How Does a Modern Day Car Dealer Really Make Money?

In today’s challenging market more pressure than ever is being put on the profit margins from selling new and used cars. Whereas maybe 5 years ago the profit that would come from the ‘metal’ would probably make upwards of 85-90% of the deal, we now live in a completely different world.

Mass MOT cancellations due to faults found on testing centre lifts | Be  Wiser Insurance

There are a number of reasons for this, primarily better competition; there really isn’t a terrible car on the road anymore. Remember Lada and Skoda before they became VW? So the market is full of great deals, new models with the latest technology and the modern car dealer has had to get smart. With chassis profit margins being eroded modern car dealers still need to achieve the bottom line, so to rise to this challenge a few things have happened:

A) Business Managers have a far more prominent role to play in the business and indeed are now paid and measured on the extra income they create mot cancellations.

B) Sales staff are also specifically incentivized to introduce prospective customers to the business manger in order to try and “up sell” them into other products.

C) Hourly rates and prices have increased in the workshops so that profits may be achieved through the service and parts departments.

In the early to mid 90s (and maybe before) the average profit (net of expenses and vat) that could be achieved on purely selling a car would be approx £1500 – £2000 per car, today that figure is probably nearer £700 and in some cases even less To try and combat this in a market where expenses are rising, a few things have happened. The trade has just had to get more creative and what you will now see everywhere is what is referred to as ‘add ons’.

Traditionally you may expect to take out a finance deal, i.e. HP or PCP, and maybe a warranty upgrade that would create a profit opportunity for the dealer, however today there are a range of F&I (finance and insurance) based products) which will achieve the overall profit required.

You may now be introduced to payment protection, (sickness, unemployment cover etc.) GAP insurance, where you can insure the invoice price of your car against theft and write-off and paintwork protection products which will protect your car from the elements. They even have tyre and MOT cover to offer you. These are often sold in packs (i.e. bronze silver or gold) and each are priced so that you have a choice of the level of cover you need. The package price will increase depending on the price of the vehicle being purchased.

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