How do Car Dealers Make Money

How do Car Dealers Make Money

How do Car Dealers Make Money

How do Car Dealerships Make Money 

This is what everyone thinks at the time of car purchase and some curios souls actually go out and think and arrive at a conclusive answer to the same.  Many ways in which Car Dealers Make Money and yes they do not make larger part of their income by selling cars!

Financial filings with the SEC for some public listed, car dealerships (new and used both) groups in USA show that these dealerships are not in the business of selling cars whether old or new, but these dealerships thrive on the sale of product and services attached with the sale of the car.

How do Car Dealers Make Money

Following is a list of revenue lines of a Traditional Car Dealer (in India but may be same for other countries as well depending on the maturity of the market and the maker of the car):

  • How do Car Dealers Make Money by Selling new Cars (duh!):  New car sales make money of the sale of a new vehicle in terms of either mark up or commission from car maker, the former being the case most of the time.  For e.g. Car priced at 5,00,000 (all inclusive) would cost the dealer normally between 4,70,000 to 4,85,000 INR (Avg margin range of 3-5%).   Yes people do negotiate the prices as well and thus these prices may still not hold good at the time of sale.  Car Dealers are the Franchisees of Car Companies and not Licensees, Read more on the difference between Licensing vs Frachising.
  • Selling Spares: Spares for rookies in driving contribute as a major portion towards total sales and revenue
  • Selling Accessories for Cars: Accessories normally are sold as an attached product to the car such as side mirrors, seat covers, steering wheel grip, steering wheel lock, reversing sound sensor, music system etc.  These accessories are typically in the margin range of about 22% to 28% (Branded) – 30%-32% (unbranded)
  • Selling Car Services (Repair and General Overhaul): Repairs of broken parts, and general servicing of working parts actually contribute higher to the total revenue of the dealership.  Some companies have gone ahead and started selling extended warranties and extended service contracts to customers for some additional money (how they will make money here is by way of luring you in for a free service and tell you all sorts of rubbish about parts gone wrong in your vehicle)
  • Commissions on Allied Product Sale: Allied products like Wax Polish, teflon coats etc which do not form a part of accessories.
  • How do Car Dealerships Make Money by Selling Financial Products (3rd Party): Car by Purchase typically is associated with Loan and Insurance.  If a dealer makes a successful sale of a Car, the Car owner generally requires a Car Loan to finance the vehicle (on which the Dealer gets commission from the lending institution) and a Vehicle Insurance to ensure that the vehicle damage is fully covered during or after a mishap (get commissions from the insurance company).  Some dealer sales people may also ask you to get a credit card from which you can get fuel refills without additional charges (that also fetches the dealer a good amount of money per card issued).
  • How do Car Dealers Make Money by Lending Operations (Self Capital): Some Car Dealerships have their own capital pool to finance couple of good credit score cases from which they can extract some money as interest.  For e.g. 5,00,000 worth of Car lent to buyer at 20% PA Reducing balance interest mean an additional income of app 2,00,000 over 4-5 years by way of interest.
  • How do Car Dealers Make Money on Exchange of Old Cars: Say you want to purchase a car which  is about 5,00,000 INR and you have an old car which is at market rate of 1,00,000 INR – The dealer may ask you to exchange it against your new car by paying equivalent amount less.  Then the dealer sells it of at a refurbished price of 1,50,000 INR or dismantles it and sells it as loose spares at actual value.
  • How do Car Dealers Make Money on Dealer Cash: Some car making companies actually give out cash prizes to sell of the cars of the shelves or to just push of some inventory in the market, this prize is called as dealer cash.
  • How do Car Dealers Make Money by Business Diversity: The car dealer will never in his life time make money of selling new cars only, thus many car dealers actually diversify their business into the following business lines:
    • Used car sale under a different brand name
    • Motorcycle sale under a different brand name (or same)
    • Giving out sub dealerships (not allowed legally but there are ways)
    • Car Rentals (Read : How Ola Makes Money)
    • Driving Classes
    • Driver on Hire
    • etc.

So now you know How do Car Dealers Make Money!  Please don’t jump on to conclusions and do take into account that its a capital intensive business and takes slight patience during slower market cycles.

Disclaimer: The understanding of the How do Car Dealerships Make Money is of the Author’s himself, neither any car dealer or dealership distributing company (local or global) or qualified consultants have confirmed or explained the same to the author and the descriptions, stats, facts and figures, if used, are either obtained through secondary web research or interrogation of relevant search professionals or other resources on the web.  Please use your own discretion to use this info when required and by continuing to read, you agree to indemnify the author & Unicornomy from the entire liability arising out of using this info on your own.

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