For U.S. car dealerships, is there any data regarding typical profit margins for cars sold, assuming “typical” consumer vehicles being sold (purchase prices less than, say, $35000 USD; or choose your own definition of “typical”)? Are the margins different for new cars vs. used cars?
Motivation for asking: this weekend I bought a new car and traded in my current car as part of the deal. Dealer offered me $17,770 on the trade-in (2016 Subaru Outback in good but not pristine condition with low mileage, if anyone cares). Figuring they could probably resell easily for $21,000-(ish) in my area, I countered $18,500, and we agreed to $18,000. Was that extra $500 (2.4%) really that important to the dealership? Or did the dealership correctly surmise that I was a chump and wouldn’t scrap the whole deal over $500, so they might as well get everything they can out of me?
Just wondering how those couple of % points they extract really matter in terms of the overall profitability.
If you assume profit of $2,500 vs. $3,000, the difference is a lot more than 2.4%.
(and, not to take the side of the dealership, they probably put some money into oil change, detailing, etc, before they sell it. So, their profit is probably less on the sale of your Outback.)
When I buy cars, I do get the sense that there is a point where they’ll draw a firm line. I have left a few times without a deal because they wouldn’t go the extra $500 or $1000 that I wanted.
From what I read online. Average margin on a car is 10-12% which translates to a profit of 2-3%. Since 500 is 2.4% of 21,000, that 500 might have been the entire profit on the vehicle.
It’s very difficult to figure out the profit on a particular car due to the way the dealer system is set up. It is possible that they will lose money on your used car, but made enough profit off selling you a new car to justify the loss.
In addition, there are several ways dealers make money on the “back end” of a car deal. The most well known extended warranties, service plans, etc. Also pretty well known is “holdback”, basically a kickback from the manufacturer for each car sold. There are also other less known ways such as a significant bonus to the dealership if they sell X number of a certain vehicle in a particular time frame. They may make a sale where they lose money on the sale of a new car, but that sale qualifies them for a large quarterly bonus from the manufacturer; thus making the loss acceptable.
Another possibility is that the manufacturer makes the dealer take a certain number of less than desirable vehicles (or colors, or option packages, etc.) in order to be allowed to receive a more popular model that will sell at a very high profit.
Also, dealerships make a lot of their money off service. So they sell you a vehicle at a low or no profit, but bet on you bringing the car in for very high profit services over the next several years.
As you can see there are a lot of moving pieces in a vehicle transaction. Which particular one applies to any situation is hard to tell. The book “Car Buyer’s and Leaser’s Negotiating Bible” by W. James Bragg goes pretty deep into this type of stuff if your interested in more detail.
The average profit is not just on the purchase of the car, the dealer gets you on a bogus transportation cost fee, with maintenance for the car, and likely receives factory rebates.
Many times the dealer takes those who aren’t good at negotiation, have limited time to make a decision, or bad credit, for a ride so to speak and makes more $$$ on the transaction.
My advice is to start shopping in the middle of the month and make your deal at the end of a business quarter. I prefer to pick the model I like and get quotes from 3 dealerships, pitting them all vs each other. Do this and you too can save.
Thanks for the replies so far. My query is not so much whether the dealer made a good profit off of me personally, as I’m sure they did. My question is more about the tactic of trying to squeeze an extra 2.4%.
There’s always a risk that if the dealer tries to get an extra couple percent, the customer may just walk out (see Procrustus’s anecdote). So the dealer is risking blowing up the deal over a couple percentage points of profit. Now, in my particular case, any reasonable salesperson would be able to tell that I probably wasn’t going to walk over $500. Money is money; the dealer will want to get the bit of extra profit if they can, but there’s risk involved. At some point, you figure the dealership has to think to themselves “eh good enough, I’ll take that rather than push it and try for more.”
Hence my question: did the 2.4% / $500 matter? Why wasn’t the response to my counter “yeah, sure, whatever. $18500.”? If the dealership is running paper-thin profit margins, then yeah, 2.5% matters. If the dealership is running large profit margins already, then it makes somewhat less sense to try to squeeze the customer as a general practice. Per puddlegum’s anecdote, it’s possible that 2.5% really is important to the sustainability of the business. Just looking if there is any hard data around to support or refute such a hypothesis.
IIRC average profit on a used car is between $500 and $1000, so the $500 probably did matter.
Practically speaking, they’re going to look at the average dealer auction price for a 2016 Outback with x miles and try to target $500 to $1000 over that. I’d wager that the black book of used car values told them $18.5k - $19k (including auction fees), so they started $1k down from that and worked up until the deal went through. Ultimately they might choose to recondition the car and sell it themselves without sending it to auction, in which case they might make a bit more on it, but they also might find a mechanical issue and end up losing money on it, which is why they just go by as-is auction value.
Of course, the other thing to consider is how much they needed the new car sale to go through. Dealerships work on a strange combination of incentives from the factory, so sometimes taking a loss on an individual deal at the end of the month is worth it to make their numbers. Or they could have been making a ton of money on the new car price and offered you a “generous” trade in value in order to make the deal seem better. There’s a lot of variables.
A “two-year-old Subaru Outback in good but not pristine condition with low mileage” is likely to be the kind of car they want on their forecourt. The ‘condition’ is fairly cheap and easy to fix and I would expect them to sell it on for top Dollar. Car salesmen take negotiating seriously - it matters not if the sums are fairly trivial; what matters is getting the best deal for them. Seriously - yes, but it’s all a game really and about bragging rights in the pub after work.
Even if the dealership isn’t lying, that $500 may be most of the salesman commission – the profit for the dealership may be built in even before the salesman reaches his personal break point.
According to the two car salesmen I’ve known, an additional factor may be that the dealer is straight out lying to the salesmen. The dealer may be making 10K on a sale (a figure pulled out of my ass), but telling the salesman (and calculating the commission) on the basis that there is only 8K margin.
Thanks for the responses. I figured the margins on cars could be thin at times; I didn’t realize just how thin in some cases. Again, probably not in my case specifically; the dealership likely made a decent amount on the new car purchase, so maybe breaking even or squeezing out a small profit on my trade-in made a lot of sense from their perspective.