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Why The Dealership Lost $400 on Your New Car

Picture this: you just spent $35,000 on a new car, and you’re convinced that despite hours of haggling, the dealership still walked away with enough profit for a trip to the Caribbean.

Truth is, your dealer is lucky just to break even. According to a 2017 NADA study, the average light vehicle dealer in the US lost $421 for every new car sold.

Here’s why.

Price competition is fierce

In the car dealer world, there are two important prices: the manufacturer's suggested retail price (MSRP) and the invoice price. Put simply, invoice is what a dealership pays for a car, while MSRP (minus some discounts) is what a buyer pays. 

A dealer's profit, then, is the difference between MSRP and invoice. That formula is pretty straightforward, until you consider that car dealers undercut their competition by offering the best discounts from MSRP.

The result is that dealerships have to edge closer and closer to the invoice price in order to win business. Dealer margins are in a constant race to the bottom, and the very fiercest competition forces some dealers to sell at or below invoice.

Size doesn't fix the problem

If you think eroding new-car margins only plague your "mom and pop" car dealerships, think again.

Penske Automotive Group, consistently one of the top 5 dealer conglomerates in the United States, collected just under 3% net profit off of over $21 billion in revenue last year. Even the furniture industry puts Penske to shame, enjoying markups of up to 900% between manufacturer and buyerDespite nearly 300 rooftops under management, Penske still feels incredible pressure on its margins. 

Dealers have started searching for profits elsewhere

If you've ever bought a car from a new car dealer, you've experienced the effects of these falling sale profits.

Notice how your salesperson works tirelessly to convince you to upgrade your car's wheels, warranty, or service plan? That's because finance and insurance (F&I) revenue is one of a dealership's most important income streams. Not only does F&I provide dealerships with enough margin to run their business, but it also keeps customers coming back to the dealership for service, upgrades, and repairs.

Online checkout is better for buyers and dealers

Understandably, dealerships place F&I products front-and-center. But these products are sometimes difficult to sell, and as a buyer, you can feel hesitant to upgrade if you don't know exactly what you're buying.

Fortunately, many dealerships are attacking this problem head-on using Drive Motors. Drive populates a dealership's inventory with a "Buy Online" button that directs a buyer to an elegant checkout process. Customers can apply for financing and select F&I upgrades from the comfort of their own homes, giving them the time and resources to research exactly what they’re buying.

In the end, an online checkout option delivers a better experience for buyers and an easier path to profit for dealerships. It’s a rare win-win in an industry that's only becoming more competitive.

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About Author

Matt Weinberg
Matt Weinberg

Matt Weinberg is the SVP of Consumer Experience at Drive Motors. With 20 years of leadership experience in the automotive industry, he has consulted for more than 100 dealer groups on internet sales processes and ecommerce and is a trusted advisor for Wards Auto Top 10 dealer groups, including Lithia, Asbury, and Hendrick.

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