How much money does a used car dealership make? The average mark up on a car in the US is around $2500 and in the UK it is circa £1250. Both these figures are averages and the actually margin a dealer will have in a car can vary massively, and a used car or specialist dealer may work on a higher margin than a large franchised dealer group that has a higher volume of sales.
The average price a dealers makes may be lower than some people would imagine. But the car sales business model has shifted over the years and a reliance on upfront profit on a car is now less important than it was. The market in now highly competitive and dominated by the larger dealer groups focused on volume and market share. These economies of scale allow a dealer to upsell highly lucrative finance and insurance packages making up for the often reduced average markup on a car.
This increased number of sales also feeds money into the service and parts department for often years to come, with most dealers making 60-70% of their overall profits from their workshops. Making the need and appeal for more volume obvious and this volume and profit is often driven by an aggressive car pricing strategy.
In most cases this has driven up the overall demand for quality used car and squeezed upfront margins further.
Smaller and specialist dealers simply don’t have the economies of scale and often don’t have the service department facilities to make money on the backend of the deal. This leaves them to run a more traditional business model and focus on making money form upfront sales. Most deal in this category will be selling slightly older cars that aren’t in direct competition with the franchised dealers, this often allows them to maintain a slightly better margin per unit due to the reduced competition.
These cars also depreciate slowly and are often priced less competitively, this intern means they are slower to sell. These dealers typically operate on a site or forecourt with 40-80 cars and are usually owner run and operated and have much lower operating cost than a franchised dealer or supermarket setup. But they also sell less cars and turn their stock less frequently.
Classic car dealers sell very few cars in comparison to a franchised dealer or supermarket setup, but this is more than made up for by the increased margins. Classic dealers work in a similar vain to specialist dealers but focus on classic cars. Margins are also similar in the lower price point but often grow significantly as the prices rise, leading to much higher average margins. Again these dealers are normally very well established and own their promises and stock outright. Overheads are low and often not considered an issue. In contrast to a dealer selling new or nearly new cars, a classic dealers stock is normally appreciating. So there is no need to turn stock regularly and cars can be held for years in some cases.
Car flippers are often just selling cars a side hustle or hobby and price cars competitively for an easy profit. Normally making an average or £1000 or $1000 dollars per car, but this can vary due to the experience level of the flipper. But this lower average margin is offset by almost zero overheads or running costs.
How do car dealers value cars
In most cases dealers of all sizes used a combination of used car guides, local area specific knowledge and experience to value cars. Examples of these guides are Kelly Blue Book in the US and Cap and Glass’s Guide in the UK. These trade car valuation guides take data from multiple sources to give an accurate price guide on both new and used cars.
These guides use extensive datasets helping them to understanding of the automotive market. Which in turn allows dealers to manage risk and increase profit. They offer suggested purchase(trade) and retail valuation on all models and offer insights and advice on stock management for all types of business and vehicles. These insights now extent beyond mere valuations and cover vehicles sales volumes by region, average number of days it takes to sell a specific model, data on pricing strategies and to number of recent vehicles sold. These insights are invaluable and are available to both the smallest car trader to the largest dealer group.
Traditionally these guides were published on a monthly basis in the form of a pocket sized book. Hence the term ‘book price’ which a term that’s still in common use today. But the days of the monthly publication and physical book are behind us. These publications are now digital and are available via a mobile phone or tablet. Giving a garage or dealer access to a huge amount of date in an instant.
Specialist dealers often use years on personal knowledge combined with guides to price their stock. True niche sellers often make their own market and influence national markets. So are less reliant on these guides.
Classic car guides are also available in various forms. But older cars are very hard to value on a like for like basis. So again a dealer will often just rely on his or hers experience. So it’s not uncommon for there to be a huge price variable for the same model.
Conclusion
In most markets sales margins in used cars haven’t increased significantly over the last few decades and a car dealers margin remains largely uniform in both the used and nearly new sectors of the market. This is mostly because of the highly competitive nature of the market and the fact new and used dealers have assess to similar pricing data. Dealers have instead focused on upselling and backend services, which have potential for grater profits.
Larger dealers and dealer groups are able to make large profits from these secondary and backend sales and services, because of the large volume of sales of both new and used cars.
Medium sized dealers may not have have the same sales volume as the bigger dealers but they often operate a similar business model and simply make less money.
Smaller and specialist dealers simply don’t have the economies of scale and often don’t have the option to make money on the back end of the deal. So typically look to make more profit upfront. This combined with lower running costs can still make this size of business highly profitable.
Classic dealers simply do not have the option of working on small margins. Stock is often hard to find, requires more preparation and the market is much smaller. So dealers rely on car sales for almost all of their profits.
Margins for car flippers have also seen little of no increase. But profits are still good and the risks and costs of getting to market are low.
