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How Much Profit Should a Dealer Make?

2/24/2012

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.


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