Auto Dealer Profitability

A business can only continue to operate if they are profitable. But when you think about the rows of new or used cars sitting in the lot waiting for a new home, it might surprise you to learn that most profit from an auto dealer stems from the services and parts department, not from actual car sales. This is true for both new and used car dealerships. Services and parts mean yearly tire changes, oil changes, car repairs, and other scheduled maintenance required. If you get into an accident or are stranded somewhere on the road, some auto dealers also offer services to come to rescue you or deal with the resulting damages.

The truth is, auto dealerships aren’t as profitable as they once were. Whether it’s because of rising car prices, the stock market, technological requirements, environmental concerns, or a lot of other factors, new car sales margins have declined. The availability of used cars is also declining in the current market. It’s difficult for any auto dealer to control or predict these factors, but they have a great impact on profitability.

So how can you increase your auto dealership’s profit margin? Whether you’re a part of a large auto dealership chain or are an independent used auto dealer, here are some ways you can increase your auto dealer profitability.

Are Auto Dealers Profitable?

Auto dealers are necessary since there will always be first-time car buyers or people looking to upgrade their current vehicles. But what really makes an auto dealership profitable? Is it the percentage they earn on each car sale? While that helps the overall revenue of an auto dealership, there are also other streams of revenue that make them profitable.

Customers might think that auto dealers earn the bulk of their money from car sales, especially when they look at some of the high prices of certain vehicles. In fact, even used vehicles can have expensive price tags. However, they might be surprised to learn that auto dealers actually make a very small margin of their money from new car sales. Only a small percentage of the invoice price customers see goes to the auto dealership.

Auto dealerships actually make the most of their profit from the car services, parts, and maintenance they provide for the vehicles that customers bought. These services might include tire rotations, winter tires, oil changes, routine car maintenance, brake changes, and more. If a customer’s vehicle is damaged in an accident, they might also take it back to the original dealership to have it repaired.

Vehicle add-ons are also a popular service offered for some auto dealerships. These add-ons include window tinting, custom car wrapping, chrome-plated wheels, wheel locks, and alarm systems. Some customers want these additional features in their car either for safety or cosmetics and will pay a reasonable amount for these services.

Dealerships also make money on the financing options they offer to customers that don’t want to pay the full amount upfront. One of the most common financing options is to set up a financing contract with monthly payments. Your customers pay the monthly amount financed plus a finance amount. Dealerships might sell these financing contracts to a bank or credit union to manage the account and collect payments.

Volume bonuses are also another way dealerships make money. A manufacturer may pay a dealership volume bonuses based on how many cars they sell in a period. Although you might lower the vehicle price to give your customers a small discount, the manufacturer might offset this loss with the volume bonus. In addition, dealerships might receive dealer holdbacks. This is money paid from the manufacturer to the dealer after selling a car.

How to Increase Dealer Profitability?

There are a few strategies to help increase your dealership’s overall profitability.

1. Offer additional services

The more services you offer, the more revenue streams you have for your auto dealership. If you aren’t already offering vehicle add-ons and multiple financing or leasing options to your customers, it’s time to get on it. Many dealers have a dedicated mechanic or service department that offers maintenance, repairs, and other car services to customers. Whether you have a service shop, a body shop, or both, it can definitely help boost your profits.

You should also consider the amount of used cars in your inventory. It’s harder for customers to compare prices of used cars and prices can shift more frequently based on availability. It’s the perfect opportunity to generate sales from customers that don’t want to purchase a new car, either from preference or finance concerns. Many dealerships also let customers trade in their current car to get a discount on their new one.

2. Recruit top talent

Your staff is the core of your dealership’s profitability. They interact daily with visitors and leads to convert users into paying customers. If your staff is well-trained and skilled, it’s not hard to create engaging, meaningful relationships with each customer. Great salespeople should understand how to interact with leads in a personalized, empathetic way. The goal is for every lead to feel welcomed, appreciated, and at ease throughout the sales process. It’s a balance between trying to close a transaction without being too pushy and aggressive.

3. Actively manage your car inventory

Sometimes, cars might sit in your lot for months before you sell them. The goal is to sell cars fast so you want to avoid that situation. Watch the market and determine the best times to add more cars to your stock – whether new or used cars. You also need to consider the time spent on preparing cars, advertising, and correct pricing. The more efficiently you attract customers and get the cars ready, the more sales you’ll make.

Car Dealership Business Model

Car dealerships rely on buying inventory at below market price and marking up the vehicle price for retail. Sometimes, dealerships will have direct contractors with a car manufacturer to buy vehicles in bulk. Other times, they’ll get stock from trade-ins, people selling their vehicles to the dealer, or auctions. The latter case is a lot more common for used car dealerships.

This business model has worked for many years, drawing in customers looking to purchase their first car or upgrade their current vehicle. Nowadays, it takes a bit more work to generate leads and customers and increase your profitability. A transparent team that’s accommodating and understanding of the customer’s needs will sell more cars. Part of that understanding comes from analyzing your sales funnel and customer data.

Data tells you what your leads are looking for and how you can effectively interact with them. It helps your staff better cater to their needs, which increases the chance of closing a sale. taq one is the perfect platform that combines the lead management process with the customer lifecycle. You can track leads from different channels, send customized forms, assign them to different parts of the sales journey, and push them to the credit process.

With the help of taq, your car dealership business model becomes more efficient and effective. Not only can you make more informed decisions about marketing and running your dealership, but you can also improve your sales funnel to drive sales and profitability quicker.