Car dealers don’t make as much money as some shoppers tend to think. According to recent data, a dealer’s margin is roughly 8.7 per cent per vehicle, which means that a car that costs $20,000 would allow a dealer to make only $1,740 – and this excludes overhead costs and other expenses.

Yet many consumers are convinced that car dealers are ripping them off, as mentioned in our previous article. A J.D. Power and Associates study shows that 36 per cent of car buyers think that dealers earn an average of $3,000 per new car sold and 26 per cent believe that the amount is between $1,500 and $3,000. In truth, however, it’s only slightly above $1,000.

So, what is it that makes those margins so thin? And how exactly are dealers able to profit from selling vehicles in general? Well, let’s figure it out right here…

Consumers Like to Negotiate

The fact that consumers negotiate car pricing is one of the biggest reasons for reduced margins. For instance, the MSRP of the 2015 Toyota Camry LE is $24,100, which means that the dealer has the potential of earning $2,032 due to the invoice price of $22,068. In some cases, manufacturers offer dealer holdbacks and dealer cash, some of which are as high as $2,000, to ensure dealers can still profit, but they don’t always exist.

Since the average cost of the Camry LE is actually $23,266, this puts the average dealer profit at $1,198. Of course, many consumers don’t even know the invoice price of their preferred vehicle, which means that they often negotiate blindly. When combined with the notion that dealers earn $3,000 per new car on average, you get plenty of customers asking for bigger price cuts than dealers can afford.

If dealers have rejected your price more than once, then your demands may be too unreasonable. Your best bet is to find out the invoice price by configuring your vehicle either on Unhaggle.com or TrueCar.com, if you reside in Canada or the U.S. respectively, and then add three to seven per cent.

Overhead Costs

Dealership overhead costs – or costs that are not directly related to acquiring vehicles – also affect the dealer margin, though they often depend on the location and size of the dealership. The costs usually include employee salaries, building maintenance, utilities, advertising and similar things.

When it comes to employees, a dealership needs at least nine to 10 of them to keep the dealership running:

Pre-delivery-inspection technician: A person that checks the new cars when they arrive from the factory and prepares them for sale (by installing accessories, refilling fluids and so on).
Detailer: A person that removes all the plastic packaging and cleans the
Porter: A person that parks and re-parks the car after after
Salesperson: This is self-explanatory
Title clerk: A person that prepares legal documents
Accountant: A person that makes sure all the sales numbers are accurate.
Sales manager: A person that oversees the whole sales process.
Dealership manager: A person that oversees the whole dealership.

The true profit margin comes into effect after absolutely all costs are taken into account.

So How Do Dealers Make Their Money?

When are margins are this low and expenses are this high, you may be wondering how new-car dealers make money in the first place. On occasions, they take advantage of dealer holdbacks and dealer cash – incentives that manufacturers offer dealers to move certain vehicles faster, usually after the vehicle in question is sold. These discounts are almost never advertised since they exist specifically for the benefit of dealerships. So, if you come across a deal that’s either at the invoice price or below, it’s likely due to one of these incentives.

Aside from manufacturer support, dealers also take advantage of used cars thanks to trade-ins. Used cars tend to have higher margins than new ones and less opportunity for customers to learn the “true cost” of the vehicle, meaning that they can only rely on average market value from websites like Canadian Black Book.

Dealers also often profit from selling extras to go along with their vehicles, which include extended warranties, rust-proofing and similar services. Finance and insurance contracts are not out of the question either since they account for a significant chunk of dealer profits – almost 40 per cent, according to the data from the National Automobile Dealers Association. The final piece of the puzzle is the service department. A smart dealer knows that a significant portion of buyers will return for regular service, parts and collision work, which can undoubtedly result in continued cash flow. If the dealer’s reputation is solid, there is no reason why a customer would not wish to come back.

In short, selling a car is not always profitable, which is why dealerships often rely on multiple strategies to turn in a profit. Be mindful of the reasons behind their existence, and if none the dealer’s offers interest you, politely decline and move on.

Taras Trofimov is the Content Lead at Unhaggle.com. Unhaggle is a technology and data company that facilitates e-commerce for the automotive industry. Unhaggle provides Canadians with transparent access to information such as invoice prices, current incentives and more. Unhaggle also offers a wide array of pricing tools and buying guides that help consumers find great deals with little to no haggling involved.