Car dealers typically make a net profit margin of 1-2% on the sale of a new car. This means that for every $20,000 in sales, an average dealership might see a net profit of $200 to $400.
Understanding New Car Profit Margins
While the sticker price of a new car might suggest a large profit, the actual net profit margin for dealerships on new car sales is surprisingly thin. The 1-2% figure represents the net profit after all operational costs are considered, not just the difference between the manufacturer's suggested retail price (MSRP) and the invoice price. This small margin highlights why dealerships rely on multiple revenue streams beyond just the new car sale itself.
To put this into perspective, here's an approximate breakdown of potential net profit based on various car prices:
| New Car Sale Price | Estimated Net Profit (1-2%) |
|---|---|
| $20,000 | $200 - $400 |
| $30,000 | $300 - $600 |
| $40,000 | $400 - $800 |
| $50,000 | $500 - $1,000 |
These figures represent a net profit, meaning the money left over after the dealership has paid for the car, employee salaries, utilities, advertising, interest on inventory (floorplan), and other overhead expenses.
Beyond the Sale Price: Dealership Revenue Streams
Given the modest margins on new car sales, dealerships generate substantial revenue from other departments. Understanding these additional income streams provides a more complete picture of their overall profitability.
- Finance & Insurance (F&I): This is often the most profitable department. It includes revenue from:
- Financing: Arranging loans and receiving a commission from lenders.
- Extended Warranties: Selling service contracts beyond the manufacturer's warranty.
- Add-ons: Products like paint protection, gap insurance, tire and wheel protection, and anti-theft devices.
- Service and Parts: The service department is a consistent and high-margin revenue generator. This includes:
- Routine Maintenance: Oil changes, tire rotations, brake services.
- Repairs: Addressing mechanical issues.
- Parts Sales: Selling replacement parts to customers and independent repair shops.
- Used Car Sales: While new cars might draw customers in, used car sales often yield higher profit margins per vehicle than new cars, as their pricing is more flexible and less constrained by manufacturer guidelines.
Factors Influencing Profitability
Several factors can influence how much a specific dealership makes on a new car:
- Sales Volume: High-volume dealerships can afford to take lower margins per car because they make up for it in the sheer number of vehicles sold.
- Market Demand: In-demand models might command closer to MSRP, while less popular models may require deeper discounts to sell, eroding profits.
- Manufacturer Incentives: Dealers receive holdbacks (a percentage of the MSRP paid back by the manufacturer after the sale) and other incentives for meeting sales targets, which boost their actual profit.
- Overhead Costs: Rent, utilities, staffing levels, and advertising expenses all impact the net profit margin.
- Customer Negotiation: A buyer's negotiation skills can directly affect the sale price and, consequently, the dealership's profit on that specific vehicle.
Ultimately, while the profit on a single new car sale may appear small, it's the combination of multiple revenue streams and efficient operations that drives a dealership's overall financial success.
