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Increasing Dealership Profitability – The Best Tips & Strategies

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Dealership Profitability

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5 Min Read

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 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? 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.

 

How do car dealerships make money

 

In addition to car dealerships Car dealerships make money through numerous ways, including 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

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.

 

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. 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.

 

Changes in Automotive Dealership Turnover & Profitability

 

Best Ways to Improve Car Dealership Profitability

Here are some of the best ways how to increase dealership service profitability:

1. Bolster 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.

 

Ways to Improve Car Dealership Profitability

 

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.

9. 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.

10. 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.

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.

 

leverage customer-centricity to grow car dealership profit

 

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, which can be done by making it possible for 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.

 

Understanding Auto Industry Trends 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.

 

Understanding Auto Industry Trends

 

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.

 

Top 12 Strategies to Boost Dealer Profitability

Strategizing is a crucial part of the automotive dealership business. To upgrade or increase your sales you must follow the strategies. Here we have the top 12 strategies that will help you boost your auto dealer profits.

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.

2) Build a strong online reputation: Focus on online presence control to create an advantageous and straightforward image in your dealership.

3) Drive sales boom: Employ powerful income techniques and strategies to boost the quantity of cars bought.

4) Provide attractive client incentives: Offer particular customer rewards and promotions to entice shoppers and stand out from the competition.

5) Increase client retention: Improve consumer engagement using offering an advantageous buying revel in and fostering loyalty.

6) Streamline operations: Enhance performance throughout all dealership operations to lessen prices and improve auto dealer profitability.

7) Utilize influencer advertising: Partner with social media influencers to attain a much wider target audience. Additionally, generate interest in your dealership.

8) Fine-song your advertising and marketing efforts: Optimize your advertising and marketing campaigns to target the right target audience and get the most return to your funding.

9) Enhance worker abilities: Invest in a team of workers training to improve their product understanding, income capabilities, and customer service skills.

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.

11) Use AI: Use an AI photo editor to enhance the quality of your visuals by making them appealing and engaging.

12) Utilize Website Providers: The website is one of the most crucial parts where your client’s engagement rate can be boosted. Additionally provides an immersive & interactive experience.

 

Conclusion

It is imperative to understand that increasing the profitability of a car dealership is a long and consistent process. However, taking the right steps can make all the difference. Connect with a professional at Spyne to learn about various ways in which your dealership can benefit from AI.

 

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FAQs

  • Q. Are used car dealerships still profitable?

    Used car dealer profit margin has increased, making used car dealerships a profitable automobile-related business worldwide. In the United States, less than 30% of car purchases are for new vehicles, while more than 70% of customers prefer to invest in used cars. A dealership can avail of a great markup on used cars. How much do car dealers make per new car?$1959. And how much do car dealers make per used car? $2337. 

    Customer interest leads to dealership profitability primarily because of the low purchase cost of used cars compared to new vehicles.

  • Q. What part of car dealerships makes profits?

    A car dealership’s parts and service department and F&I department are the most profitable. The parts and service department is the primary revenue generator of most dealerships. Leveraging these profits is the key how to run a dealership!

  • Q. What is the average margin of a car dealership?

    According to Mercer Capital, a car dealership’s gross profit margin can lie between 11% and 13.5%.

    However, this is not the precise answer to how much profit car dealerships make. This figure is an average of the gross profit inclusive of finance and insurance. The average margin of a car dealership comprises two types of profit on a car; front, which includes the selling price, and backend, which provides for products sold after the car’s price is determined.

  • Q. What is the average dealer profit on a new car?

    The average dealer profit on a new car is around 4-5% of the selling cost.

  • Q. What is the average dealer profit on a used car?

    According to the National Automobile Dealers Association (NADA) reports the average profit for a used car is $2,337.

  • Q. How much does a car dealership owner make a month?

    A car dealership owner makes approximately $9,407 a month.

  • Q. How much does a new car dealer make on a deal?

    A new car dealer can make approximately $1,170 for a car worth $30000.

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Team Spyne

Young, enthusiastic, and curious are the three words that describe Spyne’s content team perfectly. We take pride in our work - doing extensive research, engaging with industry experts, burning the midnight oil, etc. Every word we write is aimed at solving our readers’ problems.

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