how a car dealer makes money – sell cars

August 5, 2015

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Information on new car invoice cost is readily available. Knowledge is leverage. These days, most car buyers are armed with all sorts of information and are loathed to pay anything above invoice. Doesn’t it make you wonder how exactly do the car dealers make money, when there does not seem to be enough profit to pay the salesperson’s commission?

Obviously car dealerships make money. Otherwise they won’t be a continuing business.  A dealership has many revenue streams.

New Cars

• Dealer Holdback – Manufacturer pays the dealer between 2% – 3% of either invoice or sticker price, after the car is sold. Hence, even if a car is sold at invoice, or even below invoice, the dealer still makes money.

• Dealer Cash – When a car is not selling well, the manufacturer may offer special incentive to sell the car.  Dealer can get as much as $2,000 per car sold.

Used Cars

While new car cost data is plentiful, used car cost is mostly unknown. Hence, used cars are far more profitable.  These days, gross profit from a new car sell is less than $1,000. However, profit from a used car sell could be $3,000 or higher. Trade-in is a huge profit center. A lot of times, trade-in becomes an afterthought for the car buyer, or they may be too distracted by the new car price negotiation. Trade-in price should be a separate negotiation. Dealers bundle both together, to drives down the trade-in value, and turn around to sell it for a good profit.

What other revenue streams are available to a dealership, in addition to profit from car pricing? We’ll take a look at that in a future post.

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3 Responses to “how a car dealer makes money – sell cars”

  1. allisence said

    Didn’t even know trade-ins was a thing …

  2. annalice said

    there is too much involved in buying a car, good thing baba knows so much! then we don’t have to do any work =)

  3. […] how a car dealer makes money – sell cars […]

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