According to industry data, independent used car dealers try to put in an initial profit margin of about 17-20% of the total price, but usually, after negotiations realize a 10-12% gross profit margin. And when you take into consideration the cost of actually owning and operating the used car dealership (Rent, Staff, Advertising, Utilities, and that “free cup of coffee”), that leaves them around 2-3% profit.
In the United States, the used car market is notably twice the size of the new car market. This means that the overall demand for car buying is three times the volume of the new car market. Original equipment manufacturers are expected to see this as the market potential for new cars.
The average buyer today is savvy, and they know that there is simply more value – and more wiggle room – in buying a used vehicle. Dealerships know this too, and try to work both ends, often pushing the more lucrative sales of used cars while treading water and doing the bare minimum new car business to keep original equipment manufacturers happy.
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How Much Profit Does A Car Dealer Make On A $50,000 Car?
The average amount of money that a car dealer makes per used car today is around $500 to $3,000 per car, with your typical run-of-the-mill used cars selling for about $2,500 to $5,000. Have in mind that profit margins on used cars are narrower than they have been in the past due to more information is available. Keeping profit margins a secret is what allows dealerships to take advantage of customers.
If we actually knew the margins, we would indeed be offended, wiser, and make better negotiations. A thousand (or more) profit on a vehicle they own only a week or a month is a great deal for the dealership, but not for the buyer.
The internet has proven to be one of the greatest disruptors of all time. Suffice to say, the internet forced transparency. Nowadays, all the book values are known and the internet allows us to browse a wider inventory. Used cars are often marked up based on condition and availability.
However, big dealers no longer set the price for used cars themselves. They let computers do this for them. The price of a used car also decreases the longer it sits on the lot of the car dealership. An average car dealership strives to sell a used car in 60 days or less after being put on sale. So the longer it takes to sell, the lower its price goes. If the car fails to sell in 60 days, it is typically sent off for auction.
Factors that Affect the Profit Margin of an Independent Used Car Dealership
The used car business is quite competitive, but there are opportunities for business people with knowledge of cars and a way with people. Making a profit in the used car business requires skills that include the ability to find quality cars at great prices and the ability to fix cars and make them more valuable.
Focusing on the skills you need to make a living in the used car business can help you be more successful. However, there are so many factors that come into play when considering the average gross profit of any independent car dealership, and they include;
Car Make & Variant
Agreeably, some brands in the auto making industry offer better resale value than others in general. However, also remember that only the right kind of buyers can offer good value. Some of the driver focused cars like Punto, latest generation Fiesta are such options.
They may not offer great resale value in the wholesale market. Howbeit, if sold to the buyer who appreciates the cars would offer better value. The higher variants that offer more features would practically provide better resale value too.
Trade-in value/Wholesale price & Retail price
It’s very necessary to note that many car manufacturers like Mahindra, Ford, etc. have a used car business that they use for re-selling the cars that customers trade-in. These cars are then sold to car buyers looking for used car options and then the manufacturer earns some nominal profit. Note that trade-in value will always be less than what a car owner would get by selling to an independent car dealer for retail price.
Year of Manufacturing
Always remember that a car that’s aged on paper, has aged according to the norms of the country’s automotive authorities, which would make it unfit for plying on road, irrespective of its odometer reading. Therefore, a car that has been used sparingly and has about 2-3 years of life left is actually nearing towards being scrapped.
Unless the government comes up with measures that can practically access each car’s condition and provide fitness certificates accordingly, cars that have aged on paper will continue to get scrapped regardless of their actual condition. It’s one of the biggest factors that affect the valuation price of used cars and the profitability of used car dealerships.
Although a car comes with a fitness certificate that’s valid for 15 years, it has practically not aged if it has not been driven at all, so actually, a car that’s being used less actually commands more value in accordance with its propinquity to the fitness expiry as mentioned on the registration certificate.
In addition, while on an average, petrol engines are rated good for 2 kilometers, a well kept diesel engine would actually have twice the life of a petrol engine and it should return more value at the time of resale.
The condition of the car makes a great difference to the car’s valuation and the amount of profit a car dealership can make. Generally, a car’s condition is rated between fair, good, and excellent. Expect a good value if the car’s visually appealing, a car with the least amount of modifications done to the exteriors attracts better value.
Moreover, it also gives an idea about how the car’s been driven and taken care of. A clean engine bay and interiors is another factor that adds great value something that an evaluator/buyer would definitely notice.
So many people prefer buying a used car as their first car. Cars that are less than ten years old and have less than 10,000 miles are the most popular in this category. Just like it was stated above, used car dealers average a profit of $500 to $3,000 per car or a gross profit margin of 10-12%.
This is, of course, assuming they handle most of the business themselves and are good at advertising. In this business, the most ideal thing is to stick with the kind of cars that are proven to sell. These include the cars you see the regular people around you drive. Cars that are less than ten years old and have less than 10,000 miles on them sell the easiest.