When you think of car dealers, the first thing that pops into your mind probably is going there to buy a car. While that is a main function of a dealership, there also are a number of other functions that go on there, all of them focused on bringing in sales and revenue. Car dealerships actually have a number of revenue streams. Here are the five main ways that car dealerships make money.
Of course, the main way that many dealerships make the bulk of their money is selling cars. Used-car dealerships usually rely more heavily on sales for revenue, but many new-car dealerships also get a large chunk of their revenue from the sale of cars. New-car dealerships tend to get more than half their sales revenue from selling new cars, but since it’s a pretty low margin business, only about a quarter of their profit comes from this business. Sales of used cars are a higher-margin business and contribute more to a dealership’s bottom line.
Another source of revenue, especially for dealerships that specialize in new cars, is leasing. Leasing can actually be a pretty lucrative business for most dealers because they have several ways to make money from it. When you buy a car, you typically haggle to get the best possible price, but when you lease, you are focused on the payment. The dealer often is able to set the purchase price higher than it usually would be. Dealers also can make money from setting high interest rates as part of the leasing terms. And if they take the car back from you and then sell it, they can make additional money.
If you’ve ever sat down with the dealership manager thinking you’re in the home stretch of the purchase process only to get hit with several offers, you know that add-ons can be a lucrative revenue source for both used- and new-car dealerships. These add-ons often include extended warranties, protection plans for certain vehicle parts or systems, extra insurance, rust-proofing or undercoating and additional vehicle accessories that aren’t included in the purchase price. This is a very high-margin business for dealers, with some products, such as extended warranties,having markups of as much as 100%, which is why they push these options so hard.
Most people who buy a new car or truck need to get financing to be able to pay for it. You typically think of getting financing from a bank or credit union, but car loans can actually be a lucrative business for dealerships. If you go through the dealer’s preferred lender, it will usually get a fee for your business. On the other hand, dealers often send credit applications to multiple dealers and let them compete to come up with the best deal. Although doing credit applications is not a large part of any dealer’s business, it is very profitable.
Parts and Service
When you buy a new car or truck, you usually take it back to the same dealer for oil changes, tire rotations, warranty items and a number of other services, at least as long as it is covered under warranty. Repairing and servicing automobiles is a lucrative business for new-car dealerships and even some used-car ones. Many dealerships get close to half their gross profit from their service and parts departments. Parts and services provides a longer-term predictable stream of revenue for dealerships than car sales, which can be a lot more variable based on the economy.
Automotive dealerships have many streams of revenue, which is why they usually are highly profitable and successful. Though selling vehicles is generally the largest part of the business, it also is the one that is the least profitable. The other products and services dealerships provide, such as selling vehicle accessories, setting up loans and providing service to vehicle owners, are much more lucrative when it comes to the bottom line.