Perhaps you are a gearhead or have worked in the automotive industry before as a mechanic or car salesperson and had the itch to start your own car dealership. You might be wondering how much money you can make owning a car dealership. The bottom line is that a car dealership can be profitable, but there are risks with starting any business and factors that can impact how profitable you will be. Below, we will cover the current average profits earned by car dealerships and how you can better understand how much profit you can make if you decide to open a dealership. 

Average Profit Margin of a Car Dealership

Several factors will determine your dealership's profitability, including the size of your dealership, location, market conditions, brand reputation,overhead costs, and the type of vehicles you sell. 

According to the National Automobile Dealers Association (NADA), 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^.2  Breaking out the data between independent dealers and franchise dealers, there is a wider gap. Independent dealerships typically bring in $1,500 in net profit compared to $2,000 for franchise dealerships. Though independent car dealerships typically have lower overhead to franchise dealerships, they often focus on selling used cars and don’t benefit from the incentives car manufacturers provide on new car sales. 

The average net profit margin for a car dealership is 1–2%. This means that for every $10,000 in sales, the dealership makes $100–$200 in profit.¹

Additional Ways Car Dealerships Improve Profitability

Moreover, aside from the sale of vehicles, you have other opportunities to make money, including:

• Incentives from the manufacturer: Manufacturers offer incentives on such as rebates on certain VINs, which add to your bottom line
• Holdback: This refers to a percentage of the MSRP or invoice that the manufacturer allows you to retain after a sale, usually 2%
• Finance and insurance products: You can generate more revenues through add-ons, such as vehicle financing, insurance, security systems, and extended warranties 
• Services and parts: Offering after-sale services such as repairs and parts replacements will help you increase your recurring revenue and maintain contact with clients, increasing the likelihood of getting repeat business²

Diversifying your revenue streams increases income potential and enhances your car dealership’s resistance to disruption.

How Much Does It Cost to Run a Car Dealership? 

For your dealership to be profitable, you must understand and manage the costs, which include:

• Cost of Goods Sold (COGS): COGS refers to the cost of purchasing the cars you sell. Being the largest cost you incur, it accounts for 90% of all your costs.
• Salaries: Running a dealership will require a team comprising a bookkeeper, salesperson, mechanic, etc. Their salaries will contribute 2–3% of your costs.
• Sales bonuses: Along with the base pay, offering bonuses for sales is standard practice to keep staff and business objectives aligned. These bonuses will account for 2–3% of your costs.
• Operations: Rent, logistics, utilities, and showroom expenses are necessary to keep the business running and will account for 4–6% of costs.

Beyond the regular costs, you may also incur legal, marketing, bookkeeping, and other fees that contribute another 2–3% of your expenses.

How to Forecast Profits for a Car Dealership

Forecasting profits is a great way to determine whether a car dealership will be worthwhile. To do this, you'll first need to forecast sales and expenses. The basic formula to forecast Profits is to look at your estimated Sales and Expenses: Profits = Sales - Expenses.

Forecasting Sales for a Car Dealership

For you to get a revenue/sales forecast for your dealership, determine the average selling price for your vehicles and multiply it by the number of vehicles you expect to sell: Revenue = Average selling price x # Vehicles sold. Therefore, if you expect to sell twenty vehicles each month at an average price of $10,000, your projected revenue will be as follows:$10,000 x 20 = $200,000

Forecasting Expenses for a Car Dealership

Car dealerships incur two types of expenses; fixed and variable expenses. The former accounts for expenses such as salaries and rent that you can expect to remain the same. With variable expenses, expect them to change depending on your revenues. For instance, you can expect a proportional rise in bonuses and COGS if your revenues increase.

Calculating Profits for a Car Dealership

Ultimately, you want your dealership profitable enough to leave you something significant after each accounting period. However, profit usually refers to Earnings before interests, taxes, depreciation, and amortization (EBITDA).

You can calculate EBITDA as follows:

EBITDA = Revenue - COGS - Operating Expenses

On average, EBITDA will be around 3%, after which you'll remain with a net profit of 1-2% after deducting the remaining costs.

What’s the Break-Even Point for a Car Dealership?

You must understand your dealership’s break-even point. This refers to the point at which total revenues equal total costs.Use the formula below to know your break-even point: Break-even point = Fixed costs/Gross Margin.

Tips to Maximize Profits

Stocking the best vehicles and offering the most competitive prices does not necessarily mean you'll generate sales consistently. You also need to focus on other vital elements to maximize profits. These include: 

• Customer Experience: Prioritize customer satisfaction and create a positive buying experience. Satisfied customers are more likely to refer others and become repeat buyers, contributing to long-term profitability.
• Efficient Operations: Streamline dealership processes, optimize resource allocation, and reduce overhead costs. Enhancing operational efficiency can directly impact profitability by reducing unnecessary expenses.
• Digital Marketing: Leverage the power of online marketing, social media, and digital advertising to reach a wider audience and generate leads. Effective digital strategies can help increase sales and boost profitability.
• Diverse Revenue Streams: Explore additional revenue streams beyond vehicle sales, such as parts and accessories, service and repair, and financing options. A diversified income portfolio can cushion the impact of market fluctuations and enhance overall profitability.

Set Yourself Up for Success

Although operating a vehicle dealership can be profitable, doing so requires a full grasp of the variables affecting success. Average car earnings may appear low, but concentrating on profit margins, good inventory control, pricing tactics, financing, and after-sales services may significantly impact total profitability.

Furthermore, by adopting customer-centric approaches, embracing digital marketing, optimizing operations, and diversifying revenue streams, you can maximize your profits and thrive in a competitive market.

If you’re thinking of starting a car dealership or maximizing your profits, you’re in the right place. ACV Auctions is a platform that allows car dealers access to wholesale used car inventory countrywide. We offer insightful resources to help you scale your car dealership. If you have your dealers license, Become a member today to take your dealership to the next level. 

Sources:

1. Alan. SharpSheets. “How Much Profits can you Make with a Car Dealership?” SharpSheets Blog, https://sharpsheets.io/blog/car-dealership profits/#:~:text=What%20is%20the%20average%20profit,are%20very%20costly%20to%20run.

2. Onlineautodealered.com. “How Much Do Car Dealers Make.” Onlineautodealered.com, https://www.onlineautodealered.com/career-central/how-much-do-car-dealers-make