A local dealership proudly sells a high-end sports car at a hefty price, celebrating as they close the deal. However, when the financials are reviewed, the accountant reveals that despite the impressive sale, the profit margin is razor-thin due to high overhead costs and slim markup. Celebration turns to concern as the team regroups to figure out how they will recoup the loss.
As a local business owner in the auto industry, you know just how important it is to understand and optimize profits in a highly competitive and constantly shifting marketplace. We’re here to help.
Read on for key insights, strategies, and trends shaping dealership margins to enhance your fiscal strategies and grow your dealership in a sustainable way.
But before you do so, allow us to tell you how you will increase those margins through the power if nurturing leads! Speed to lead is critical in today’s fast-paced market, and Podium offers an unparalleled advantage by ensuring businesses engage with leads within a couple of minutes—guaranteed. Podium’s conversational AI is outcome-driven – it doesn’t just respond to inbound leads it guides conversations toward a specific goal, such as a sale or booking. Unlike other AI systems that focus on providing correct responses, Podium aims to drive specific customer actions to grow your business.
Podium’s AI BDC helps dealers transform potential interest into concrete actions like booking test drives and scheduling service appointments. Engage every lead with meaningful conversations to drive sales with Podium’s best-in-class conversational AI Employee. Watch a demo today.
Significance of Understanding Dealership Margins
How much do dealerships make on new cars? Car dealerships average a net profit margin of 1-2% per car. That means that for every $20,000 in sales, the average dealership makes $200-$400 in profit.
Understanding your dealership’s profit margins is crucial for maximizing profitability, ensuring sustainable business growth, and making informed strategic decisions in an extremely competitive automotive market that continues to navigate chip shortages and supply chain interruptions.
Overview of the automotive industry landscape
So, how is the auto industry doing right now? In 2024, digital marketing and text have continued to gain traction as the market has steadily moved online.
Technological advancements and environmental concerns have continued to reshape industry terrain, with a global shift to electric, highly-personalized, connected vehicle adoption and a focus on online presence. (We’ll say more on this when we address future trends toward the end of the article.)
Factors Influencing Dealership Margins
Several factors influence car dealership margins, particularly vehicle acquisition costs, operating expenses, and market demand and pricing trends.
Vehicle Acquisition Costs
How much do dealers pay for cars from manufacturers? And how much should you pay? Factors influencing acquisition costs include wholesale prices set by manufacturers, incentives or discounts offered, transportation fees, and import tariffs or taxes. Negotiating favorable terms with suppliers and manufacturers, leveraging bulk purchasing power, and optimizing inventory management practices can help you mitigate the impact of acquisition costs on your margins.
You should always apply extensive research and quantitative data to determine how much a type of vehicle, new or used, will go for in the demographic you cater to with a specific location and time frame in mind. When acquiring the vehicle, your projected net profit margins should land around 4-5% or higher.
Operating Expenses
Operating expenses encompass all costs associated with running your dealership’s day-to-day operations. These expenses include salaries and wages, rent or mortgage payments for your dealership premises, utilities, insurance, marketing and advertising expenditures, maintenance costs, and administrative expenses. Managing operating expenses efficiently is crucial for maintaining healthy profit margins. You can achieve this by implementing cost-cutting measures, considering consulting to improve your operational efficiency, negotiating favorable contracts with your service providers, and investing in technology such as text, website chat, and automations to streamline processes and reduce overheads.
Market Demand and Pricing Trends
Fluctuations in consumer preferences, economic conditions, and industry trends directly influence demand for specific vehicle models and the prices at which you can sell them. You need to closely monitor market dynamics, analyze consumer behavior, and adapt pricing strategies accordingly to remain competitive. Factors such as seasonality, new product launches, competitor pricing, and consumer perception of value also impact pricing decisions. By staying informed about market trends and leveraging pricing analytics tools, you can optimize your new car dealer cost.
How to Improve Profit Margins in Your Dealership: 3 Strategies
So, how do car dealerships make money? We chat with local businesses all day, every day. Read on for proven strategies to improve your auto dealer margins and how to get started with each.
Efficient Inventory Management
Implementing efficient inventory management practices can help you minimize carrying costs, reduce risk of depreciation, and optimize stock turnover. Utilize data-driven analytics to forecast demand accurately, maintain an optimal mix of inventory, and streamline acquisition processes to avoid overstocking or understocking.
Negotiation Tactics with Suppliers
Pro Tip: Customer relationships aren’t the only kind that matters. Negotiating favorable terms with suppliers, including manufacturers and wholesalers, can lead to lower acquisition costs, volume discounts, and great payment terms. Build strong relationships with suppliers, leverage purchasing power, and explore opportunities for cost-saving initiatives to improve margins.
Marketing and Sales Strategies
Develop targeted marketing campaigns to attract potential customers and differentiate your dealership from competitors by using channels such as text, video, and online messaging. Invest in digital marketing channels such as social media advertising (influencers, campaigns, competitions, how-to videos) and local search engine optimization to expand reach and generate leads. Pro Tip: Opt for a platform that gives you real-time, in-depth data on all of your channels to improve as you go.
Technological Innovations Impacting Margins in the Auto Industry
How much do car dealers make in the future? Technological innovation in the auto industry is bright–and it also has a big impact on your dealership margins. Here are a few trends to prepare for:
Digital Platforms and Online Sales
As we mentioned, as society has moved online, so have cars. Online car sales have taken on a major role in modern commerce, with a marked shift to internet selling, purchasing, and designing. Digitalization has transformed the customer experience, with online demonstration platforms and virtual showrooms becoming increasingly prevalent.
According to one survey, 7% of buyers bought their cars completely online in 2023. Over 40% bought vehicles with a mix of online and in-person steps. And with the growth of dealerships such as Tesla, Car Gurus, and Carvana, these numbers are only projected to grow.
CRM Systems and Data Analytics
Autonomous vehicles are disrupting the industry, with more and more self-driving cars joining the flow of family life as consumer and regulatory concerns get resolved.
Vehicles are also becoming increasingly connected with surrounding software and data collection systems as 5G and internet technologies continue to expand. Manufacturers are hyper-personalizing vehicles to fit perfectly into the lives of consumers and optimize benefits, which means that your team will increasingly need to understand the intricacies of CRM systems and the data analytics cars are being equipped with.
Get Started
Are you ready to improve your car dealership profit margin across the board? From streamlining customer communication to turbocharging your online reputation via text, Podium empowers local auto businesses to optimize profit margins and consistently exceed customer expectations.
Don’t let the competition leave you in the dust—click here to explore how Podium can accelerate your dealership’s performance today.
