How does a modern day car dealer really make money?

In today’s challenging market more pressure than ever is being put on the profit margins from selling new and used cars. Whereas maybe 5 years ago the profit that would come from the ‘metal’ would probably make upwards of 85-90% of the deal, we now live in a completely different world.

There are a number of reasons for this, primarily better competition; there really isn’t a terrible car on the road anymore. Remember Lada and Skoda before they became VW? So the market is full of great deals, new models with the latest technology and the modern car dealer has had to get smart. With chassis profit margins being eroded modern car dealers still need to achieve the bottom line, so to rise to this challenge a few things have happened:

A) Business Managers have a far more prominent role to play in the business and indeed are now paid and measured on the extra income they create.

B) Sales staff are also specifically incentivized to introduce prospective customers to the business manger in order to try and “up sell” them into other products.

C) Hourly rates and prices have increased in the workshops so that profits may be achieved through the service and parts departments.

In the early to mid 90s (and maybe before) the average profit (net of expenses and vat) that could be achieved on purely selling a car would be approx £1500 – £2000 per car, today that figure is probably nearer £700 and in some cases even less To try and combat this in a market where expenses are rising, a few things have happened. The trade has just had to get more creative and what you will now see everywhere is what is referred to as ‘add ons’.

Traditionally you may expect to take out a finance deal, i.e. HP or PCP, and maybe a warranty upgrade that would create a profit opportunity for the dealer, however today there are a range of F&I (finance and insurance) based products) which will achieve the overall profit required.

You may now be introduced to payment protection, (sickness, unemployment cover etc.) GAP insurance, where you can insure the invoice price of your car against theft and write-off and paintwork protection products which will protect your car from the elements. They even have tyre and MOT cover to offer you. These are often sold in packs (i.e. bronze silver or gold) and each are priced so that you have a choice of the level of cover you need. The package price will increase depending on the price of the vehicle being purchased.

Now remember these products are all useful to varying degrees depending on your situation and you may indeed choose one or all of them, however the mark up on these packages can be astronomic and the dealer will use this to compensate for the profit lost in selling the car. For example a standard package including GAP insurance (AKA Retail Price Protection), paintwork protection and tyre cover might retail at around £800 but cost the dealer only £150 – £200.

The advice is to negotiate the price of the car and then get info about any add-ons and decide what (if any) extras you need before you collect your car. You will often be told by some salesmen or business mangers that you must sign up for one of these products on the day of purchase to qualify for any deal they may offer you. This is absolute rubbish, you can go away and think about it and indeed cancel during a cooling off period if you wish. You can also shop around for the same or similar products if they appeal and get them a lot cheaper. Remember they are pushing you on an "add on" as its very profitable for them, so be in control.

I will leave you with a true story that happened to an old colleague.

He once met a rather difficult customer who spent hours trying to knock him down on the price of a car, in trying to be clever he allowed the man to have his way with the final price but “up sold” him on lots of accessories which would have bought in an extra £1500 profit (there was a pitiful profit in the car alone).

On signing the deal the customer said he would buy the car but asked whether him buying the extras depended on him getting this deal? "Absolutely not" he was confidently told and so he signed.

The salesman, on the departure of his customer swaggered around boasting about how he had got one over on a difficult customer (not the real words used, obviously!) until, that is, when 2 days later his customer telephoned to say that he still wanted the car but had managed to get the accessories cheaper elsewhere and would no longer need the extras he’d been offered. Needless to say the salesman was absolutely gutted, the customer was very happy and the salesman’s colleagues quite smug as we watched him having to explain to our Sales manager how he had just blown a big profit by trying to be clever.

The moral of the story, "add ons" are great if you want them but cannot be used to close a deal on a car, so let them think you want a gold package right up until you have agreed a price on the car then make up your own mind!

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One Response to How does a modern day car dealer really make money?

  1. Dave Cooper August 8, 2008 at 1:07 pm #

    Absolutely, the “add-ons” and meeting other sales targets are where the money is made. The car by car margin is pretty slim.
    Until recently, in a mortgage market where interest rates are low and margins for selling those mortgages are low, mortgage brokers and financial advisors made most of their money selling insurances like home insurance, life insurance but most of all payment protection insurance to people. The only people who have to buy the payment protection insurance to get a loan at all are those who are bad credit risks. No surprise that these guys went out to sell the biggest mortgage possible to people in this position. All different now though…

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