How Do Dealerships Make Money?
Price, financing, warranties - there are many avenues for car dealerships to make and lose money when selling a car, but what actually makes a profit and what misconceptions do buyers have when purchasing a car?
A popular belief is that the vehicle's price is where the bulk of the profit is made for the dealer. While that may have been true a couple decades ago, in this internet age where consumers can cross shop vehicles across the city from their house, dealers are incentivized to price low to attract customers.
No Haggle Dealerships
As additional dealerships change to a no-negotiating policy like we have at Car City Wholesale, we don't increase the price to compensate for any negotiating room. With the priority of pricing a vehicle competitively, the margins get slimmer for making money on the total price of the sale. The days of "Let me talk to my manager" haggling are on the decline.
Add in that keeping vehicles on the lot costs money and takes up the space of another potentially profitable car and we're doubly motivated to sell vehicles quickly. So it's in a dealer's best interest to find vehicles they can sell for less than their competitors and find customers for them sooner than later. Setting prices high and waiting for the right customer is not a viable strategy in the long run.
Part of the benefit of going through a dealer is having an easier time financing a vehicle compared to getting a loan for the Craigslist car down the street.
How Car Dealerships Make Money on Financing?
Because we finance hundreds of customers through banks associated with our dealership, we are often able to negotiate with those banks more effectively than a customer with no previous history with them can.
As a result we can usually beat the rates of non-associated credit unions and offer buyers a simpler financing process as we handle a bulk of the paperwork and can set buyers up quickly and easily.
If you're worried a dealership is charging you an unexpectedly high interest rate, get a third-party quote and see if they can beat it.
Finally we have extended warranties. We covered the details of extended warranties in another post here. The summary of which is, not all extended warranties are equal and that "Non-Exclusionary Coverage" is the gold standard compared to "Exclusionary Coverage."
Avoiding break downs is something customers and dealers want to avoid. Because at Car City Wholesale we only offer Non-Exclusionary Coverage it's in our interest to sell reliable cars that won't eat into the cost of the warranty.
Now mechanical failures are just a part of owning a vehicle, but dealerships that offer quality extended warranties will avoid stocking their lots with crappy cars 50 miles from a breakdown. You can see what we look at to avoid lemons here.
Hopefully this information gives you an informative behind the scenes look at how car dealerships operate.