Car dealerships are a ubiquitous presence in North America’s transportation industry. Whether you’re looking for a brand new car or a used model, working with a dealership is likely on the table for most consumers. However, many people may not know how car dealerships make money. This article will investigate the various ways car dealerships operate to increase their bottom line, so that you can make informed purchasing decisions.
II. Investigating the Sales Process
One of the most obvious ways that car dealerships make money is through sales. However, the negotiation process between the customer and dealership can be complicated. Salespeople are often trained to make a profit on the deal, which can sometimes come at the expense of the customer.
Financing options also play a significant role in dealership revenue. Dealerships may offer financing through banks or other financial institutions, often with an added markup of interest rates. When customers are unable to finance their purchase through external means, the dealership becomes the financier and collects interest payments as well.
Another factor to consider is trade-ins. Dealerships will take in used cars from customers and resell them to others. The dealership will make a profit based on the difference between the trade-in value and the resale value of the car.
III. Exploring Additional Commission & Upgrades
In addition to sales, car dealerships also employ strategies to maximize commission for salespeople. Salespeople are often paid on a commission basis, meaning that they earn a percentage of the sale price. Therefore, the higher the price, the higher the commission for both the dealership and the salesperson.
Dealerships also offer add-ons and upgrades, such as extended warranties and maintenance packages. These extras can be highly profitable for dealerships. Salespeople may also offer insurance packages, gap coverage plans, or even paint protection.
IV. Discovering Manufacturer Incentives & Rebates
Car manufacturers often offer incentives and rebates to both customers and dealerships. These incentives can take the form of cash-back offers, rebates, or special financing deals. The dealership may receive a bonus if they sell a certain number of cars in a specified time frame, or if they meet specific criteria set by the manufacturer.
These incentives allow dealerships to sell cars more quickly, and incentivize the dealership to push specific models with the best incentives. They also reduce the amount of money manufacturers have to spend on advertising and marketing, since the incentives are already built into the sale price.
V. Analyzing Financing Options & Interest Rates
Dealerships also typically offer financing options to customers. When offering financing themselves, the dealership serves as the financier. Interest rates usually play a significant role in the amount of profit dealerships can make.
Dealerships can set their own interest rates, which can be higher than those offered by traditional financial institutions. Therefore, financing through the dealership may not always be the best option if the customer can secure a lower rate through their bank or other financial institution.
VI. Comparing Different Dealerships’ Strategies and Techniques
Not all dealerships are created equal. Different dealerships utilize different strategies to maximize profits. For example, some may be more aggressive in their sales tactics, while others may focus on customer service and satisfaction as a way of building repeat business.
Marketing campaigns also play a role in dealership revenue. Some dealerships may be well-known in the community, while others may rely on ads to attract customers. Customer reviews and feedback can be a useful tool in determining the quality of a dealership’s customer service and sales practices.
Understanding how car dealerships make money can help customers make informed decisions when purchasing a car. Sales, financing options, add-ons and upgrades, manufacturer incentives, and marketing campaigns all play a role in dealership profitability. Additionally, knowing the ins and outs of the sales process and financing can help customers avoid overpaying.
Ultimately, the best way to ensure a successful car-buying experience is to do research ahead of time, know your budget and your limits, and work with a dealership that has a good reputation and is transparent in their practices. By understanding the strategies and techniques used by dealerships, consumers can save money and build long-term relationships with the dealer.
Disclaimer: This article is for informational purposes only. It is not intended to serve as financial advice or to advocate for or against any particular product or service.