The operation of car dealerships is not limited to selling cars. To ensure maximum success, you must focus on other commodities related to the vehicles you are dealing with. Understanding and increasing car dealership profitability comprises leveraging certain techniques that bring effective response and long-time performance that amplify your growth. By catering to a customer’s needs throughout their car’s life cycle, dealerships build trust and loyalty. Happy customers are more likely to return for future purchases and recommend the dealership to friends and family, leading to a steady stream of revenue and long-term success. It’s a smart business strategy that benefits both the dealership and the customer.
What is Dealership Profitability?
Dealership profitability is a metric that defines what you net on sales for new and pre-owned vehicles. It includes profits from financing, service and parts and extended warranties. Dealership Profitability is a key metric that reflects the financial health of a car dealership. It encompasses all the income generated through various channels, not just the direct sale of new and pre-owned vehicles. This includes profits from after-sales services like maintenance and parts sales and commissions earned on financing and insurance products offered to customers. However, dealership profitability also factors in all the expenses incurred, such as the cost of acquiring vehicles, interest on loans for unsold inventory, and operational overheads like salaries and marketing.
By calculating the difference between total revenue and total expenses, dealerships can gauge their financial success and identify areas for improvement.
How Do Car Dealerships Make Money?
Ever looked at the existence of multiple car dealerships, most of them profitable, and thought, how do car dealers make money?
Ever looked at the existence of multiple car dealerships, most of them profitable, and thought, how do car dealers make money? Well, here’s the tip of the iceberg on how: A recent data report from the National Automobile Dealers Association stated that the new vehicle department within a car dealership accounts for 58% of the total sales. Still, the profit generated from this is less than 26% of the total profit generated by the dealership.
In addition, Car dealerships make money through new car sales, pre-owned car sales, financing, service and parts, and extended warranties. More on how car dealers make money; they do so by offering something to lending institutions that you can’t – volume!
Car Dealerships avail access to loans and resell the same to customers. The parts and service department is the primary revenue generator for most car dealership profits. Any car dealership keeps a stock of relevant items that go toward maintaining, upgrading, or fixing a car, from shocks to tires. Car dealers make off the vehicle itself but also from the trade-in, warranty sales, and service work. Dealerships can leverage the fact that profit from one part of a sale can subsidize a discount in another to maximize their gross profit.
Understanding Car Dealership Profits – Frontend Vs. Backend Profits
For dealers, there are two sources of profit: frontend and backend. The frontend profit is made when the vehicle is sold whilst the backend profit includes everything that is sold after the sale of the vehicle.
The difference between the dealer invoice and selling price is termed as frontend profit. Dealerships also make money from selling different insurance policy packages and warranties, extended warranties, wheel and tire protection, and so on. This is known as backend commission.
As a thumb rule on how car dealers make money, they are also known to make more profit on the backend of the car dealer than the front. According to data, depending on the car dealership, a “healthy deal” for the car dealer will result in approximately $2500 to $3500 in frontend and backend gross profit.
What Makes a Car Dealership Successful?
There are a few factors that make a car dealership successful, let’s explore these factors in detail:
1) Improved Customer Experience: This is all about making the automobile buying technique easy, friendly, and efficient. It consists of such things as having an informed group of workers, a welcoming environment, and imparting online buying options for comfort.
2) Product Expertise: A well-educated staff can answer customer questions hopefully, apprehend their needs, and endorse the proper car.
3) Building Your Dealership: This is going past bricks and mortar. It’s approximately constructing a popularity for trust and customer satisfaction.
4) Multiple Advertising Options: Reaching the right audience with the proper message is key. This contains a mixture of online advertising, social media advertising, and conventional procedures like neighborhood commercials.
5) Develop Marketing Strategy: A nicely described advertising and marketing strategy will assist goal-precise patron segments. Additionally, create targeted campaigns to pressure sales.
6) Inventory Management: Having the proper automobiles in stock to satisfy customer demand is crucial. This entails studying income statistics and marketplace tendencies.
7) Automotive CRM: An automotive CRM allows dealerships to track leads, manipulate customer interactions, and customize the automobile shopping journey.
8) Image Merchandising: High-quality visuals of automobiles could make a big distinction online and in advertising and marketing.
9) Better VDPs: Vehicle Description Pages (VDPs) must be informative and attractive, with specific descriptions, feature lists, and clean pricing.
10) Training & Development: Invest in training employees so they have the abilities and expertise to excel in income, customer service, and product information.
By focusing on these regions, a dealership can create a positive experience, build trust, and obtain long-term achievement.
What is the Financial Value of a Car Dealership?
The answer to how much a car dealership is worth is not straightforward. However, there are multiple factors that influence the worth of a car dealership. These these factors include:
1) Revenue Beyond Car Sales
A dealership’s revenue isn’t limited to the sale of vehicles, rather a majority of it comes from added services and financing. Even though selling cars is the most visible part of the dealership, it just accounts for 7% of profit per sale. For cars that are used, the profit margin is usually around $1500 to $3000 per car.
2) Different Valuation Approaches
To estimate the value of a car dealership, there are five main approaches you may take. One of the key methods is to focus on the financials such as financial statements, adjusted net income, asset valuations and other revenue streams. All these financial factors are important to give you an idea of a dealership’s worth.
Other than financials, you should also take into consideration the dealership’s market position and its customer base. These external factors can also influence the valuation significantly. A dealership that has a strong reputation and a loyal customer base will be worth more than one that doesn’t.
3) Use EBITDA
A really helpful tool for estimating value is EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). By using EBITDA along with valuation multiples, you can get a more precise estimate of how much the dealership is worth.
There are multiple factors that influence the value of a car dealership such as revenue streams, financial health, market position as well as tangible assets like inventory and property and intangible assets like brand reputation. Buyers and sellers should also consider challenges like taxes and compliance with regulations. These challenges makes process of determining a dealership’s overall worth harder.
Evolution In Automotive Dealership Turnover & Profitability
The auto enterprise is in overdrive! Buckle up, because the way we buy and sell cars is undergoing a major transformation. The Presidio report states that the average dealership’s net pretax profit surged by 111.8% from 2020 to 2021. However, 2023 has seen a faster decline after a 5.1% drop from 2021 to 2022.
A dealership’s brand and location have important roles in its success. From showrooms to smartphones, the game has changed. Get prepared to explore how technology impacts dealership turnover, profitability, and the future of the car-buying journey. Check out the graph underneath we have the statistics on dealership turnover & profitability.
Best Ways to Improve Car Dealership Profitability
There are a number of ways to improve the profitability of your car dealership. Here are some of the best ways that you should follow to increase dealership service profitability as a car dealer:
1. Boost Your Online Presence
You can improve dealership profitability by ensuring your digital media presence is updated and reflects the correct payment information and up-to-date inventory based on your dealership’s current and incoming inventory. Bolstering your online presence enables a seamless digital retail experience by providing customers with everything they require to purchase.
2. Streamline Your Dealership’s Sales Process
You can streamline your dealership’s sales process by using a contextual pricing strategy that consumers can use to evaluate market prices. It lets car dealerships provide context to the customer around how a price was finalized, building trust and confidence.
To streamline your dealership’s sales process, remember that letting go of the F&I process will not leave a customer satisfied. Negotiation and applying for credit are two aspects of buying a car that makes consumers anxious. According to an online retail F&I study, 72% of shoppers are interested in learning more about F&I products and services as they have real value to consumers. Hence the sales process must be streamlined, keeping this in mind.
3. Optimize the Online-to-in-Store Process for Customers
Today, buying a car begins way before the customer reaches a car dealership. Customers approach a dealership after checking their online reviews and website and comparing other online particulars. Creating a virtual showroom on your website or investing in a proper vehicle display page is vital for search engine optimization, making it easy for a consumer to transition from online to in-store processes.
4. Improve The Used Car Trade-In And Purchase Process
How much do Used Car Dealerships make? Reuters reports that first-quarter 2022 sales of used vehicles rose by 47% for AutoNation, Inc., the top auto retailer in the U.S. However, the average gross profit on used vehicle sales fell by 10%. Car dealerships can make money with the used car business with the combination of statistics and experience. The used car market is booming and will continue to grow; hence leveraging car dealership profit solutions through the used car trade-in and purchase process is essential.
5. Invest In Reconditioning
Car reconditioning is what transformed banged-up trade-ins into vehicles that customers will purchase. To compete with the rising prices and customer expectations in the used car market, car dealerships need to invest in reconditioning practices.
6. Work On Used Car Refurbishment And Stock Management Process
Working on used car refurbishment and stock management processes will ensure you keep your automobile dealership profitability analysis from slipping out. Used car refurbishment will get you your desired profit range, given the recent boom in the used car industry.
As for stock management, ensure dealership data drive your inventory decisions. Moreover, you must also maximize the profitability of your existing pre-owned inventory and build the same through proactive vehicle acquisition.
7. Pay Attention To Aftermarket Services
Aftermarket services are highly profitable, with high margins. A study by Accenture found that GM earned more profits from aftermarket revenues in 2001 than it did from $150 billion in car sales. Loyalty with aftermarket services guarantees sales loyalty as well. Certain studies have shown that car dealerships are more likely to acquire long-term and permanent customers plus references by rendering aftermarket services.
8. Increase Efficiency In Your Processes
Bring cars to the market efficiently by spending less time preparing them. Utilize Automotive Software, good photos, and correct pricing, and incorporate prepaid maintenance plans to increase efficiency in your process and your average car dealership revenue. Bring together a good car dealership team and make use of digital resources, all of which will lead to automobile dealership profit.
9. Do Inventory Calculations Very Often
It would be best if you always had an idea of the cars that are in demand as well as profitable. Car dealer DMS can be used for regular inventory calculations to ensure you don’t waste your investments on things that don’t benefit you. Sometimes limited edition cars make a more beneficial impact than a series of multiple cars. Be regular with your inventory calculation to increase car dealership profit.
10. Take Care Of The Competition
Car dealerships face a lot of competition because, like in every industry, customers lean toward better deals even when buying a car. It matters less if you have established yourself for decades; a car dealership with better deals and after-sales services will acquire customers faster. Hence, a crucial aspect of how do car dealers make money; is to convince their existing and prospective customers to choose your dealership over their competition.
11. Market Survey For Potential Issues
A properly carried market survey of the automobile industry can render a variety of benefits for dealerships. These include the ability to align selling strategy to market potential and awareness of social, economic, political, and technological forces affecting your target market. Market surveys for potential issues will result in useful insight that will help transform your Car Dealership Marketing strategies, aligning with customer expectations.
How to Leverage Customer-Centricity to Grow Car Dealership Profit?
Customer centricity is the heart of your automobile dealership’s profit growth. It means approaching your business with a ‘customer-first perspective’ and focusing on customer-centric sales experiences to increase profit. There are numerous ways to do this like:
1. Target Interaction and Negotiation
Online is the way to go when it comes to negotiation. In a survey, 80% of car shoppers were extremely likely to use an online tool to replace negotiations with the dealer. Easy pricing CTAs can help customers start the negotiation process on their own terms from the comfort of their homes. Make your sales process short, easy, and fun. The point of customer-centric sales is to make car-buying a manageable process.
2. Offer Convenience
Customers think of test drives as a demo, and any good demo requires a focus on the product. Make test drives customer-centric by offering total convenience. This can be done by enabling customers to schedule a test drive from your website. You can also offer a test drive delivery system at their desired place.
3. Give Them Transparent Pricing.
When buying a car, customers want to avoid any inaccuracy or confusion in pricing. Render transparent pricing breakdowns on your website, giving customers an idea of the price before they visit your dealership. Such transparency makes the sales process more customer-centric and customer-convenient, increasing car dealership average revenues.
Analyzing Trends in the Automotive Industry in 2024
A rise in digital sales, SUV dominance, increased acceptance of used and refurbished vehicles, and alternate mobility and the prices of many make & models of cars may remain the same or start to decrease are some trends expected to dominate the auto industry in 2024. Before 2024, there was a notable increase in vehicle costs, huge drops in supply and unprecedented changes in interest rates but this should change in 2024. The auto market is believed to return to a stable form after years of turbulence.
Now that we’ve come this far in understanding the concept of vehicle dealership profit and how to increase dealer profit on new cars. Let’s look at the auto-industry trends in 2024.
1. Rise of Online Sales and Agency Model of Dealerships
Today, customers look for convenience and transparency when purchasing a car. The OEMs (original equipment manufacturers) are looking at digital platforms as the primary channel. The online Car Dealers industry’s market size, measured by revenue, is $47.3bn in 2024. The study indicates ease of use, convenience, and speed as the main reasons for going through a digital process. Moreover, most dealerships have moved from a traditional dealer-led sales model to agency models. While others are evaluating a hybrid dealership model.
2. Shared Mobility Market
The shared mobility market is expected to grow at a CAGR of 25-30% in the coming three to four years. Opting for sharing/subscription can lead to significant savings, and car dealership unicorn companies are increasingly adopting EVs in their plan. Moreover, ride-hailing, last-mile delivery, and two-wheeler ride-hailing platforms are also emerging as new business models.
3. Increased Acceptance of Used Cars
The trend of used cars has been on the rise, and the used cars to new cars ratio are 1.4:1 currently and are likely to touch 2:1 in a few years. Used cars have gained more acceptance due to factors like the requirement for personal mobility post-pandemic, better affordability, and trust created by car dealerships and OEMs.
4. Enhanced Focus on Customer Experience and Quality
Customers expect to gain a hassle-free car buying journey, including purchase and after-sales. Hence, there is an increased focus on improving customer experience to retain customers. Customer expectations for quality are driven by tier IV customers, increased use of digital platforms for buying cars, and car dealerships going the extra mile for customer convenience.
5. SUV Dominance, Government Schemes, and Safety
Owing to increased customer spending and the introduction and acceptance of higher ground clearance of sub-4m SUVs, the auto market is dominated by SUVs (more than 46% of total PV sales). Major OEMs and dealerships are offering multiple products in this segment, and safety is one of the major trends that will continue to dominate the auto industry through 2024.
Examining Dealership Profit Forecasts of 2024
J.D. Power’s recent report on the latest dealership profit forecasts states the following: In 2024, dealership profits are expected to reach around $26 billion. 2024 profits are down by over 50% in comparison to 2022, however, they are still almost 50% higher than pre-pandemic levels. The drop from the $55 billion in annual profits seen in 2022 is mostly due to increased dealer competition, manufacturing overcapacity, uncertainties surrounding electric vehicle (EV) adoption, and changing consumer demand.
During the height of the pandemic, when new vehicle inventories were at record lows, dealer margins soared to about 7%. After the pandemic, the inventories have started to climb and are currently estimated at about 1.7 million vehicles. This rise in inventory has also led to the rise of dealer advertising spend which also rose from over 2% to 5.2% of the sticker price of the vehicle. This increase is unfortunately complemented by a decrease in margins which have dropped to 3.2% and continue to trend downward.
The Presidio Group’s latest Quarterly Outlook adds more context by showing a 20.4% drop in profits for franchised dealers in 2023 as compared to the previous year. But despite this decline, the average dealership’s net pretax profit in 2023 was still more than 2.5 times higher than in pre-COVID 2018.
So, what does this mean for dealerships moving forward? As the industry adapts to these changes, it’s going to be a challenging path ahead as these trends are bound to impact how dealerships operate in the coming years.
Top 18 Strategies to Boost Dealer Profitability
Boosting the profit making capacity of your dealership does not have to be difficult. If you keep certain strategies in mind, you can easily boost your dealership profitability. These are the top 20 strategies that will help you in boosting the profitability of your dealership:
1) Expand Product Offerings:
Diversify your inventory with the help of a dealer management system to cater to a much wider variety of client needs and budgets and increase the chances of making a sale.
2) Build a Strong Online Reputation:
Focus on online presence control to create an advantageous and straightforward image in your dealership. You can build your online presence by having a Google Business Profile. You can also ask your customers to post reviews of your services.
3) Drive Sales Boom:
Employ powerful income techniques and strategies to boost the quantity of cars bought. You can give your customers a highly personalized experience to make them feel special. Another strategy you can employ is special promotions and deals on financing to woo consumers.
4) Enhance Worker Abilities:
Ensure that each employee receives comprehensive training materials such as a detailed check stub. This practice would help to facilitate their understanding of compensation breakdowns and financial transparency.
5) Increase Client Retention:
Improve consumer engagement by providing a positive buying experience that fosters loyalty. Offer your customers an experience that is unforgettable and makes them feel special. This experience would make a positive impression on them and they will keep coming back.
6) Streamline Operations:
Enhance performance throughout all dealership operations to lessen prices and improve auto dealer profitability. Ensure that all the departments in your dealership such as sales, services, financing and parts are working together efficiently.
7) Utilize Influencer Advertising:
Partner with social media influencers to attain a much wider target audience. Boosting your presence on social media is a great strategy to boost your profitability as it impacts the popularity of your dealership directly.
8) Fine-song Your Advertising and Marketing Efforts:
Optimize your advertising and marketing campaigns to target the right target audience. Get the most return on your funding. You should target your marketing campaign towards people that are actively looking for a car to increase the chances of a sale.
9) Provide Attractive Client Incentives:
Offer particular customer rewards and promotions to entice shoppers and stand out from the competition. Customer rewards and promotions not only boost your chances of scoring a sale but they also enhance brand loyalty by leaving a positive impression on the buyer.
10) Engage With Customers On Social Media:
Leverage social media platforms to connect with existing clients, and build emblem focus. And also sell your dealership. Connecting with customers on social media can also lead to higher quality leads.
11) Use AI:
Use an AI photo editor to enhance the quality of your visuals by making them appealing and engaging. AI can help you refine your images as well as videos easily and this would help increase visitor retention.
12) Utilize Website Providers:
The website is one of the most crucial parts where your client’s engagement rate can be boosted. Additionally it also provides an immersive & interactive experience to the visitor.
13) Provide exceptional customer experience:
Transform brand loyalty into dealership loyalty by having a customer-centric culture. Provide customers with transparent pricing and efficient after-sales support and make customer interactions personalized to mold a deep impression in the minds of customers.
14) Scrutinize your sales processes:
Review data procured by the sales team to identify any patterns or objections that the sales team faces and try to overcome them together. Analyze customer data to identify any upselling or cross-selling opportunities.
15) Improve Product Knowledge:
The more knowledge your sales team has, the better they would be at answering complex queries and positioning value. If the seller possesses deep knowledge about the product, they can make the customer feel more at ease and lead to strong buyer intent.
16) Improve Service Department Efficiency:
The Service Department is an important revenue generator for the dealership but only if it is efficient. Keep a check on the costs of housing cars under repair, the time it takes to complete repairs and the cost of parts.
17) Refine Recruitment Techniques:
Make sure that you prioritize top-talent recruitment as the talent on your team is directly responsible for increasing auto dealer profitability. By providing a strong culture, fair wages and ample opportunities for growth, you can transform your team into a group of high achievers and subsequently drive up revenue.
18) Utilize Inventory Management Software:
You can leverage Inventory Management software to gain insight about inventory turnover and carrying costs and monitor them over time. IMS might be a substantial capital investment but it returns your investment in dividends by allowing you to monitor metrics that help you improve your margins and control risk.
Conclusion
Increasing the profitability of a car dealership might seem like an arduous process, but with these tips you should be able to devise new strategies that boost the profitability of your dealership. The tips provided will streamline the process of making your dealership profitable but it won’t happen overnight. It takes time to make a dealership profitable. But staying consistent and following the right steps will ensure that you get there.
