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Guard Your Margins to Boost Vehicle Profits

Nov 3, 2016

The good news: Profits for dealerships are at an all-time high, with the average net pretax dealership profit hitting $1.17 million in 2015.

The bad news: The average dealership net profit margin has remained flat for the past five years at just 2.2%.

These figures, which were recently reported by the National Automobile Dealers Association, illustrate one of the biggest challenges faced by many dealerships today: the transparency of vehicle pricing.

Recognize the shift

Back in the “good old days,” most car buyers had no idea how much dealerships paid wholesale for vehicles. But today, it takes just minutes for an Internet-savvy customer to find wholesale pricing information on cars they’re thinking about buying.

This dynamic has drastically shifted the leverage in many vehicle negotiations, potentially putting car buyers on a more equal footing with dealerships. As a result, many dealership salespeople feel pressured to accept customer offers for vehicles that are lower than they might have accepted in the past.

“After all,” the thinking sometimes goes, “if I don’t accept the offer, the customer will just go to my competitor down the street who will probably accept it. So I may as well make the sale, even if it’s not as profitable as we’d like.”

Think profitably

One solution to this problem is to retrain your salespeople in basic negotiation tactics. This means setting a minimum vehicle sales price, based on a minimum target gross profit margin, and then making sure they stick to it.

To accomplish this, you could base commissions not only on vehicle sales, but also on the profitability of each sale. For example, you could pay a full commission on sales that meet your minimum gross profit target and then reduce the commission proportionally for sales that don’t meet the target.

Hold the line

In order to increase net pretax profit, you must guard your margins carefully. Emphasize this to your salespeople and structure your commissions to incentivize them to hold the line on your pricing.

Dealer Insights - November/December 2016

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