Where Dealerships REALLY Make their Money

By Bill Lang | Posted in Uncategorized on Thursday, August 27th, 2020 at 7:41 pm

You’ve heard me say repeatedly that the price of the car is not that important. Many dealers will advertise prices that are well below actual cost to lure you in. They make up that loss (and then some) with dealer add-ons, low-ball trade-in bids, and back end finance products.

Dealers make money on the front end and the back end of a vehicle transaction;

Front End

  • Vehicle Price
  • Trade-in Value
  • Dealer Add-ons/Addendum

Back End

  • Finance Reserve (interest rate markup)
  • GAP Insurance
  • Credit Life & Disability
  • Extended Warranty
  • Tire & Wheel Protection
  • Windshield Protection
  • And More!

AutoNation, the largest dealership group in the country, makes an average back end profit of $2,172 per vehicle* transaction! That’s up 12% over last year and represents 31% of the total dealership gross profits! The other public dealership groups are not far behind, and I know of several privately owned store that make those numbers look weak.

With the compression of new car margins, dealers are depending more and more on back end products to maintain and improve profitability. The dealers’ profitability on a transaction is less dependent upon the price of the car or the trade value, and more dependent on how well the finance manager sells additional products on the back side. If you’ve been through the grinder in the finance office lately, you know what I mean. There’s certainly nothing wrong with back end products. We sell them as well and they are each useful and appropriate in the right circumstances. In case you’re wondering, last month we averaged $381 per deal in back end profits. Pretty pathetic in comparison. You could justifiably accuse us of not being very good salespeople, but that’s ok. First, we don’t push these products very hard. We present them and discuss whether or not a product is a fit, but don’t push them. Second, we don’t mark up our back end products nearly to the degree that the dealerships do. We would rather have a client for life than try to maximize the profit on a single deal. That’s why you love us!

*Figures from Automotive News, August 10, 2020.

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