Car Dealer Tricks: Multiple Profit Points

September 29, 2010

The Internet has changed everything when it comes to buying cars. Consumers no longer have to begin their car buying search by walking through the front door of a local car dealer. In fact, if you’ve been following this website, you know that I frequently tell my readers that beginning your car search on a dealer’s sales lot can cost you hundreds—even thousands—of dollars more than necessary.

In truth, the Internet is a godsend for consumers. You can research the make and model you want, read professional and customer reviews of the car you are thinking of purchasing, see what others in your area are paying for exactly the same car, and negotiate the selling price, all before you ever talk to a salesperson face-to-face.

What about the dealer?

Where does all of this leave car dealerships? The economic downturn has decimated their ranks. The total number of car dealers across the country has dropped from over 20,000 to just over 18,000. If that weren’t bad enough, it’s now rare for a customer to walk into a showroom and pay full sticker price for any car, though dealers are thrilled when that happens.

It’s more likely that customers arrive at the dealership knowing the dealer’s invoice cost for the car they wan to buy AND what other buyers in the area have actually paid. Put yourself in the shoes of the dealer trying to negotiate these customers back up to full sticker price. It’s no wonder that buying a car in this kind of a market can be such a painful experience.

So what’s a car dealer to do? As the saying goes, “When the going gets tough, the tough get going.” In this case, when the going gets tough on the selling price for car dealers, they simply switch to other profit points to make up the difference.

Multiple profit points

Car dealers have many opportunities along the sales process to make a profit.  Each one of these is called a profit point. The selling price of the car, truck, or SUV is the first profit point that most customers encounter. It’s also the easiest to understand. Subtract the invoice cost from the dealer’s selling price and you’re left with the gross profit on the deal.  Dealers pay the salesperson’s commission out of the gross profit. The salesperson’s managers also get a cut. The dealer uses this profit pool to pay the cost of overhead expenses, including advertising and marketing costs, office staff, heat and power, taxes, license fees, and a long list of other expenses.

What happens if most customers negotiate the selling price of the car close to the dealer’s invoice cost? This results in a dwindling profit pool to pay expenses. How does the car dealer meet payroll keep the lights on? The answer is they work very hard to increase the profit in other areas of the car deal. In fact, the next profit point that most customers are forced to deal with has to do with financing their car. We explore this issue tomorrow.

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