Car dealerships are typically given a really bad rap. You’ve heard it from your friends and family, whenever they are car shopping for a new or used car. Everybody thinks that all dealers are greedy, bad, sleazy, and the list of negative opinions goes on and on. Below are some of the realities and facts to some common misconceptions about car dealers and buying a car.
Car Dealerships Have Low Overhead Costs
- Pre-delivery-inspection technician: A person that checks the new cars when they arrive from the factory and prepares them for sale (by installing accessories, refilling fluids and so on).
- Detailer: A person that removes all the plastic packaging and cleans the exterior.
- Porter: A person that parks and re-parks the car after test-drives.
- Salesperson: This is self-explanatory.
- Title clerk: A person that prepares legal documents.
- Accountant: This is self-explanatory.
- Sales manager: A person that oversees the whole sales process.
- Dealership manager or GM: A person that oversees the whole dealership.
This does not even begin to include the costs of owning or leasing the property, taxes and other bills like water and heat/AC. The true profit margin comes into effect after absolutely all costs are taken into account. If you looked up the average salary of every position, you would wonder how dealerships were able to keep the lights on.
Mark-Up on New Cars is Ridiculously High
According to an online survey conducted by J.D. Power, 36% of people believe that dealerships make over $3,000 per new vehicle. In reality, however, J.D. Power estimates that dealers make an average of $1,161 per vehicle. That being said, dealer profit often falls below this amount if the consumer decides to haggle or if a consumer uses a professional auto concierge service. As a rule of thumb, consumers looking for a deal on a car should expect to pay anywhere from three to seven percent above dealer invoice price.
Believe it or not, consumers pay more margin on everything else they buy compared to an auto purchase. Electronics, Furniture, Food, Water, Gas, Tobacco Products, etc all have more profit and margin than any car you’ve ever driven.
Margins on New Cars are Higher Than on Used Ones
Since new cars cost more than used ones, it’s logical to presume that pre-owned vehicles have even smaller margins. The truth is that dealers obtain used cars for relatively low prices from auctions or trade-ins, allowing them to earn anywhere from $1,400 to $1,600 per vehicle on average. This is considerably more than $1,161, which is what the dealer makes on average per new car.
Dealers Rip You Off When You Trade in
Those of us who have experienced trading in a vehicle might still cringe at the trade-in value we were quoted for our car. The truth about trade-ins is that only the cleanest and in-demand vehicles make it to the showroom floor. Most trade-ins either end up remarketed at auctions or resold to other dealerships. The costs associated with remarketing a car can be high and cut deep into profit margins. Those who are still hesitant to trade in a used car should also consider the tax advantages of trade-ins. Buyers will only be taxed on the net purchase price of the new vehicle (minus trade-in value), which can result in a sizable discount.
New-Car Sales are the Lifeblood of Dealerships
While most car dealerships are best known for their new car sales, new vehicles tend to be their lowest-margin product. For instance, the 2016 Ford Fiesta S has an MSRP of $15,749, which puts the dealer mark-up over the invoice cost at $592. The majority of dealer profits come from post-purchase add-ons, including parts, servicing and warranty extensions.
Car Dealers Hate Internet Customers
With online-focused companies gaining traction in the consumer space, car dealers increasingly view the internet as a cost-effective marketing channel. As a result, the majority of car dealerships welcome internet customers with open arms. At the end of the day dealers prefer to sell as many cars as possible, and have a customer spending money in the service drive, parts department, or just bragging about the great service they received and forwarding referrals to the dealership.
New-Car Dealerships Don’t Sell Used Cars
Most new-car dealerships have a selection of high-quality used cars for sale, which they are willing to offer at a fraction of the cost of a new one. Unlike a number of independent used-car lots, new-car dealerships have a name and a brand to protect. As such, the probability of getting a lemon from a new-car dealership is lower. Additionally, new-car dealerships also offer CPO or “certified pre-owned” vehicles. While these might cost a little more than regular used cars, they come with the manufacturer warranty and a promise that they have been thoroughly inspected and repaired.