How Do Car Dealerships Make Money?
Spoiler alert—car dealerships generally make more money on the sale of accessories and warranties than they do on new vehicles.
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That shiny building didn't pay for itself, and it may leave you wondering: how do car dealerships make money?
Car dealerships, like any business, need to be profitable to survive. But the way that they make their money may not be what you expect.
New car sales: not a big money maker, at least in normal times
New car dealers typically have lots full of brand-new vehicles awaiting their first owner. While the
Except for Tesla and Rivian, which do not use traditional dealerships, a dealership buys its new inventory directly from an automaker at wholesale prices. The automaker will usually provide financing to help the dealership float millions of dollars in inventory. The MSRP is exactly what it sounds like: a suggested selling price set by the manufacturer. Dealers can choose to discount a vehicle off of MSRP, or, for especially in-demand vehicles, they can choose to charge above it.
A vehicle sold at or below MSRP typically has a small profit margin, much of which may go directly to the sales person's commission.
Financing, accessories, and warranties: where dealers make money on new cars
On a new vehicle, a dealer can bolster its profit margin by selling accessories such as different wheels, rubber floor mats, or paint protection. That said, while not every accessory is worth it, some may actually be a good deal.
If you finance or lease a car, the dealership's finance department may receive a spiff from the automaker or the lender. Additionally, extended warranties are usually profitable for the finance department.
Like cars themselves, accessories and warranties are typically negotiable—don't be afraid to ask for a discount.
Used car sales: almost always a money maker
Dealerships will gladly sell you a new car, but it's used vehicles where they often make the most money.
Consider where a dealership gets its used-car inventory: either from trade-ins or at a wholesale auction. If a dealership pays, say, $10,000 for a used car, they may spend another $500 or $1,000 reconditioning it by fixing dents, scrubbing the upholstery, and performing service, and then they may place it in their showroom for $15,000 or more.
That said, it is possible to get a great deal on a used car—particularly one that was in a dealer's inventory for a long time. If the dealer sees that a certain car sat on its lot for several months, it may be more willing to discount it to a level closer to what it has into the vehicle simply to clear space for another model.
It's not a given that car dealerships make money on car sales—in some cases they can lose money on used cars. Every used car can be something of a gamble; if the dealership buys a vehicle with a major fault, they may spend so much to repair it that they wind up erasing any profits.
Service departments: a continuous income stream
New car dealers always have service departments, which are authorized to provide repairs and maintenance on the new products they sell.
Service departments have two major costs to consider: parts, and the labor to diagnose and subsequently repair the vehicle. Labor is paid at an hourly rate, while parts are priced individually. Dealers pay automakers and part stores wholesale prices for everything from motor oil to tires, and then they mark those prices up when they provide a service on your vehicle.
While servicing can be negotiable to a degree, an automaker typically determines the amount of time it takes to perform common repairs. Maintenance (such as oil changes, tire rotations, and even tune-ups) tend to be more negotiable. Calling around to several dealers in your area and asking them to quote you on a specific service can also help you determine who has the best deal. Sometimes servicing— like air filter replacements—can even be done inexpensively and in very little time at home.
Frugal drivers can sometimes provide parts they acquire on their own, although dealerships—and even independent repair shops—will often not install parts unless they sell them.
So, just how do car dealerships make money? They have several major revenue avenues, including:
- Profit margins on new and used cars
- The sale of accessories and warranties
- The costs associated with servicing and maintaining a vehicle
