How Car Dealers Make Money Outside of the Car Itself
Dealerships in general, not just high end luxury and exotic dealerships, make money from three distinct divisions and 2-3 products.
The number one most profitable aspect of a dealership is the F&I (finance and insurance) office; that awesome office that gives you the great approvals you’ve never seen as a possibility.
Their first order of business is to make finance deals with basis points which means a dealer has a buy rate (assume 2%) and any percent over that is 1% of the loan amount paid to the dealer after 90 days. So if a dealer with a 2% buy rate sells you a loan for 4%, they made 2% of the loan amount and on a $100K car that’s $2,000. This is one of the most profitable venues for dealers.
The second most powerful sale in that same office is the warranty sales, which are often purchased at core prices of 20% of the offered price to you. So if a dealer sells you a $2,000 warranty, they most likely pay $400 for this product. The leverage on F&I products is significant, and dealers rarely carry products they can’t mark up 10X.
The third place most dealers make money is service. The oil change you pay $499 for or the 12-month tune up you pay $1299 for costs them less than $100 to fulfill between labor and parts. This is where massive margins exist and of course break downs of parts that are marked up 50% and labor that is paid at $18/hr but charged at $120/hr – once again a 10X mark up approach to that.
The final part is obviously the car. Dealers use tactics like telling you they are selling you a car at a loss or simply at invoice, which is a lie. Most dealers make about 10% on the car, sometimes less, but that’s a good average. They also can make more if they are franchised dealers as moving new cars means more backend kickbacks from manufacturers, and from corporate to compliment them on moving so many units.
So car dealerships are like the mafia; they make money on everything and don’t give two fucks… you have been warned. Know what you are buying, and know what it’s worth.