How Do Car Dealerships Make Money? A Comprehensive Insight with MotorVero

Car dealerships are dynamic businesses, thriving on multiple revenue streams beyond just new car sales. While it might appear straightforward to many car buyers, there is a complex business model at play that ensures profitability. In this in-depth exploration, we'll break down exactly how car dealerships make money and how MotorVero helps dealerships maximize their profits across various income sources.

New Car Sales: A Major Profit Driver

New car sales remain a key revenue stream for dealerships. Despite common misconceptions, the profit from new car sales isn't as substantial as people think. Most dealerships operate as franchises, purchasing vehicles from manufacturers and selling them at prices influenced by the Manufacturer's Suggested Retail Price (MSRP). This price often becomes a starting point for negotiation rather than the final selling price. Dealerships generate profits through several incentives and markups:

• Manufacturer-to-dealer incentives: Automakers may provide dealerships with special incentives, also known as "spiffs," to promote the sale of slow-moving inventory. These incentives are not always passed on to the buyer and may vary regionally based on market demand.
• Dealer holdback: Manufacturers pay dealerships a percentage of the car's MSRP as a holdback fee. This fee helps dealerships stay profitable despite fluctuating market prices and narrow margins.
• Adjusted dealer markup: In some cases, dealerships will add a markup to high-demand models, especially during inventory shortages or for specialty models, further contributing to their profits.

Used Car Sales: A Lucrative Opportunity

In addition to new cars, used car sales are a significant part of a dealership's income, accounting for about 34% of gross profit in 2023. Dealers source used cars primarily from trade-ins, auctions, or direct purchases from owners. The reconditioning process, which includes detailing and repairs, adds value to the vehicle, making it more marketable and increasing its selling price.

Certified Pre-Owned (CPO) vehicles also provide dealerships with an opportunity to generate higher profit margins. Brands like Honda, Toyota, BMW, and Ford offer CPO programs, which assure buyers of the quality of a used car with manufacturer-backed warranties. MotorVero supports dealerships by making the process of acquiring and marketing used cars more efficient, ultimately boosting dealership profitability.

Parts and Service: Strengthening the Bottom Line

While new and used car sales are crucial for dealerships, the parts and service department represents an often-overlooked revenue generator. According to the National Automobile Dealers Association (NADA), service departments contributed around 12.4% of total dealership revenue in 2023, equating to $142 billion. These service centers offer maintenance and repairs for new and used vehicles, covering:

• Warranty work: The car manufacturer reimburses dealerships for repair work covered under a manufacturer's warranty. For aftermarket warranties, the service is provided through the warranty company, adding another stream of income.
• Non-warranty repairs: Customers often return to the dealership for regular servicing and maintenance. Parts departments also generate additional revenue by selling car parts to local mechanics or directly to car owners.

MotorVero provides dealerships with tools that streamline the parts and service process, ensuring faster customer service, increased productivity, and ultimately higher customer satisfaction. These efficiencies help dealerships grow their bottom line while building stronger relationships with customers.

Finance and Insurance (F&I): Enhancing Profitability

Finance and Insurance (F&I) products are critical contributors to a dealership's profit margins. The finance manager's role goes beyond managing paperwork; it involves maximizing additional sales opportunities by upselling customers on finance-related products such as extended warranties, gap insurance, and protection plans.

Dealerships earn money through financing by partnering with lenders who provide car loans to buyers. They earn a commission from the lender for arranging the financing. Even when a customer brings in an outside loan offer, dealerships can often offer better interest rates due to these partnerships, incentivizing the customer to finance through them.

MotorVero helps dealerships simplify the financing process, offering tools that allow for seamless integration with multiple lending institutions. This approach not only saves time but also increases the likelihood of securing competitive financing offers, resulting in more closed deals and additional revenue for the dealership.

Vehicle Add-Ons and Accessories: Boosting Sales

Many dealerships also increase their revenue by selling vehicle add-ons and accessories. These can include everything from all-weather floor mats to high-end sound systems, aftermarket wheels, and protection packages like paint protection or interior treatments. Customers often choose these add-ons for convenience, adding them to their financing package rather than purchasing them separately.

By positioning these add-ons during the sales process, dealerships can significantly boost their profits. MotorVero supports dealerships in identifying which add-ons are most popular and implementing targeted sales strategies to boost accessory sales effectively.

How MotorVero Helps Dealerships Maximize Profits

MotorVero offers an all-in-one platform that empowers dealerships to maximize profits across various channels. From optimizing inventory management and financing to enhancing the customer experience in parts and services, MotorVero integrates key solutions tailored for dealerships:

• Inventory Optimization: With insights into both new and used car sales trends, MotorVero helps dealerships understand which vehicles to stock and how to price them competitively while still maximizing profits.
• Finance and Insurance Integration: The platform seamlessly integrates with multiple lenders, allowing dealerships to offer the best possible financing options and boost their F&I product sales.
• Service Efficiency Tools: MotorVero's service department tools streamline workflow, ensuring quick turnaround times and higher customer satisfaction, leading to increased repeat business and loyalty.

Key Factors Impacting Dealership Profitability

While car sales are at the core of a dealership's business, multiple factors can impact profitability. These include:

• Market conditions: Economic factors and consumer confidence can significantly affect vehicle sales. High interest rates or financial uncertainty can lead to lower demand, forcing dealerships to adjust prices and profit expectations.
• Manufacturer relationships: The terms set by manufacturers, including incentive programs, volume bonuses, and the cost of acquiring inventory, can directly influence profitability. MotorVero helps dealerships navigate these relationships by offering analytics that optimize sales strategies in alignment with manufacturer programs.
• Seasonality: Demand for certain types of vehicles can vary throughout the year. For example, SUVs may be more popular in winter months, while convertibles may peak in spring and summer. Understanding these trends allows dealerships to optimize their inventory and marketing efforts, which is something MotorVero's advanced analytics tools can facilitate.

The Importance of Customer Retention for Dealership Profits

Retaining customers is key to a dealership's long-term profitability. The parts and service department plays a significant role in bringing customers back after the initial purchase. Offering exceptional service, follow-up reminders, and loyalty incentives are all ways to keep customers coming back for maintenance and repairs.

MotorVero assists dealerships by providing customer relationship management (CRM) tools that help them stay engaged with their customers, sending timely reminders about servicing, offering exclusive discounts, and tracking customer preferences to provide a personalized experience.

Conclusion: Building a Profitable Dealership with MotorVero

Car dealerships make money through a complex combination of new and used car sales, parts and service departments, financing, insurance products, and vehicle add-ons. Each department plays a vital role in contributing to the overall profitability of the business. By using a platform like MotorVero, dealerships can streamline operations, enhance customer experiences, and optimize every aspect of the car-buying process.

MotorVero is committed to helping dealerships not only understand these revenue streams but also maximize their potential, ensuring that every department—from sales to service—operates efficiently and profitably. By leveraging the right tools, dealerships can navigate market challenges, capitalize on opportunities, and continue to grow their bottom line.