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How Much Profit Should a Dealer Make?

How Much Profit Should a Dealer Make?

By Jeff Youngs, February 24, 2012

There is an old saying in the car business that states the "best price" during a sales transaction is the one that makes the dealer and the customer both happy-regardless of the actual dollar amount. During the negotiation process, consumers are focused on maximizing the discount. The dealer, on the other hand, is interested in making the customer happy while still earning a profit.

Automobile dealers are operating a business. Like most other establishments, they must generate enough revenue to cover overhead expenses. At a car dealership, these include payments on the property, loans on the vehicle inventory, insurance premiums, advertising costs, and wages for the staff in the business office. In addition, car dealers must pay a percentage of every transaction to the salesperson and finance manager. Industry-wide, there is no simple rule to put a dollar amount on how much a dealer should make on the sale of one car, but they assuredly deserve to make something (especially if one expects the dealer to be in business for service and warranty work the following year).

It is important to know the ballpark invoice price of the new vehicle, and the value of any incentives and rebates offered by the manufacturer to the dealer or to the customer. However, you should also be aware that most new vehicles carry a "holdback" amount, which is typically a percentage of the invoice or MSRP that the dealer draws upon to finance the loans used to stock the vehicles at the dealership.

You should also know that the vehicle manufacturer frequently pays "spiffs" to the sales staff in amounts ranging from $50 to much more than that, depending on the make and model, and how well the model is selling. The more cars a salesperson sells in a month, the higher the per-car "spiff" amount is. Sometimes additional "spiffs" are in effect for just a day, or just a weekend, as an additional incentive to get the sales staff to move the metal.

Now that you know about the dealer holdback and the sales spiffs, forget about them. This is the dealer's money, and you aren't getting any of it. Simply knowing that these payments to the dealer exist, however, can give you leverage during negotiations.

During the negotiation, explain that you are interested in giving the dealer profit, but you would like to stretch your discount. This empathetic statement makes it obvious that you understand the basic principle behind the negotiation-something few other customers grasp.By knowing the ballpark invoice figure and whether incentive or rebate programs are available on the new car, by understanding that vehicles in high demand are sold for a premium (sometimes over the sticker price), and by arranging your financing ahead of time, you know what a fair price will be for the vehicle.

Communicating this knowledge to the dealer, and expressing a willingness to pay enough for the vehicle for the dealer to cover the costs of doing business and make some money on the sale, will set abetter tone for the negotiation and quickly bring both parties closer to that hard-to-obtain "best price." More likely than not, it will be in your favor.

More New Car Buying Tips:
  • New Car Buyer'sGuide
  • Preparing your finances before buying a car
  • ShouldI trade my old car in or sell it privately?
  • Three values associated with used-vehicle pricing
  • Whois the best person to negotiate with at the dealership?
  • How do I buy anew car?
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