How Do Auto Dealerships Work?

The term “dealership” triggers the idea of your local automotive franchise. Car dealers are administered by the state law, which requires new cars to be sold by an independent dealer.

Simply stated, it’s illegal to purchase a car directly from a car manufacturer. Whether you’re planning to buy a car, or you’re planning to start a car dealership store, understanding how the dealership works will serve you right.

Vehicle inventory

Dealers pay their inventory with floor financing, a line of credit secured to buy the inventory itself. Used cars are either purchased or obtained through trade-inns. If the car dealer uses his floor plan to acquire a vehicle, they’ll have to keep paying interest as long as the car is sitting on the floor. Therefore, he needs to sell it as fast as possible.

If the car stays for so long, they have to lower the prices. Not with the motive of generating profit but to get rid of it and stop paying the money, it’s costing him/her.

Prices and incentives

While a car dealer can easily negotiate prices, sometimes they are required to follow strict pricing standards from the manufacturer. Besides their profit, they also get “hold back” from a manufacturer once the car sells (usually 2%-3% of the total invoice). Manufacturer’s add ons, and incentives can also encourage sales.

To price used cars, a dealer begins by how much the car was bought, the repair cost, and then the traditional profit to come up with the cost. There is also some dealer or administrative cost, which is like “hold back” for new cars.

Management sales

The owner is referred to as the principle. If the latter owns more than one store, they will appoint a general manager to oversee the daily operations of the other stores. In most cases, the manager might be required to buy-in as a minority partner.

The salespersons are paid some kind of commission. If they meet their quotas or sell certain cars at exceptionally high prices, there are given a bonus.

Finance and Insurance

Finance and Insurance organize for financing for customers. It works with “captive lenders” and local banks. The F&I profits from dealer reserve, in which the dealer pays the loan’s interest rate and keeps the difference as their profit. Dealers can also sell warranties and insurance. F&I handles all paperwork related to car purchasing.

The F&I and sales are referred to as the front end of the automotive dealership.

Part, service and body shop

The service, part, and body shop are considered the backend of a dealer’s store. Small dealerships don’t have those parts. They increase customer interaction and revenue of a dealer.

Even though based on the expenses, the profit margin may be small, the customers are likely to come back for another purchase.

Do you want to start a car dealership business?

The automotive business is very lucrative, and can easily give great returns if well conducted.
The above pointers will let you into the basics of a car dealership, to set a strong foundation for your business.

Click on this link to learn more about automotive marketing to boost sales.

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