How automobile dealerships make money.

This will be quite a wall of text, but will be well worth reading to anyone who is still mystified by any part of the process of buying a car from a franchise dealership.

I sold cars at two franchise dealerships for a total of four years. Both sold the same popular, full-line, brand of Japanese car. The first one was in a county of 40,000 people and sold 80-120 cars a month with 80% being used. I worked there for six months. The second was in a city of 150,000 people with an attached military base of another 50,000. It also sold 80-120 cars per month but 80% of those were new. I always paid close attention to what went on at work. I befriended managers and asked a lot of questions. I wanted to work in management myself but that did not happen. This list is very inclusive but may not be exhaustive. This list is not meant to be advice in the process of purchasing a vehicle. If you are purchasing a vehicle do not sign anything that you have not completely read and/or do not completely understand.

1. Lot fee -- this is a fee the owner charges to the sales department when the owners buy a car. It is nearly universal in the business for used cars and is becoming increasingly popular for new cars. The owners of the lot buy a car, they add the lot fee and basically resell the car to the sales department. The sales department is then free to use the car to create opportunity for their own profit. If the sales department losses money on the car due to a losing sale or the car aging on the lot and getting sent to the auction the owners have already made about $500. on the fact that they had the car and the loss is deducted from the gross profit the sales managers are paid on.

2. Charging Interest to the Sales Department. Most car dealerships borrow the money to buy the cars on the lot. When the car comes off the truck at the dealership the manufacturer has already been paid for the car. If a lot has a $5 million inventory they are required to have 20% on deposit at the financial institution that lends them the money to buy the cars. If they have to spend that money their cars can be seized and sold. The financial institutions charge interest on the money lent and the dealership charges that money to the sales department, so again that money is deducted from gross profit on which the management team is paid.

The second dealership I worked at had been successfully selling cars since 1945 and bought all their cars outright from the two manufacturers who supplied their three dealerships. They still charged interest to the sales department and just pocketed the money.

On a new vehicle invoice there is an amount of money the manufacturer pays the dealership when the car is sold called holdback. Holdback is used to reimburse the dealership for interest paid while the vehicle was in inventory. It is calculated using current interest rates and the average number of days a vehicle of that model will sit on the lot. That doesn't stop the dealership from charging interest to the sales department even though they get reimbursed for it.

3. Second Sticker Charges. There are two types of second sticker or lot sticker charges. Those that represent something real and of obvious value such as a brush guard on the front of a pick-up truck. It can be seen and touched. It can be removed and sold on eBay. The second type represent things that are more ethereal, less quantifiable, and perhaps are totally nonexistent. I'll talk about the first type first.

If you have a second sticker charge for an accessory that you can actually touch ask yourself the following: What is it I'm getting and what is it really worth? At the first dealership I worked at the Sales Department bought the accessory, we'll say a brushguard for a midsized pickup truck, from the Parts Department. So Parts got their markup, 85-100%. Then Sales would pay Service one hour of labor at the same "gate rate" they charged to the general public. $90-105 an hour while I worked. I left the car business in Feb. 201X. Then the Sales Department would add it's own very high markup onto the part. In the end they were trying to get $1,200 for an accessory that the average pickup truck buying man could have bought himself for $435 and installed himself on a Saturday afternoon while still having time to drink a beer and fall asleep to golf on the TV.

Then we had pin stripping. We charged $99 for that and paid $8 per car.

Both dealerships had what one, possibly both, called "Glamour Shield," which used 'spaced-aged' polymers to seal the paint. It was basically a high-speed wax and buffed out very nice. They also like scotch guarded the interior. The first dealership second sticker priced it at $895 and the second at $495. At the lower figure I actually had some people pay five hundred bones for a wash and wax. The Sales Department at the first dealership employed the guys who detailed the cars so their pay was deducted from the Sales Managers gross. The guys at the second place worked for the Service Department. They made minimum wage + $2.00 a car, so Service paid 9.25 plus maybe a couple of dollars worth of expendables while charging Sales that same 90-105 dollar gate rate.

As far as things that are totally phony appearing on second stickers I believe the days of the fake undercoating are gone. (Not that undercoating was a bad thing when it did not come standard on cars. It's just that a lot of dealerships couldn't resist the temptation to charge for it while doing nothing, back in the day.

* Note: If you live in the Southeast the distributer of the nation's number one selling brand of Japanese cars has an exclusive right to perform and profit from many popular interior upgrades such as leather interiors and, I believe, premium audio. Therefore when shopping this brand of car you may see the distributers second sticker and a third sticker from the lot. The good news is that these upgrades are factory available in other parts of the country. If you buy in the Southeast the quality and trade-in value of the upgrades is similar to factory options.

** Note 2: I have no experience with the following however it is my understanding that if you see a second sticker charge for something like a regional advertising fee, it is a legitimate charge the dealership pays and will expect to pass on to you.

4. Modifying the vehicle at the time of purchase. Many customers who want a top of the line full sized sedan but can only afford little better than a base model mid-sized sedan are delighted to find that they can get a Nav/DVD/CD/MP3/PlayStation/back-up camera unit for only $2,000. We used the same audio/rim shop that we used for all our window tint, leather upgrades, and Nav/Stereo systems, and rim and tire upgrades, and paid about $1,200. for the unit. We paid another $100. for installation, which was a good deal since we did a large volume of business. There was an extra quick $700 in profit on the deal for basically dropping the car off across town and picking it up again when it was done. We did similar numbers in leather interior upgrades. Remember anything a dealership arranges to have done for you you are most likely not only paying to have it done but you are paying them to arrange to have it done. Moonroofs were marked up about $350-400.

Boxing your trade. When you have your vehicle appraised at a new car dealership the Used Car Manager will put an 'actual cash value' on the vehicle which represents the actual number of dollars of the owners money that he is willing to spend to get the vehicle. The customer will rarely see this number. Depending on who the customer is most will initially be offered a figure lower than this. This cash value will, in almost all cases, be the North American Dealer Association 'rough trade-in' value of the car. You can get it off the internet, start here:
http://www.nadaguides.com/Cars
Don't use the mobil app ( .mobi ) as you can't get the rough book number that you need to know to know the real value of your trade-in.
If the sales consultant can show you a trade-in allowance that is $1,000. less than the Used Car Managers ACV that is an additional one thousand dollars of profit added to the deal. (Let me explain how this works a little better. If the Used Car Manager puts an actual cash value of $10,000. on your trade-in and the salesman offers you $9,000. for your trade, the Used Car Manager still pays $10,000 for the car. $9,000 to you in the form of your trade allowance and $1,000. to the Sales Department, credited to the deal that brought the used car on the lot.)

5. Document/Administrative Fee. This is no more and no less than additional price of the car. No matter what anyone tells you it's just more money you pay for the car. That was why in my state the highway use tax was computed on sales price + fee.

6. Dealer Cash/Retro Cash. Dealer cash is like a rebate for the dealership. It is usually specific to one or a few models in a given month. The manufacturer tell the dealer that for each copy of sedan X they sell that month they will give them, let's say $2,000.

Retro cash is like dealer cash but to qualify for any money the dealership must sell a certain minimum number of units and then will be paid, say that same $2,000. retroactively to the first unit. So if they sell 29 they will get nothing, if they sell 30 they will get $60,000. assuming their number to sell is 30.

Dealer Cash and Retro Cash monthly rates are published on Edmunds.com.

7. Holdback money. The above mentioned holdback money paid by the manufacturer.

8. Compensation for arranging financing. The Business Managers or Finance & Insurance Managers as the case may be receive direct compensation from the companies they arrange financing from, including the manufacturers lending arm. These managers make more from lenders than they do from the dealership. What the exact breakdown was I never was able to find out.

In all fairness, the nice lady at the bank or credit union, that you think of as your friend, gets paid a commission if she arranges your car loan through her office.

9. Selling warrantees. The manufacturers warrantees that we sold full price for $2,500. cost us about $830. Sometimes on customers with less than perfect credit the bank will cut all the profit out of the car part of the deal in favor of the Business Manager selling them a warrantee at a huge profit. As a salesman I hated it because it took my pay and put it in a manager's pocket but the bank's logic was that they were more likely to keep paying for their car if it was still running.

10. Selling Insurance. The Business managers sold credit life and credit disability insurance. The bottom line is that any insurance you can buy anywhere will be a better deal than this insurance, so if you can afford it just consider investing in more life insurance and some disability insurance from someone who sells insurance for a living not cars.

11. Selling service plans. Service plans basically lock in tomorrows oil changes and routine maintenance visits at today's dealership service rates. It's not a bad deal if you value dealership service.

12. Selling parts off your new car. For the sake of full disclosure I must state that I never saw this actually happening. However let me lay it out this way: One of the most popular upgrades that we arranged for our customers was larger rims and tires. The price of these items never accounted for any discount or allowance for the tires and rims that came with the car. Even on an ordinary sedan those were often 16" aluminum rims with brand new tires. Both sets of items had some value. In many cases they were 18" or 19" rims and tires from performance oriented sedans or two door high horsepower sports cars, and these very definitely had value. In no case did the customer ever ask for or receive back their stock rims and tires when they got an upgrade. If nothing else you could just throw them back on at trade-in time to avoid investing in a new set of tires or taking the hit on trading it in with bald skins. It is possible that the dealership simple returned these items to the manufacturer. Now, let me reiterate, I never actually saw this happen, but two things are certain. One is that the possibility exists, and two is that something happened to all those rims and tires that came off of all those cars.

13. Selling parts. As I mentioned above about an 85-100% mark-up.

14. Performing warranty work, service campaigns, and recalls. The manufacturer pays the dealership to perform all warranty work, service campaigns, and recalls. Service campaigns are work the manufacturer will pay the dealership to do at no charge to the customer to fix an acknowledged fault. They are not safety related and cannot be government mandated. When researching a new or used car ask if it has any outstanding and past recall and service campaign work. Sometimes certain cars on the lot will be on a sell hold order from the manufacturer, meaning they can not be sold until certain work is done, for which work they currently cannot supply you the parts.

15. Performing customer paid service. This is service that the dealership performs and charges the customer for. As I stated above it was $105 an hour when I left. That is in a relatively low cost area of the nation. They pay the mechanic about 1/3 of it and they pay the service writer a commission on all the billable service hours they write up, (sell). I was never able to find out what the commission rate was but I know that the service writers felt the successful sales consultants made a lot of money, so that indicates to me that they didn't do so well. Not to sit at that desk all day and explain to people they have to pay $105 an hour, for nine hours worth of work plus import car parts prices, no thanks.

16. Holding points on financing. If you buy a car at a new car dealership never only allow the dealership to arrange financing without looking at other rates from your bank or credit union. I have seen where one lender approved a customer at 8% APR on their loan, another approved them for about 10.5 but offered to pay the dealership X amount of dollars for every half a percentage above that, up to 14% APR. She had one ding on her credit and it was enough to make her insecure enough to leave with a 14% rate when she qualified for one just a little more than half that.

As a note of interest I will say there is a lot of misconception about how much money automobile dealerships actually make on cars that they sell. Once I was utilized to take my General Sales Manager's chicken scratchings and turn them into the Semi-annual report for the General Manager. He reported the "front end gross profit" for each car. Our dealership was unusual in that they included not only basic profit on the car but also the document fee and any retro cash, (my manufacturer didn't have dealer cash). It didn't count the lot fee. That half year we reported an average of $1,200. per new unit and $1,500. per used unit.

With all the information that is available on the internet it is relatively easy to go to a dealership and pay little to no profit on a great new vehicle with financial and optional products that you will use and enjoy having.

On the other hand it is all too easy to go into one and drop $1,500. profit on the car alone, another $1,500. profit on modifications, another $1,500 profit on a warrantee and another $1500. in paying too high of an interest rate over the next five or six years. Suddenly it's a good day at the car dealership for everybody but you. Remember a new car dealership will make every penny off every customer that they possibly can, every time. But they are a store and have a right to make a profit. If you bought something for $40,000 to sell for a profit what would you expect to make off of it? The markup for the vehicles of the major Japanese brand of vehicles that I sold was in the six to 10% range. Jewelry stores mark their inventory up 100% and no one bats an eye.

In further behalf of the new car dealerships I will say that the dozen or so in my city support over 1% of it's population and are the primary givers for many important local charities.

If you feel you know a way new car dealerships make money that I have overlooked please feel free to post it. Note that I'm not talking about illegal shenanigans that they know they shouldn't be doing.

Lastly, let me say, that there is a truism in the car business that I saw proven month over month, for 49 straight months. That is, the happier someone is with their new vehicle and their deal the more profit they paid. The people who left the lot fussin' and fumigatin', convinced we had nailed them in the tail, were rolling out on, what were for us, $2,000. loser deals. So if you are happy with your car deal chances are your salesman is happy with your car deal too.

Thank you for considering my observations.

Ive lived upon the edge of chance for 20 years or more...
Del Rios Song