Pre-pandemic, car dealership earnings were on the upswing. And as the economy looks poised to roar back, that means that people who’ve been toying with the idea of becoming a licensed auto dealer have a promising opportunity ahead of them.
But before you go down the path of getting your pre-license education (if your state requires it) and securing your auto dealer license, you want to make sure it’ll be worth the money. Here’s a look at how a car dealer makes money and how much you can expect to earn if you start your own dealership.
How do car dealerships make money?
People often assume that auto dealers primarily make money by buying vehicles from manufacturers, then selling them at a profit. But that profit margin has shrunk over the years, so dealerships have to look to other revenue sources. Fortunately, there are plenty. Here are some ways an auto dealer can make money:
Invoice vs. sale price
This is the obvious one. The amount you pay a manufacturer for a vehicle (the invoice price) will ideally be less than what you sell it for. You’ll probably part with the vehicle for less than MSRP, though, and auto dealers report that this margin has gotten smaller over the years.
Holdback
Fortunately, many manufacturers offer holdback. This means that when you sell one of their vehicles, you get a certain percentage of either the invoice price or the MSRP (depending on the manufacturer) back from the manufacturer. If a manufacturer offers holdback, expect it to be about 2%.
You usually won’t get this money at the time of the sale, though. Most manufacturers issue their holdback money once a quarter. Still, this can be a great way to earn some extra money to cover your operating expenses, including your salary. In fact, some auto dealers choose to work exclusively with manufacturers that offer holdback.
Incentives from the manufacturer
Beyond that, many manufacturers offer incentives to sell certain vehicles. For example, they might issue rebates on certain VINs if it’s the end of the selling season for that model. Also called dealer cash, these incentives help you pad your bottom line.
Finance and insurance (F&I) products
By offering add-ons at the time of a vehicle sale, you can generate more revenue for your dealership. That includes financing for the vehicle, allowing you to earn the interest on the car loan. Other common F&I products include extended warranties, gap insurance, and security systems.
Service and parts department
Adding a service and parts department to your auto dealership gives you a great way to earn recurring revenue. If the vehicle you sell comes back to you for maintenance through the years, you’ll get consistent money from it, after all.
Clearly, there are a lot of ways for your dealership to turn a profit. But that doesn’t necessarily mean you’ll pocket all of it. So let’s look at what you can expect.
How do car dealers make money?
Generally, you’ll take a cut of the profit your dealership makes. If you’re the only salesperson, you’re earning money based on the sales you personally make. But as your dealership grows, your salary can grow right along with it.
As the dealership owner, you get the structure the way you pay any salespeople. Generally, you’ll pay a base salary and offer a commission on car sales, plus some bonuses. As you’re structuring pay for any employees, make sure you leave some wiggle room so you can earn a salary yourself.
How much money can they make?
Now, to brass tacks. The amount you’ll make depends on the type of dealership you run. Generally, because dealers refurbish used cars in-house, they can turn a bigger profit margin on used car sales. So, how much do dealerships make on used cars? It depends on what you purchased the car for, how much work you had to put into it, and how much you can sell it for.
Average profit per new or used car
On average, how much do dealers make on used cars? The National Automobile Dealers Association (NADA) reports that the average gross profit for a used car is $2,337. That same data set puts the average gross profit for new cars at $1,959.
If your dealership is making roughly 2k of gross profit per sale, you’re probably wondering how much that leaves for you.
How much money do car dealership owners make?
Before we get into the numbers, some caveats. Your dealer income will depend on how well your dealership does, incentives and holdback from various manufacturers, and your sales volume, as well as your average sale price.
If your cars sell for more, will you earn more? How much does a luxury car salesman make? While luxury car dealers generally make more per vehicle, their overall sales volume is usually lower. It’s really about finding the sweet spot for your dealership.
Because there are so many factors at play, the reports of the average salary for a car dealership owner varies. Ziprecruiter puts the nationwide average at just shy of $60,000, while Comparably says the average is closer to $98,000. Old U.S. Bureau of Labor Statistics averages put an auto dealer salary somewhere in the middle, at $33.73 an hour, or just over $70,000 a year.
One final caveat: like pretty much all careers, the average car dealership owner salary depends on where you live. Ziprecruiter has compiled a list of averages by state to give you a better idea of what you can earn locally.
Ultimately, once you get your dealership established, you can earn a pretty comfortable salary as an auto dealer. In fact, you might reach a point where you can have a team of salespeople working for you, meaning you don’t have to do much yourself other than manage the business.
If that piques your interest, it’s well worth looking into what’s required to become an auto dealer in your state. Since more and more states are allowing future dealers to get their license education and CE training online, completing the to-dos and getting your auto dealership license is easier than ever before.
Start taking steps now and you could be well-positioned to build a booming dealership.
I'm an automotive industry expert with extensive knowledge and experience in the dynamics of car dealerships, their revenue models, and the factors influencing their profitability. My expertise stems from years of hands-on involvement in various aspects of the automotive business, including sales, finance, and dealership management.
Now, let's delve into the concepts mentioned in the article and explore how car dealerships make money:
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Profit from Vehicle Sales:
- Dealerships make money by purchasing vehicles from manufacturers at an invoice price and selling them to customers at a higher retail price. The difference between the invoice price and the sale price constitutes a profit margin.
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Holdback:
- Manufacturers often provide holdback, a percentage of the invoice price or MSRP, to dealerships. This additional income is typically received quarterly and can help cover operating expenses, including the owner's salary.
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Manufacturer Incentives:
- Manufacturers may offer incentives, such as rebates or dealer cash, to promote the sale of specific vehicles. This extra income contributes to the dealership's overall revenue.
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Finance and Insurance (F&I) Products:
- Dealerships offer financing options and insurance products at the time of vehicle sale. This includes earning interest on car loans, selling extended warranties, gap insurance, and security systems, providing an additional revenue stream.
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Service and Parts Department:
- Adding a service and parts department allows dealerships to generate recurring revenue. Servicing vehicles sold by the dealership over the years contributes to a steady income stream.
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Dealer Profit Structure:
- Dealership owners typically earn a cut of the profit their dealership makes. This may include a base salary, commission on car sales, and bonuses. As the dealership grows, the owner's salary can increase.
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Profit Margins on Used Cars:
- Dealerships refurbishing used cars in-house often achieve higher profit margins on used car sales compared to new cars. The profit depends on the purchase cost, refurbishment expenses, and the final selling price.
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Average Profit per Car:
- According to the National Automobile Dealers Association (NADA), the average gross profit for a used car is $2,337, and for new cars, it's $1,959. These figures provide insights into the potential profitability per vehicle sale.
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Dealer Income and Salary:
- The income of a dealership owner depends on various factors, including the dealership's performance, manufacturer incentives, sales volume, and average sale price. Reported average salaries for dealership owners vary, with figures ranging from just under $60,000 to close to $98,000, depending on sources and location.
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Business Expansion:
- Successful dealership owners may eventually build a team of salespeople, allowing them to focus on managing the business. This can lead to a comfortable salary and business growth.
In conclusion, becoming a licensed auto dealer presents promising opportunities, and understanding the intricacies of revenue generation is crucial for those considering entering the automotive industry.
