The perception of how much car dealers make on each sale often differs greatly from reality. Many car buyers overestimate the profit margins, leading to tougher negotiations and potentially skewed expectations. Let’s delve into the actual figures and explore the factors influencing a car dealer’s income.
A common belief among car buyers is that dealers pocket a significant chunk of profit, with many estimating between 10 and 20 percent on every new car sold. However, this perception doesn’t always align with the facts.
The Misconception of Car Dealer Profits
Surveys reveal a widespread belief that car dealerships enjoy substantial profits. Some buyers even believe dealers make upwards of 50% profit on new cars, while a smaller percentage think it’s even higher, exceeding 75%. This perception often stems from the visible investments in modern, luxurious dealerships, creating an illusion of high-profit margins.
However, the reality is often far different. While some believe dealers are “printing money,” the truth is more nuanced and often less lucrative than imagined.
The Reality of New Car Profit Margins
The actual average profit margin for car dealers on new cars is closer to 7 percent. Dealer group executives confirm that gross profit margins typically range between 5 and 7 percent. This figure highlights the competitive nature of the new car market and the pressures dealers face to maintain profitability.
Used Car Market: A Slightly Different Story
The used car market presents a slightly more favorable profit picture for dealers. Profit margins on used cars typically range from 12 to 15 percent. This higher margin reflects the increased opportunity for dealers to add value through reconditioning, marketing, and offering warranties.
Factors Influencing Car Dealer Income
Several factors contribute to the overall income of a car dealership, including:
- New Car Sales Volume: While individual profit margins on new cars may be relatively low, selling a higher volume can significantly boost overall profitability.
- Used Car Sales: As mentioned, used car sales offer higher profit margins, making them a crucial revenue stream.
- Finance and Insurance (F&I): Dealerships generate income through financing options and insurance products offered to customers.
- Service and Parts: The service department and parts sales contribute significantly to a dealership’s overall revenue and profitability.
- Manufacturer Incentives: Dealers often receive incentives from manufacturers for meeting sales targets or achieving specific customer satisfaction scores.
Car Inventory on Dealership Lot
Expert Opinions on Car Dealer Profitability
Industry experts emphasize the misconception surrounding car dealer profits. David Kendrick, a partner at UHY Hacker Young, notes that there’s a “huge misconception as to how much retailers make on vehicle sales.” He also points out that impressive, multi-million dollar dealerships contribute to this skewed perception.
Mike Jones, an industry analyst, agrees, stating that “many people think dealers make large sums because the showrooms are that nice and expensive, they must be making that much.”
Understanding the Car Dealer’s Perspective
It’s crucial for car buyers to understand the realities of car dealer profit margins to foster fair and informed negotiations. While dealers are in business to make money, their profit margins are often much slimmer than perceived. By understanding the factors that influence a dealer’s income, buyers can approach negotiations with realistic expectations and potentially achieve a mutually beneficial outcome.
In conclusion, while the perception of car dealer profits might be inflated, the actual figures reveal a more moderate reality. Understanding these figures and the factors that influence a dealer’s income can lead to more informed and productive car-buying experiences.
