Car dealerships make money from three primary revenue streams within a dealership. This article will explain the basics and provide you with general information that pertains to most all car lots.
1) Front End Profit. This is profit made on the sale of a vehicle. Whether a vehicle is financed through a loan company or if you pay cash, the dealership’s front end profit is unaffected. Front end profit is the difference between the sale price of a vehicle and the dealers actual cost. In addition, dealers make money from manufacturer’s incentives, dealer “holdback” (a percentage of the invoice cost, paid to the dealer by the manufacturer) and rebates, if retained by the dealership. The front end profit is what car salesman are paid their commissions from, which is commonly 25%, referred to in the industry as “gross”.
2) Back End Profit. This is profit that is made from brokering the financing for a vehicle sale in addition to various finance products. These include the sale of Gap Insurance, Extended Car Warranties, Credit Life Insurance, Extended Service Contracts and Prepaid Service Plans. Interest rates as well as these other financial products have a cost. The dealer marks up the price of each and the difference equates to profit for the dealer finance department. Finance managers are generally paid a salary plus a commission rate of 5% to 10% on the sale of backend financial products.
3) Service Department. If a new vehicle is covered under warranty and is brought in for a warranty repair, the dealership is paid by the manufacturer for labor and part costs. Also, when used vehicles are cycled through the dealership and are prepared for sale, those expenses are charged to the used car department and paid to the service department. Those charges become a part of the used car departments “cost” for the vehicle. Service department profits easily exceed front end and back end profits in many new car dealerships.
That’s a general explanation of how car dealerships make money.