How profitable is a car dealership business?

Data provided here comes from our team of experts who have been working on business plan for a car dealership business. Furthermore, an industry specialist has reviewed and approved the final article.

car dealership profitabilityHow profitable is a car dealership business, and what is the average monthly income for dealership owners?

Let's check together.

Revenue metrics of a car dealership business

How does a car dealership business makes money?

A car dealership makes money by selling cars and providing services related to cars, such as repairs and maintenance.

What do car dealership businesses sell, in addition to cars?

In addition to selling cars, car dealership businesses offer a range of products and services aimed at enhancing the overall car ownership experience for their customers.

These may include various types of automotive financing and leasing options to help individuals and families afford their desired vehicles. Dealerships often provide extended warranties, service contracts, and insurance packages to give customers peace of mind and protect their investment. Many dealerships also have parts and accessories departments where customers can purchase genuine or aftermarket components to personalize and maintain their vehicles.

In-house repair and maintenance services, such as oil changes, tire rotations, and mechanical repairs, are commonly offered to ensure the ongoing reliability and performance of the cars they sell.

Additionally, dealerships may engage in trade-ins, accepting customers' existing vehicles as part of the transaction, and may have certified pre-owned programs that offer thoroughly inspected and refurbished used cars backed by warranties.

Some dealerships even provide vehicle rental services or collaborate with rental agencies, making transportation solutions more convenient.

What about the prices?

In a car dealership business, the prices of vehicles vary depending on several factors such as the make, model, year, trim level, optional features, and current market demand.

Generally, new cars can range from around $15,000 for compact models to over $100,000 for luxury or high-performance vehicles. Used cars offer a wider price spectrum, with older or more basic models starting at approximately $5,000 and premium used cars, like certified pre-owned vehicles, potentially reaching up to $70,000 or more.

Dealerships may also offer financing options for both new and used cars, with monthly payments depending on the vehicle's price, down payment, loan term, and interest rates.

Beyond the vehicles themselves, dealerships may provide additional services and products such as extended warranties, maintenance plans, insurance packages, and accessories, which can contribute to the overall cost.

Item Price Range ($)
New Compact Car $15,000 - $30,000
New Luxury/Performance Car $50,000 - $100,000+
Used Basic Car $5,000 - $15,000
Used Premium Car $20,000 - $70,000+
Financing Options Varies based on loan terms
Extended Warranties Depends on coverage and car
Maintenance Plans Depends on coverage and car
Insurance Packages Varies based on coverage
Accessories Varies based on item

What else can a car dealership business sell?

In addition to offering a wide range of vehicles for sale, car dealerships can also diversify their revenue streams by:

  • Hosting special vehicle showcase events or test drive sessions
  • Allowing auto mechanics to use their service bays for repairs and maintenance
  • Assisting customers in selecting financing and payment plans
  • Organizing exciting car-related challenges or competitions
  • Renting out showroom space for private automotive events or filming
  • Partnering with local businesses to offer exclusive automotive service packages
  • Providing online virtual tours and consultations for remote customers

business plan auto body shopWho are the customers of a car dealership business?

A car dealership business typically serves a variety of customer types, such as individual buyers, fleet buyers, and car rental companies.

Which segments?

Based on our market research, we've identified various types of customers who usually visit car dealerships when buying vehicles.

Customer Segment Description Preferences How to Find Them
First-Time Buyers Individuals purchasing their first car Affordable options, financing assistance Local events, social media, college campuses
Family Shoppers Parents looking for spacious and safe vehicles Minivans, SUVs, safety features Parenting forums, family-oriented events
Luxury Enthusiasts High-income customers seeking premium cars High-end brands, advanced features Luxury lifestyle magazines, upscale events
Commuters Individuals needing efficient daily transportation Fuel efficiency, compact cars Public transportation hubs, online ads
Off-Road Adventurers Outdoor enthusiasts seeking rugged vehicles 4x4, SUVs with off-road capabilities Off-road clubs, outdoor expos

How much they spend?

In our detailed analysis of the automotive retail sector, customers at a standard car dealership are often seen spending between $20,000 to $45,000 for a new car. This range accounts for various factors including the car model, brand, additional features, and any after-sales services included in the purchase.

Customer data indicates that the average car owner might trade-in or purchase a new vehicle roughly every 3 to 6 years. This behavior is influenced by various elements such as financial stability, vehicle wear and tear, and the desire for newer, updated models.

Given these parameters, the estimated lifetime value of an average customer of the car dealership would be in the range of $40,000 (2x20,000) to $225,000 (5x45,000), considering some customers may buy only two cars in a decade while others might purchase more frequently or opt for high-end models.

With these considerations, it's reasonable to conclude that a single customer would contribute around $100,000 in revenue to a car dealership over their lifetime, factoring in both the lower and upper ends of purchasing frequencies and amounts.

(Disclaimer: the figures presented are based on industry averages and may not precisely reflect your specific business circumstances.)

Which type(s) of customer(s) to target?

It's something to have in mind when you're writing the business plan for your car dealership business.

The most profitable customers for a car dealership business are typically those in the mid to high-income bracket, as they have the financial capacity to make significant purchases and are often looking for premium or luxury vehicles.

These customers contribute to higher profit margins due to their willingness to invest in more expensive cars and additional features.

To target and attract them, it's crucial to implement targeted marketing strategies through channels such as social media, online advertising, and partnerships with luxury lifestyle platforms. Offering personalized and exclusive deals, as well as exceptional customer service during the buying process, can further appeal to this demographic.

Retaining these customers involves maintaining strong post-purchase relationships, providing top-notch after-sales service, and creating loyalty programs or exclusive events to keep them engaged and satisfied, ensuring they return for future purchases and recommend the dealership to others in their network.

What is the average revenue of a car dealership?

The average monthly revenue for a car dealership can range significantly, typically between $50,000 and $500,000. The spectrum is broad due to various factors, including the dealership's location, the brands of cars sold, and additional services offered. Here's how it breaks down:

You can also estimate your dealership's potential revenue using different assumptions with a tailored financial plan for your business model.

Case 1: A small used car dealership in a rural area

Average monthly revenue: $50,000

This type of dealership is often family-owned and operates in a small community. The focus is generally on used cars, which means the profit margins can be narrow. Such dealerships might sell around 10-15 cars a month, given the limited market in a rural setting.

Without the bells and whistles of modern showrooms or extra services like in-house financing, high-grade servicing, or a broad inventory, these dealerships rely on a few solid sales. They might make an average of $3,000 to $4,000 in revenue per car, leading to a modest monthly total of $50,000.

Case 2: A mid-sized dealership in a suburban area

Average monthly revenue: $200,000

Suburban dealerships strike a balance between the rural and urban extremes. They usually have more space and offer a comfortable mix of new and used cars, attracting a broader segment of buyers.

These dealerships might offer added-value services such as personalized financing, insurance, a dedicated service department, and a more extensive selection of vehicles. With these enhancements, such a dealership could sell closer to 40 cars a month, with various profit margins, averaging perhaps around $5,000 per vehicle.

Assuming an active marketing strategy and a solid reputation within the community, these suburban dealerships could generate around $200,000 in revenue monthly.

Case 3: A high-end dealership in a major city or affluent community

Average monthly revenue: $500,000

At the top end, we have luxury dealerships situated in prime urban locales or affluent neighborhoods. These businesses specialize in high-end new cars, often from several premium brands, and cater to the more affluent segment of car buyers.

Such a dealership not only profits from car sales but might also offer high-end maintenance and repair services, customizations, and brand-specific merchandise. They might sell fewer cars — perhaps around 50 a month — but with high luxury price tags, the dealership could easily make $10,000 or more in revenue per sale.

With the addition of exclusive services, first-class customer treatment, and an inventory of high-demand luxury vehicles, these dealerships can see a monthly revenue reaching $500,000 or more, solidifying their place in the market as a premier automotive retail destination.

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The profitability metrics of a car dealership business

What are the expenses of a car dealership business?

A car dealership business typically incurs expenses related to maintaining a vehicle inventory, managing facilities, compensating staff salaries, and investing in advertising.

Category Examples of Expenses Average Monthly Cost (Range in $) Tips to Reduce Expenses
Facility Costs Rent or Mortgage, Utilities, Maintenance $5,000 - $15,000 Consider energy-efficient upgrades, negotiate lease terms
Inventory Costs Vehicle Purchases, Insurance, Storage $50,000 - $200,000+ Optimize inventory turnover, negotiate bulk insurance rates
Personnel Costs Salaries, Benefits, Training $10,000 - $30,000 Efficiently schedule staff, provide ongoing training
Marketing and Advertising Advertising Campaigns, Online Marketing $2,000 - $10,000 Focus on cost-effective digital marketing, track ROI
Vehicle Maintenance Repairs, Parts, Servicing $1,000 - $5,000 Implement regular maintenance schedules, source parts competitively
Licensing and Permits Dealer License, Regulatory Fees $500 - $2,000 Stay compliant to avoid fines, explore fee reduction options
Insurance Liability Insurance, Worker's Comp $1,000 - $3,000 Shop for competitive insurance rates, maintain a safe workplace
Interest on Loans Auto Financing Interest $2,000 - $10,000 Shop around for favorable loan rates, consider prepayment
Taxes Sales Tax, Property Tax $1,000 - $5,000 Seek professional tax advice, take advantage of deductions
Technology and Software CRM Systems, Inventory Management Software $500 - $2,000 Choose cost-effective software, train staff to use efficiently

When is a a car dealership business profitable?

The breakevenpoint

A car dealership becomes profitable when its total revenue exceeds its total fixed and variable costs.

In simpler terms, it starts making a profit when the money it earns from selling vehicles and providing services exceeds the expenses it incurs for premises, inventory, salaries, and other operating costs.

This means that the dealership has reached a point where it covers all its expenses and starts generating income; this is known as the breakeven point.

Consider an example of a car dealership where the monthly fixed costs, including salaries, rent, and utilities, typically amount to approximately $50,000. However, there's also a variable cost associated with each car sold, such as the cost of the car itself, sales commissions, and any additional preparation or servicing costs.

Assuming the dealership makes an average profit of $2,000 per car sold after covering its variable costs, it would need to sell 25 cars per month to cover the $50,000 in fixed costs. This calculation gives us a rough estimate of the breakeven point for this car dealership scenario.

It's important to recognize that this indicator can vary widely depending on factors such as location, size, type of vehicles sold, operational costs, and competition. A large dealership with high overheads would obviously have a higher breakeven point than a smaller dealership with lower expenses.

Are you curious about the profitability of your car dealership? Try out our user-friendly financial plan crafted for car businesses. Simply input your own assumptions, and it will help you calculate the amount you need to earn in order to run a profitable business.

Biggest threats to profitability

The biggest threats to profitability for a car dealership business can be the combination of fluctuating economic conditions and changes in consumer preferences.

In a strong economy, people are more likely to buy new cars, but during economic downturns, consumer spending on big-ticket items like cars tends to decrease.

Additionally, shifts in consumer preferences towards electric vehicles or ride-sharing services can impact the demand for traditional gasoline-powered cars, potentially reducing sales.

High operating costs such as rent, utilities, and staff salaries can also eat into profits, especially if sales slow down.

Lastly, intense competition among dealerships can lead to price wars, reducing profit margins.

These threats are often included in the SWOT analysis for a car dealership business.

What are the margins of a car dealership?

Gross margins and net margins are crucial financial metrics used to assess the profitability of a car dealership business.

The gross margin is the difference between the revenue generated from selling vehicles and services (like maintenance and repairs) and the direct costs related to acquiring and maintaining those cars and services.

Essentially, it's the profit remaining after deducting the costs directly tied to the dealership inventory, such as purchase costs from manufacturers, sales commissions, and vehicle preparation expenses.

Net margin, conversely, accounts for all the expenses borne by the dealership, including indirect costs such as administrative expenses, marketing, rent, and taxes.

Net margin delivers a more comprehensive insight into the dealership's profitability, encompassing both direct and indirect costs.

Gross margins

Car dealerships generally have an average gross margin ranging from 8% to 15%.

For instance, if your dealership earns $500,000 per month, your gross profit would be approximately 11.5% x $500,000 = $57,500.

Here's an example to illustrate this.

Consider a dealership that sells 20 cars in a month, with each car sold for $25,000. The total revenue here would be $500,000.

However, the dealership faces costs including the purchase price of the vehicles, sales commissions, and showroom expenses.

If these costs total $435,000, the dealership's gross profit equates to $500,000 - $435,000 = $65,000.

Therefore, the gross margin for the dealership would be $65,000 / $500,000 = 13%.

Net margins

Car dealerships usually have an average net margin ranging from 2% to 5%.

In layman's terms, if your dealership generates $500,000 in a month, your net profit might hover around $15,000, representing 3% of the total revenue.

Continuing with our consistent example:

The dealership sells 20 cars, generating $500,000. Direct costs were figured at $435,000.

Besides, the dealership also shoulders various indirect costs such as administrative expenses, advertising, insurance, legal fees, taxes, and property costs. Assuming these additional costs are $50,000.

After accounting for both direct and indirect expenses, the dealership's net profit stands at $500,000 - $435,000 - $50,000 = $15,000.

Thus, the net margin for the dealership would be $15,000 divided by $500,000, resulting in 3%.

As a dealership owner, recognizing that the net margin (in contrast to the gross margin) offers a more accurate depiction of your business's actual earnings is crucial, as it factors in all operating costs and expenses.

business plan car dealership business

At the end, how much can you make as a car dealership owner?

Understanding that the net margin is a crucial indicator of your car dealership's profitability is essential. It reveals what percentage of your total revenue remains after covering all operational expenses.

The amount you earn significantly hinges on your business strategies, customer service quality, and overall execution of your business model.

Struggling car dealership owner

Makes $2,000 per month

Starting a dealership with a minimal variety of cars, ignoring customer trends, little to no marketing efforts, and inadequate customer service might leave you with total revenue around $10,000.

If operational costs are high due to poor management and inefficient practices, your net margin might be struggling at around 20%.

This scenario would leave you with a meager $2,000 monthly profit (20% of $10,000). This is a situation you'd want to improve from as a dealership owner.

Average car dealership owner

Makes $10,000 per month

If you run a standard dealership with a decent variety of vehicles, engage in some form of traditional marketing, and offer satisfactory customer service, your total revenue could climb to $50,000.

Assuming you manage your overheads and operational costs reasonably well, you could achieve a net margin of about 25%.

Thus, as an average dealership owner, you might be looking at a more comforting $12,500 in monthly earnings (25% of $50,000).

Exceptional car dealership owner

Makes $70,000 per month

An exceptional dealership owner innovates and stands out in the competitive market. You might offer a diverse range of attractive vehicles, use cutting-edge marketing strategies (including digital platforms), provide exceptional customer service, and maybe integrate after-sales services and financing options.

With these strategies, your dealership's total revenue could skyrocket to $200,000. Efficient management of expenses and shrewd business strategies could increase your net margin to an impressive 35%.

Therefore, in this optimal scenario, you could be earning a stellar $70,000 per month (35% of $200,000). Such success comes from strategic planning, dedication, and continuously evolving with the market trends.

Aspiring to reach this level of success begins with a comprehensive, adaptable business plan for your car dealership, emphasizing customer satisfaction and continuous growth.

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