Car dealerships can be a profitable business, especially when it comes to selling used cars. Many factors affect how much money a dealership can make on each used car sale.
I will explain these factors, provide insights into profit margins, and offer tips for maximizing profits.
Understanding Profit Margins
Profit margin is the amount of money a dealership makes from selling a car after all costs are deducted. It is usually expressed as a percentage. For example, if a dealership sells a car for $10,000 and makes a $1,000 profit, the profit margin is 10%.
Profit margins are important for understanding the financial health of a dealership. They help determine how well the business is performing and where improvements can be made.
Average Profit Margins
According to the National Automobile Dealers Association (NADA), the average gross profit for a used car is around $2,337. It indicates that after subtracting the cost of the car and other expenses, the dealership makes about $2,337 per car sold.
However, this number can vary based on several factors. Some dealerships may have higher profit margins due to better buying strategies or lower operating costs, while others may have lower margins due to higher expenses or competitive pricing.
Factors Affecting Profit Margins
Location
Dealerships in different areas can have different profit margins. For example, a dealership in a big city might have higher costs for rent and salaries but can charge more for cars. On the other hand, a dealership in a small town might have lower costs but also lower prices.
The local economy, competition, and customer demographics also play a significant role. Urban areas might have more affluent customers willing to pay higher prices, while rural areas might have less competition but also fewer potential buyers.
Type of Dealership
Profit margins on selling used cars can vary significantly depending on the type of dealership. Here’s a comparison of different types of dealerships and their profit margins:
Franchise Dealerships
Franchise dealerships, which are affiliated with specific car manufacturers, tend to have higher overhead costs but also benefit from manufacturer incentives and brand recognition.
On average, franchise dealerships make a gross profit of about $2,000 per used car sold. The net profit margin for franchise dealerships is typically around 1-2%.
Independent Dealerships
Independent dealerships, which are not tied to specific manufacturers, generally have lower overhead costs compared to franchise dealerships. They focus mainly on selling used cars and can often offer more competitive prices. Independent dealerships typically make a net profit of around $1,500 per used car sold.
Online-Only Dealerships
Online-only dealerships, such as Carvana and CarMax, have been gaining popularity. These dealerships often have higher gross profits per used car due to their streamlined operations and lower physical overhead costs.
For example, Carvana’s gross profit per used car is $4,303, while CarMax’s is $2,277. However, these dealerships do not allow price negotiations, meaning consumers often pay a premium.
Publicly Traded Dealership Groups
Publicly traded dealership groups like AutoNation, Asbury, and Lithia also show varying profit margins. For instance, AutoNation has a gross profit of $2,117 per used car, while Asbury’s is $2,141.
These groups can leverage economies of scale and often have diverse revenue streams, including financing and service departments, which can enhance overall profitability.
Luxury vs. Middle vs. Regular Brands
Luxury Brands
Luxury brands like Porsche typically have the high profit margins than middle and regualr brands due to their exclusivity, superior brand management, and ability to price above market rates.
Middle Brands
Middle brands, which include premium but not ultra-luxury brands like BMW, Mercedes-Benz and Audi, also enjoy higher profit margins compared to regular brands but typically lower than luxury brands.
Regular Brands
Regular brands like Ford, Honda, and Toyota focus more on volume sales and competitive pricing. They generally have lower profit margins but benefit from higher sales volumes. Examples include:
- Ford
- Honda
- Toyota
- Chevrolet
- Hyundai
- Nissan
- Kia
- Mazda
- Subaru
- Volkswagen
Market Conditions
The state of the economy and the demand for cars can also affect profit margins. In a strong economy, people are more likely to buy cars, which can increase profits. In a weak economy, sales might be lower, reducing profit margins.
Seasonal trends, fuel prices, and changes in consumer preferences can also impact the market. For example, a sudden increase in fuel prices might lead to higher demand for fuel-efficient cars, affecting the types of cars that dealerships need to stock.
How Dealerships Make Money
Buying Low, Selling High
Dealerships make money by buying cars at a low price and selling them at a higher price. They often buy cars from auctions, trade-ins, or directly from customers. The goal is to buy the car for less than what they can sell it for.
The process involves careful evaluation of each car’s condition, market value, and potential resale price. Skilled negotiators and experienced buyers can significantly impact the profitability of a dealership by securing better deals on the cars they purchase.
Additional Services
Many dealerships offer additional services like financing, warranties, and maintenance. These services can add to the dealership’s profits.
For example, offering a financing plan can bring in extra money through interest payments. Extended warranties and service contracts can also provide a steady stream of income.
By offering a range of services, dealerships can create multiple revenue streams, enhancing overall profitability. These additional services also help build customer loyalty, encouraging repeat business and referrals.
Calculating Profits
Forecasting Sales and Expenses
To understand how much money a dealership can make, it is important to forecast sales and expenses. The basic formula for calculating profits is:
Profits=Sales−Expenses
For example, if a dealership expects to sell 20 cars a month at an average price of $10,000, the projected revenue would be:
Revenue=20×10,000=$200,000
Types of Expenses
Dealerships have two main types of expenses: fixed and variable. Fixed expenses, like rent and salaries, stay the same each month. Variable expenses, like bonuses and the cost of goods sold (COGS), change based on sales.
Managing these expenses effectively is necessary for maintaining profitability. Fixed expenses must be kept under control, while variable expenses should be aligned with sales performance.
Tips for Maximizing Profits
Focus on High-Demand Cars
As you can imagine, selling used cars that are in high demand can help increase profits. High-demand cars often sell faster and at higher prices, reducing the time they spend on the lot and minimizing holding costs.
Offer Quality Customer Service
Good customer service can lead to repeat business and referrals. Happy customers are more likely to come back and recommend the dealership to others.
An excellent customer service involves trained staff, a welcoming environment, and addressing customer needs promptly. Personalized service, transparent pricing, and post-sale support can enhance customer satisfaction and loyalty.
Manage Costs
If a dealership wants to make more profit, keeping costs low is key. This means getting good deals when buying cars, cutting down on overhead costs, and managing inventory well. Using cost-saving methods like energy-efficient lighting, simple processes, and buying in bulk can help a lot.
Regular financial checks and performance reviews can show where money can be saved without lowering quality.