How Dealerships Make Money from New Car Sales and Warranties

Many people are curious about the financial aspects of car dealerships and wonder exactly how much money they make from new car sales. Is it the primary source of profit, or do other factors play a significant role? This article delves into the complex world of dealership economics, focusing on the profit margins from both new car sales and warranty repairs.

The Profit Margin from New Car Sales

One common misconception is that dealerships make a substantial profit on the sale of new cars. However, the reality is quite different. A dealership typically makes a small profit on each car sold, often less than you might expect. This is because manufacturers in most cases provide significant incentives to dealers to make these sales, with some incentives reaching up to 8% of the invoice price of the vehicle. Additionally, dealerships are required to hold a minimum inventory level which includes fixed and variable costs.

Despite the small profit margin per car, the sheer number of cars sold over time can add up to a considerable amount. However, this is not the primary source of a dealership's revenue. For many dealerships, manufacturing incentives and volume bonuses offset the lower profit margins on individual car sales.

Dealership Revenue Streams Beyond Car Sales

Dealerships rely on a variety of revenue streams to stay profitable and sustainable. One of these is the sale of warranty services. The aftermarket warranty programs, offered by third parties, can generate significant revenue. When customers purchase these warranties, the fees paid to the dealerships can be substantial and often exceed the margin made on car sales alone.

Another important revenue stream is service and maintenance. Even if only a small percentage of car owners return for maintenance or repairs, the profits earned from these services can be much higher than the margin from selling cars. A single repair, especially for high-cost components like engines or transmissions, can generate more profit than selling several cars. This is particularly true for roadside services where customers are often called upon to pay for emergency repairs out of pocket.

Warranty Repairs: A Key Profit Source

Warranty repairs are another significant source of profit for dealerships. Manufacturers typically pay dealerships a portion of the cost of the repair, significantly boosting the dealership's earnings. For example, if a customer's vehicle requires a critical malfunction fix, such as replacing a broken transmission or engine, the dealership can make more money from this single repair than from selling multiple cars.

Manufacturer Incentives and Rebates

Dealerships also benefit from manufacturer incentives, which can be substantial. These incentives are often provided to dealers to ensure they meet certain sales goals or to keep their inventories up to date. In some cases, these incentives can cover a significant portion of the cost of the car, making the dealership's margin appear smaller in comparison. However, the total sum of these incentives over time can be a major contributor to the dealership's overall profitability.

It's also worth noting that dealerships are expected to perform warranty repairs, as this is a requirement to keep the warranty valid. However, even for those who do not take advantage of these services, the manufacturers still pay the dealers for the repairs, contributing to a steady stream of revenue.

Conclusion

In summary, new car sales are just a small part of the revenue picture for dealerships. The combination of manufacturer incentives, warranty programs, and service and maintenance charges provides a robust and resilient financial base. So, while a dealership may not make a large profit on each individual car sale, the overall earnings from a variety of sources can ensure their continued success and profitability.

Understanding how dealerships make money through new car sales and warranty repairs can help consumers make more informed decisions when choosing a dealership or considering warranty options. By recognizing the different revenue streams, you can appreciate the complexities of the business model and be better prepared to negotiate and navigate the car buying process.