How Car Dealers Make Their Money
For many people, buying a car at a dealership can be a nerve-wracking experience. Most people rarely negotiate the way you have to when buying a car, and no one wants to get ripped off. To get the best deal possible, it helps to know how car dealers make their money. That way you can spot the places where they might try to overcharge you and negotiate like a pro. Here’s a detailed look at how car dealers make their money and how you can use that information for your own gain.
Most people assume that dealerships make most of their money selling new cars. But that actually isn’t the most profitable part of a dealership’s business. The market for new cars is extremely competitive, which keeps prices relatively low (even though it might not feel that way to you). Sometimes a dealer may earn only a few hundred dollars selling a brand new car. For full transparency, you can ask the salesperson to show you the invoice price, which is what the dealer paid for the car. They aren’t required to do this (so ask nicely), but it can help you figure out if you’re getting a good deal.
It’s also important to note that dealerships and individual salespeople often make bonuses for hitting certain sales targets. So, if you go at the end of the month and they need one more sale to get their bonus, they may be willing to give you a better deal.
Although it may seem counterintuitive, given that used vehicles are less costly than new ones, dealers can actually make a much better profit margin selling used cars. That’s because they use the old reliable business strategy of buying the product for a low price and selling it at a much higher one. Higher margins for the dealer mean more room for you to negotiate the price down.
Add-ons & the Parts and Service Department
Add-ons are one of the more lucrative parts of a car dealer’s business. The expensive upgrades come with huge margins for the dealer, giving them every incentive to get you to buy them. In fact, sometimes dealers will outfit cars with add-ons so that if you find something on the lot that you like, you’re either forced to pay for the additions or try to find a different vehicle. While these upgrades can certainly add functionality, convenience, and value to the vehicle, you may be paying for more than you’re really getting.
While add-ons have high-profit margins, parts and service are where dealerships make most of their money. On average, the service department may account for over half of a dealership’s overall profits. In fact, car dealers sometimes joke that they only sell cars so they can make money servicing them.
Service advisers often work on commission, so they may recommend repairs or replacement parts before they’re truly needed, and the hours spent working on your car are padded for extra profit. You only buy a car once, but you may come in for service once a year or more. Dealerships count on this ongoing relationship to make their money, so they’ll do whatever they can to maximize profits.