In the massive world of automotive retail, car dealerships play an essential role.
Because the primary source for consumers is those who want to own a car, car dealerships might seem like a good business idea since the market is huge and it’s constantly growing.
That’s why you might think of owning a car dealership as a business owner and wonder whether it’s worth all the trouble.
One of the things that determine whether a business is a good idea or not is the profit margin you can expect to make.
Profit margins are a reflection of the balance between revenue and expenses, influenced by a variety of factors.
That’s why you might wonder what the average profit margin of a car dealership is.
In this blog post, we will go into detail about the profit margin of car dealerships and anything related to the profits and profit margins of a car dealership.
Car Dealership Average Profit Margin
The average profit margin for car dealerships is relatively low, mostly because of the costs associated with running a dealership. Also, the margins change a lot based on the type of cars you are selling.
For example, if you are selling luxury cars and not average ones, your profit margin will be much more than most other car dealerships.
However, it would still be lower than the average profit margin of other businesses.
According to some reports, the national average profit margin for a car dealership is between 1% to 2%. For luxury cars, the gross profit margin could go as high as 10% or 15%, depending on the brand.
It’s worth noting that about 90% of the total cost is for the costs of the cars only. Other expenses will largely lower this profit margin even more.
Average gross revenue of a car dealership
As we mentioned, a car dealership’s profit margin might be extremely low, but the turnovers are very high, even with low-profit margins.
According to the data from National Automotive Dealers Association (NADA), there were about 16,750 cars sold across the United States in the first half of 2022 only.
This amounts to $618 billion for the automotive industry in just six months.
In the same data, we can also see the average gross revenue of a car dealership. In 2022, this number stood at $74 million per year per car dealership.
Some car dealerships could make way more than this, depending on the type of cars and other significant factors. This is just the national average of all car dealerships’ annual turnover.
Average Car Dealership Owner’s Salary
We looked at the profit margins and the gross revenue of car dealerships, but if you are a car dealership owner, how much can you expect to take home?
The numbers vary a lot based on your overall operating expenses and other factors.
However, according to Zip Recruiter, the average salary for car dealership owners is about $61,490 annually.
This means that the average net profit car dealerships make is about $61,000 annually.
This could change a lot based on different factors, and it might be well over $100,000 annually or below the average number.
Calculating The Profit Margin And The Profit Of A Car Dealership
There is a variety of types of costs when you are running a car dealership, and each of these costs takes up a certain percentage of your costs.
Here is a small breakdown:
| Type of Cost | Percentage it takes on your total costs |
|---|---|
| COGS (Cost of Goods Sold) | 85%-90% |
| Salaries | 2%-3% |
| Sales bonuses | 2%-3% |
| Operations | 4%-6% |
| Other | 2%-3% |
As you can see, the biggest driver on your costs is the cost to buy the vehicles you will be selling at your dealership.
Salaries and bonuses take up the second biggest cost scale, and this depends mostly on your location.
In some states, the salaries are way higher than in others, which could damage your profit margin and eat up your profit.
Operations and other costs, such as marketing, legal fees, etc., depend mostly on you. You need to find the most cost-optimal solution to keep the average down.
By knowing how much percentage you spend on each cost type, you can calculate your profit margin better and get a clear picture of your expected profit.
Is Car Dealership A Profitable Business?
Owning a new car dealership can be a profitable business. The average gross profit per new vehicle has significantly increased, with an average of $6,244, representing a 180 percent increase from pre-pandemic levels.
Publicly-owned new-car dealerships have experienced substantial profit growth, with an average profit of $7.1 million over a 12-month period, marking a 242 percent increase compared to the pre-pandemic era.
Used Car Dealership Profitability
The profitability of owning a used car dealership can also be attractive. The National Automobile Dealers Association (NADA) reports that the average gross profit for a used car is $2,337. Compared to new cars, the profit margin for used cars is variable and not as limited.
This flexibility can provide opportunities for higher profit margins, especially if the dealership focuses on acquiring and selling used cars with desirable features, low mileage, and excellent condition.
Factors affecting the profit margin of a car dealership
Your profit margin is largely affected by your costs and other factors about running your business. If you are aware of these factors and manage them well, you might be able to increase your profit margin a little bit.
Here are some of those factors.
Overhead expenses
As we mentioned above, one of the biggest factors affecting your profit margin is how much you spend each month on expenses such as utilities, salaries, marketing, etc.
Apart from the cost you spend on buying vehicles, the higher your ongoing costs, the lower your profit margin will be. That’s why you must always go for the most cost-optimal solution.
However, don’t give up on quality to choose the cheapest option. Find the option that gives you the best of both worlds because the cheapest option could increase your costs in the long run than cutting it.
Location
If your business is in a busy area with high prices, your rent or your mortgage payment will be higher than average.
On top of it, you might need to pay more in property taxes, depending on your state.
Size
The bigger your store is, the more help you are going to need and the higher your bills will be. All of these put a dent in your profit margin and lower it.
Before you make the decision for your car dealership location, research deeply about how much size you will realistically need.
Don’t go for excessive size to be on the safe side, and try to find the most optimal one.
Purchase Cost
The biggest cost driver of a car dealership is the cost to buy the cars. This is the reason why profit margins are extremely low for car dealerships because there isn’t a lot of room to put extra profit on top of it.
If you can get cheaper rates for the cars than the average prices, you might be able to put more profit on top of your purchase price. This will increase your profit margin.
Tips To Maximize The Profit Margin Of A Car Dealership
You can always use some little tips and tricks to increase the profitability of your car dealership. Here are some tips:
- Focus on upsell or cross-sell opportunities: Instead of pushing the customers for a car they don’t need, try to sell them accessories, financing, insurance, and extras on the car they purchased. Focus on their needs.
- Manage your stock extremely well and always keep your inventory at bay: Always read the car market well. Don’t buy cars that are not in demand, and only buy those that have the potential to sell fast.
- One contact sales process: Lower the friction and pain points in your sales process. Have one person handle every process of the sale and create familiarity with the customer.
- Have a one-price pricing scheme: To keep some of your customers and get their references, have a one-price pricing scheme. Don’t negotiate at all for this price, and that is the only available price.
- Offer trade-in: If a customer wants to trade their car for a better one by paying on top of it, you can use this to your advantage. Offer trade possibilities with cars that you think you can sell with a higher price tag and fast.
Conclusion
A car dealership is an extremely costly business to open and run, but the automotive market is massive. This gives a great opportunity to own a car dealership business.
However, the profit margin of car dealerships is between 1% to 2%, on average. For luxury car dealerships, this could be between 10% to 15%, maximum, on average.
The average gross revenue for a car dealership is $74 million annually. This means that car dealerships make more in dollars than in percentage, but then this introduces a lot of risks.
You can employ some tips and tricks or leverage the factors to increase your profit margin.
In the end, a car dealership is not a risk-free business, but it could make you a lot of money annually if you can run it well.
FAQ
What is the national average profit margin of a car dealership?
A car dealership’s national average profit margin is between 1% and 2%. However, depending on the type of cars, this could go as high as between 10% and 15%. Other costs also affect your profit margin.
Can a car dealership have a negative profit margin and lose money?
Since the profit margin is extremely small, it could be possible that you lose money with a negative profit margin.
That’s why you need to always analyze your costs and see if you are always keeping up with your profit margin.
How profitable is a car dealership?
An average car dealership is expected to have a turnover of about $74 million per year. This is the gross revenue before removing the expenses and taxes.
The net revenue of a car dealership is around $61,000 annually. This number could be well above $100,000 annually, depending on several factors.
Amit Gupta is an experienced expert in digital marketing and co-founder of DrFranchises. With more than 11 years of knowledge in franchise digital marketing, SEO, email marketing, and social media marketing, Amit has helped many brands achieve incredible success online. As a passionate entrepreneur and owner of 7 franchises, he continues to study franchise models, looking at costs, revenue, and profitability to guide brands toward profitable growth. When he’s not working on digital marketing, Amit enjoys spending time playing with his beloved dog.