How Do Car Dealers Make Money?
Car dealerships love to tell their customers what a great deal they’re getting. If sales managers, finance officers and service advisors were to be believed, there’s no way the business would be able to survive. So how do car dealers make money? There are a lot of time-tested techniques (and often new tricks) to ensure the sales manager doesn’t literally lose his shirt. Make no mistake: each little nook and cranny of a car dealership is a potential profit center.
Many consumers assume that new car sales answer the question, how do car dealers make money? It’s an easy mistake: all those shiny new vehicles lined up, twinkling like jewels on velvet, each with a price tag ranging from reasonable to absurd. That’s got to be a moneymaking magic formula, right? But how do car dealers make money from the sale of new cars? It’s not as straightforward as it seems. It’s now such common knowledge that car buyers should aim to buy a car for invoice price (the dealer’s cost of obtaining the car from the manufacturer) that sales managers simply expect it, which doesn’t leave the dealership much profit. But new cars are usually gussied up with optional packages and services, each with a separate add-on fee. These fees are almost always negotiable, but not everyone knows that – if the buyer is unaware, or simply relents under the salesperson’s pressure, it’s profit for the dealer.
Dealer cash and dealer holdbacks are both cash bonuses provided to the dealer by the manufacturer, but they serve different functions. Most manufacturers work dealer holdbacks into the sale of each car: it’s usually 2 or 3 percent of the invoice price or MSRP that the dealer pays up front when the car is purchased, and then is given back to the dealer in the form of a quarterly rebate after the car’s sold. Dealer cash is an incentive intended to boost the sale of slow-selling cars, supposed to be secret but usually found online. These incentives also help explain how car dealers do make money from new cars when profit margins are otherwise tight.