to store their inventory. These expenses add up quickly, and a few sales a week is typically not enough to cover it all and earn a profit.

Flipping Used Cars for Profit

Buying a car from a customer as a trade-in and reselling it is considered a “flip”, but it’s not the kind of flip we’re talking about. If a dealership has a service department, they may buy used cars at an auction, fix them up, and resell them for a profit. This can be very profitable, with some cars selling for as little as $300 or less.

Let’s say that a car has bald tires, an oil leak, and it needs all new brakes. If you’re paying in-house for the labor, and it takes 5 hours, then you may only pay $100 to $200 for labor plus the cost of parts. In that case, a valve cover gasket ($20), 4 tires ($300), and all new calipers, pads, and rotors ($300) will cost $620.

If you purchase the car for $500 and spend an additional $820, you’re out $1,320 total. Well, with the cost of used cars being so high, you may be able to resell that car for $3,000 to $5,000 with a document fee. This is a popular strategy for used car dealerships, and it can be very profitable if you know what cars to look for!

Document Fees

Most car dealerships will charge anywhere from $200 to $500 for pushing paperwork for a new vehicle. This is on top of the registration fees and everything else. While this amount is not enormous for each sale, it can still help increase the margins on the sale by covering some of the labor costs.

Servicing Cars

Many dealerships, especially new car dealerships, make the majority of their profits off of their service departments. This is because they can track the maintenance schedules of their new cars from start to finish, offer expert advice on customers’ particular models, and offer some other advantages that you can’t find at a general mechanic. For these reasons, dealerships tend to charge a lot more for car repair services.

Building a rapport early on with customers gives dealerships an advantage over general mechanics, even if their rates are higher. Most consumers trust dealerships more for their expertise, allowing for greater profit margins. If sales aren’t enough to keep the lights on, service usually is.

How Do Car Dealerships Make Money?

While it depends on the dealership, most of the profits a car dealership earns will come from servicing and selling vehicles. There are plenty of car dealership tips that we could offer, but the strategy is up to you. Either way, we strongly suggest taking our virtual training to help you and your team improve the profitability of your dealership!

Start Earning

Now that we’ve answered the question “how do car dealerships make money?”, you can see that there are many strategies and tactics to choose from. None of them are necessarily better than the others, you just have to choose which works best for your specific dealership. Fortunately, we can help with that!

Stay up to date with our car dealership guide and feel free to contact us with any questions or for help with your sales strategy!