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Commissions on the sale of new cars vary from one dealership to another, but the usual range is from 20 to 30 percent of the profit. The amount of profit is also different between sellers. The bottom line is that a good seller in a popular franchise can make more than $50,000, but the average is considerably less. Two conditions count for this: sales that generate only “mini” commissions and the added cost of the “pack” of the dealer.
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In theory, salespeople at new car dealerships primarily on a commission basis receive 20 to 30 percent of net profits, with 25 percent shared. In practice, how much salespeople are paid and how they are paid can be more complicated. For example, most new car sales have two stages, the sale itself and the financing of the sale, and the salesperson’s commission is based only on the sale.
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Another thing to know about the net profit on a new car sale is that there is often no profit and the seller loses money on many new car sales. You may wonder how the seller stays in business. It manages to survive because it usually makes up the loss and more on the profit from the financing.
Suppose, for example, that the dealer’s invoice cost on the vehicle is $25,400. The average markup on a new car sale is surprisingly thin, only about 5 percent on a lower priced vehicle and 10 percent on a luxury car. The profit of 5 percent on that car $ 25, 400 is equal to $ 1, 270. The sales commission, which is 25 percent of the net profit would be $ 317.50.
But, there is a catch. Say the car in question is a 2016 model and at the beginning of 2018, the seller’s job is to sell that car and the lot before its value decreases further. The seller may decide that the target price for the car is not the invoice amount of $25,400 plus the commission of 5 percent or $26,670. It is instead listed at $24,000 or $1,400 below invoice cost and calculated to get the car off the lot quickly.
As for the seller, this is a good deal. The back-end, which is the actual financing of the car could generate a profit of $2,000 or more, compensating the loss in the front-end and leaving a minimum of $600 profit.
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The result for the seller is not so satisfactory. Since there was no profit on the sale itself, there is no commission of 5 percent. Instead, the seller receives a “mini”, which in auto-deal parlance is a fixed minimum amount on the sale. In this sale of $ 24,000, the mini could be no more than $ 125.
Another factor that impacts the amount of money a dealer makes on a new car sale is “the package.” The package is an arbitrary amount that the seller can add to the seller’s invoice for preparation, shipping costs or any other cost that the seller chooses. It’s just a way for the seller to make sure they make money by reducing the sales commission. If the invoice cost of a vehicle, for example, is $30,000, then the normal profit of 5 percent would be $1,500 and the sales commission of 25 percent on the sale would be $375. But if the seller adds a package of $ 400, the added cost is $ 30, 400 and assuming that the selling price remains the same, the profit is not $ 1, 500, but $ 1, 100. 25-percent of that amount, the commission adjusted later. the package is included in the cost, it is only $275.
Since the average car dealer makes about 10 or 11 sales per month, the combination of cars he sells at a loss or a reduced profit generates a mini-commission of $125 and other reduced commissions from packages added to the invoice cost , suggests. that being in car sales is not likely to make anyone rich.
On the bright side, a car dealer often earns more money from bonuses, which can be offered for selling a certain number of vehicles over a 30-day period, or for selling add-ons such as rust protection and the undercoating. Dealers love add-ons because the markups on add-ons are higher than for the car itself. A good seller could end up with as much money in his pocket from selling add-ons as from the commission on the sale.
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I am a retired Registered Investment Advisor with 12 years of experience as a head of an investment management company. I also have a Ph.D. in English and has written more than 4,000 articles for regional and national publications.
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You will not feel a sinking feeling in your stomach when you sign the documents on a car purchase. But there are a lot of reasons why you can.
Buying a car is one of the biggest financial commitments you will make in your life. The average person takes out a loan for more than $30,000 to buy a new vehicle. And how most dealerships operate, no one could blame you for asking:
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How much of that money goes towards the car, and how much wind in the seller’s wallet thanks to the commission?
This question would make anyone feel uneasy. That’s why we eliminated the profit-based commission model at Apple Autos dealerships over 25 years ago. Our sales staff are paid the same no matter what you buy. We do this because we want to make the process easier and stress-free.
But most other dealerships are different. Here, how much commission a car salesman makes depends on his ability to sell high and buy low.
As in: The higher the price they can get you to pay on your new car, and the lower the amount they can get you to accept in your trade-in, the better their payday will be. .
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You don’t need to take this. You can fight. The key to shopping smart—and minimizing how much of your money goes toward your dealer’s next trip to Hawaii—is to understand how most dealerships operate.
Let’s start with a great look at the car buying process. That will help you see exactly where a car dealer may be trying to drive you into something you might not need.
The Front End: This is everything that happens on the lot or at the seller’s desk. It includes determining the value of your exchange, and setting the price of the car you want to buy or rent. (Unless you’re at a dealership like ours, where we give you our best price right up front – you don’t have to haggle to get it.)
The Back End: This is everything that happens in the dealership at the desk of a financial manager. Loans and aftermarket warranties are two other places where the dealership makes money.
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The Back End is the domain of the financial manager of a dealership. And we’ve created other resources to help you through it. Check out our guides on how to get the best car loan for your credit score, and how to determine if an extended car warranty will be “worth it” for you.
Since this article is about the amount of commission that a car dealer makes, we will focus on the Front End. This is where they make their money.
To understand how things work—and how your decisions affect your pocketbook—there are a few other key terms to know.
To understand how cash flows when a deal is made, it is important to understand some key concepts. The car sales industry uses a very specific insider vocabulary.
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There is no hard and fast answer, unfortunately. But it is safe to say that the sale of used cars is the most profitable of all businesses.
That’s because, as we explain in this video, the margins on used cars are much higher than on new vehicles. The statistics support this. According to the National Automobile Dealers Association (NADA), in 2017 dealers made 2.3 percent of net profits on new cars, and 3.7 percent on used ones.
Rule #1: Be Aware that Selling Used Vehicles May Mean More Payments for Your Seller. At a concession at a low price like ours, it is not true. As we said before, our staff is paid the same no matter what you buy. But in a grant on a commission model based on profit, this could be because a
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