THE FIVE SOURCES OF DEALERSHIP PROFIT
Knowing how a dealership makes a profit is the first step towards negotiating a better deal.

Many are not aware that a Dealership often gets more than 50% of their profits from the Trade-In, Add-
ons, Warranty, and Financing.  This is in addition to the profit from the sale of the vehicle.  As a result,
many focus all of their attention on negotiating the best Purchase Price and pay less attention to the
other items.  Don’t give the Dealership this advantage.

Sometimes a Dealership may even forego a profit on the Purchase Price of the vehicle, if they can
make enough on the other items.

                   
In the car business, everything is negotiable!

How does a dealership make a profit?  

1)  Purchase Profit:      By selling you a vehicle for more than they paid for it
2)  Trade-In Profit:        By giving you a credit for your trade-in that is less than what your trade-in is worth
3)  Add-on Profit:          By selling you additional equipment or options (“add-ons”) for more than they cost
4)  Warranty Profit:       By selling you a warranty in which they receive a commission
5)  Finance Profit:        By arranging the financing of the vehicle and receiving fees from the finance company  


1)  Purchase Profit

Key terms:  MSRP, Dealer Invoice, Dealer Net Cost

An example:

MSRP                                             $19,500                Not Important

Dealer Invoice                                 $18,000                Important, readily available
Less Holdback                                       360
Less Advertising subsidies                    120
Less Dealer rebates/incentives*     
       750
Dealer Net Cost                              $16,770                 Important, not readily available


If a dealership sells a vehicle at Dealer Invoice, or $18,000, and the Dealer Net Cost is $16,770, then
dealership profit is $1,230.

The MSRP is the Manufacturer’s Suggested Retail Price and is included on the window sticker.  The
MSRP is not important.

Dealer Invoice is an important amount and is available either at the Dealership or at websites like
Edmunds.com.  Ask.  The better dealerships will show you the invoice.  They know you have access to
the information anyway, so why make it difficult for you.

The Dealer Net Cost is the most important number, but can sometimes be difficult to determine.  Most
will confirm that Holdback is 2% or 3%, and many will disclose the advertising subsidies and any Dealer
rebates and incentives (particularly if they think you may visit a competitor, make a few phone calls, or
search the internet).  Holdback by vehicle manufacturer can be found at Edmunds.com.

*Note:  Unlike “Customer Rebates” that are advertised, information about “Dealer Rebates/Incentives” may or may not be readily available.


2)  Trade-In Profit

If the dealer gives you a trade-in allowance of $4,000 and sells your vehicle at auction for $4,500, the
dealership profit is $500.

3)  Add-on Profit

Additional dealer installed equipment or “add-ons” can include anything from floor mats to expensive
custom wheels and high performance tires to special paint and fabric protection.  Like any other
product you buy, the difference between what you pay and the cost to the dealership is additional
dealership profit.

4)  Warranty Profit

If a dealership can sell a warranty product for say $1,200, they may be making a commission of
several hundred dollars.  This commission is additional dealership profit.

5)  Finance Profit

The dealership earns fees from the finance company for loans they arrange.  Fees can range from
less than $100 to several thousand dollars.  Fees received from finance companies are additional
dealership profits.

Summary:

A vehicle purchase could include the following components:

1)  Purchase Profit                               $1,230
2)  Trade-in Profit                                      500
3)  Add-ons Profit                                      300
4)  Warranty Profit                                     300
5)  Finance Profit                                  
     150

Total Gross Profit                                  $2,480

The above is the “gross profit”.  Note that the Purchase Profit is less than half of the Total Gross Profit
in this example.  This is not unusual.

Note:  The combined gross profit for all vehicles sold must exceed operating expenses in order for the dealership to make a “net” profit.  
Operating expenses include salaries, commission, marketing, advertising, rent, utilities, telephone, as well as all other items.


Knowing how a dealership makes a profit is the first step towards negotiating a better deal.


                                            Next:  Homework, Shop, Homework, Buy


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