How does the car business work?

Tony Shelton

Tony Shelton

BS Detector, Esquire
Do you know how the car business works?

In the 80's and early 90's this is how it worked:

Dealership pays 20k for the car.
Factory cuts them back 2% (varies)or $400.00 each quarter.
Dealership covers it's office nut with "Doc" Fee (under $50.00)
Dealer adds $300.00 PAC to "invoice" price for advertising, etc.
Salesman sells car for $22,300
Salesman gets 35% of $2000 or $700.00 (Salesman paid well and has incentive to keep in touch with the customer and provide good service for future business)
Dealership gets $1300 and pays managers $300, keeps $1000. (Round numbers)
Dealership finances and keeps 3% of 5 yr financing and makes another $1500 on the loan.

Car price $22300
Dealership gets $2900 after all direct expenses
Salesman gets $700

Shoot forward to 2008

Dealership pays 20k for the car.
Factory cuts them back 2% (varies)or $400.00 each quarter.
Dealership covers it's office nut with "Doc" Fee (NOW some are $800.00)
Dealer adds $1500.00 PAC to "invoice" price for advertising, etc.
According to the dealership they "own" the car for $21,500
Salesman sells car for $22,300
Salesman gets 20% of $800 or $160.00 (Salesman doesn't give a crap about the customer or future business)
Dealership gets $640 and pays managers $200, keeps $440. (Round numbers)
Dealership finances and keeps 2% of 5 yr financing and makes another $1500 on the loan.

Car price $22300
Dealership gets $3890 after all direct expenses (including an allowance for inflation over the years)
Salesman gets $160

What has changed? Nothing but the greed of the owners of the dealerships. Salespeople are expendable and less than human.

What's ironic about all this is the salespeople brought this upon themselves by being so greedy and heartless during the 70's.

It's the trickle up theory of Karma. :eek:
 
That's the way it was a few years ago. But today that's not the case. My buisness is dealerships. They are lucky to make a few hundred off a deal. They don't have the money to pay me or some of there salesmen. I have seen dealers that have been in biz for 30 years that are loosing everything they and there parents have worked hard for.
 
bears said:
That's the way it was a few years ago. But today that's not the case. My buisness is dealerships. They are lucky to make a few hundred off a deal. They don't have the money to pay me or some of there salesmen. I have seen dealers that have been in biz for 30 years that are loosing everything they and there parents have worked hard for.
Click to expand...

In all honesty I haven't paid much attention to it since 2004 or 2005 but this is how it was then. The internet buyer was eating into the profit by then.
 
Yeah and if you find a factory dealership that will do warranty work let everyone know. Since the billable rate that the manufacturer will pay for warranty work is less than what they can charge an individual the dealers are really not intrested in doing the work.
I think it is the same with medicine and the proposed govt health care the hospitals and doctors are not going to go fo it.
Anyone notice the utterly dead reception the pres got from the speech he got from the American Medical Accociation? All you hear about is his speech not the fact that the doctors are not applauding him for wanting to cut thier livelyhoods.
 
Don't forget also that the finance manager gets a bigger commission if he can get you to sign at a higher % rate on the loan. Anything above what the bank wants for the % rate goes back to the dealer and him as a bonus. Also on the back end are the pretty much useless warranty packages. The finance manager and the sales person also get a % on that. Funny thing is most of the time if you can't see it, touch or feel it, it's probably not covered. (unless of course it's a lease) They like protecting vehicles that they technically still own.

I sold New cars for a while until people started coming in with their own invoices telling us what they were gonna pay and what their trade was worth. (Theres another % for the dealer. ACV verses what they give you and sell it for at auction or back on the lot.) I got sick of that and went to work at a secondary lender store for the next 6 yrs. I made real good money working there. Flat pay per car with bonuses at certain levels but it was easy money. Those bonus checks at the end of the month were sweet!
 
I sold cars for nearly 10 yrs....got laid off back in Nov... 8 years at one dealership....I change to another and got canned... Thank God it happened when it did (3 weeks from having my house finished that I was building)......got a 4.8% rate instead of 6% cause I had to wait until I had another job...


Anyway, Tony you have it summed up pretty well. the numbers could be off some but that is about how it goes in car sales these days....LOL
 
Tony Shelton said:
Do you know how the car business works?

In the 80's and early 90's this is how it worked:

Dealership pays 20k for the car.
Factory cuts them back 2% (varies)or $400.00 each quarter.
Dealership covers it's office nut with "Doc" Fee (under $50.00)
Dealer adds $300.00 PAC to "invoice" price for advertising, etc.
Salesman sells car for $22,300
Salesman gets 35% of $2000 or $700.00 (Salesman paid well and has incentive to keep in touch with the customer and provide good service for future business)
Dealership gets $1300 and pays managers $300, keeps $1000. (Round numbers)
Dealership finances and keeps 3% of 5 yr financing and makes another $1500 on the loan.

Car price $22300
Dealership gets $2900 after all direct expenses
Salesman gets $700

Shoot forward to 2008

Dealership pays 20k for the car.
Factory cuts them back 2% (varies)or $400.00 each quarter.
Dealership covers it's office nut with "Doc" Fee (NOW some are $800.00)
Dealer adds $1500.00 PAC to "invoice" price for advertising, etc.
According to the dealership they "own" the car for $21,500
Salesman sells car for $22,300
Salesman gets 20% of $800 or $160.00 (Salesman doesn't give a crap about the customer or future business)
Dealership gets $640 and pays managers $200, keeps $440. (Round numbers)
Dealership finances and keeps 2% of 5 yr financing and makes another $1500 on the loan.

Car price $22300
Dealership gets $3890 after all direct expenses (including an allowance for inflation over the years)
Salesman gets $160

What has changed? Nothing but the greed of the owners of the dealerships. Salespeople are expendable and less than human.

What's ironic about all this is the salespeople brought this upon themselves by being so greedy and heartless during the 70's.

It's the trickle up theory of Karma. :eek:
Click to expand...
While this is all pretty true, how many times in TODAY's market can a salesman sell a $20k cost car for $22300. With the internet, etc. it's just not happening like that, most consumers know the cost structure of a car better than their salesman. The profit margin today is lower than yesterday, and the manufacturers have responded by increasing the incentives to dealers. Since '01 especially, it has all been incentivized selling. Unfortunately, you are right, the salesman don't make as much as they used to, or do they? Some might argue that is just a market correction to the over-pay they used to receive. Mike Epistani was a legendary salesman in the '90's in CA and easily grossed over $300k/yr (some reports have him closer to $500k). For every Mike, there were four other salesman not making crap (80/20 rule). Now many of the payplans include a flat salary, CSI pay, or a $200 mini (instead of the old $50 ones). Today's top sellers like Scott Reber don't make as much as the likes of Mike, but the average guy makes more so what has really happened is not a decrease in the average, but an increase in the median.
 
Larry Millette said:
Don't forget also that the finance manager gets a bigger commission if he can get you to sign at a higher % rate on the loan. Anything above what the bank wants for the % rate goes back to the dealer and him as a bonus. Also on the back end are the pretty much useless warranty packages. The finance manager and the sales person also get a % on that. Funny thing is most of the time if you can't see it, touch or feel it, it's probably not covered. (unless of course it's a lease) They like protecting vehicles that they technically still own.

I sold New cars for a while until people started coming in with their own invoices telling us what they were gonna pay and what their trade was worth. (Theres another % for the dealer. ACV verses what they give you and sell it for at auction or back on the lot.) I got sick of that and went to work at a secondary lender store for the next 6 yrs. I made real good money working there. Flat pay per car with bonuses at certain levels but it was easy money. Those bonus checks at the end of the month were sweet!
Click to expand...
True the bank will pay back PART (usually 70%, with a max of a three point spread) of the extra finance charges to the dealer (called reserve). I can recall many situations where a well-shopped consumer was sitting in my office (I was a finance director) and couldn't land a rate below 15%. If I give him 13%, he's gotten a good deal. So what if I convinced the bank's buyer that the customer wasn't as high risk as they thought and got it bought at 10%. When did profit become a four letter word?

Also, technically, "stealing the trade" is calculated on the front-end (commissionable) gross. Many managers, though, do significantly pad the recon costs to reduce the payable commission, you are right. This is all going by the wayside with newer payplans, though.
 
Alexy said:
Yeah and if you find a factory dealership that will do warranty work let everyone know. Since the billable rate that the manufacturer will pay for warranty work is less than what they can charge an individual the dealers are really not intrested in doing the work.
I think it is the same with medicine and the proposed govt health care the hospitals and doctors are not going to go fo it.
Anyone notice the utterly dead reception the pres got from the speech he got from the American Medical Accociation? All you hear about is his speech not the fact that the doctors are not applauding him for wanting to cut thier livelyhoods.
Click to expand...
Not only do franchised dealers HAVE to do warranty work, they want to. The manufacturer pays them quickly at very fair rates. Last warranty rate I remember (from '02) was $75/hr. Warranty work is key to getting their absorption ratio to exceed 100%
 
I purposly forgot all the details of a car dealership. I used to work for a large dealership in Buford GA and all I know is that when it got bought out by a Corporation everything went south. Working at a dealership is cut throat. Just because you are doing a good job doesn't mean you have job security. I have seen a LEAD salesman get cut for making too much money....HOW DOES THAT MAKE SENSE? He is selling cars that make the dealership money?? Go figure. We used to go through 10 to 15 salesmen a month. They would have a 2 week long training class and then turn them loose. If they didn't make it...then who cared? There was another set of salesmen ready in another 2 weeks. It was crazy. Also...the sales manager was the type that would sell you a car, rip you TOTALLY off, and make you feel good about it. Then he would laugh all the way to the bank. I remember him dealing with a particular customer that had made the statement "I need to ask my wife" and the manager picks up the phone and goes "Hold on...I need to ask MY wife if I can sell you the car." Totally obnoxious.

Sorry...as you can tell...this left a bad taste in my mouth. lol

And as far as the warranty work is concerned..the mechanics all refer to that as the "gravy". Most of it is real simple to do but pays the most.
 
Nichole said:
I purposly forgot all the details of a car dealership. I used to work for a large dealership in Buford GA and all I know is that when it got bought out by a Corporation everything went south. Working at a dealership is cut throat. Just because you are doing a good job doesn't mean you have job security. I have seen a LEAD salesman get cut for making too much money....HOW DOES THAT MAKE SENSE? He is selling cars that make the dealership money?? Go figure. We used to go through 10 to 15 salesmen a month. They would have a 2 week long training class and then turn them loose. If they didn't make it...then who cared? There was another set of salesmen ready in another 2 weeks. It was crazy. Also...the sales manager was the type that would sell you a car, rip you TOTALLY off, and make you feel good about it. Then he would laugh all the way to the bank. I remember him dealing with a particular customer that had made the statement "I need to ask my wife" and the manager picks up the phone and goes "Hold on...I need to ask MY wife if I can sell you the car." Totally obnoxious.

Sorry...as you can tell...this left a bad taste in my mouth. lol

And as far as the warranty work is concerned..the mechanics all refer to that as the "gravy". Most of it is real simple to do but pays the most.
Click to expand...

I have heard of this type business practices going on. Thank God I worked for family owned dealerships and things were WAY better. I actually enjoyed the work.

If you want to get treated like a human being deal with family owned dealerships, they are real people.
 
pb4ugo said:
While this is all pretty true, how many times in TODAY's market can a salesman sell a $20k cost car for $22300. With the internet, etc. it's just not happening like that, most consumers know the cost structure of a car better than their salesman. The profit margin today is lower than yesterday, and the manufacturers have responded by increasing the incentives to dealers. Since '01 especially, it has all been incentivized selling. Unfortunately, you are right, the salesman don't make as much as they used to, or do they? Some might argue that is just a market correction to the over-pay they used to receive. Mike Epistani was a legendary salesman in the '90's in CA and easily grossed over $300k/yr (some reports have him closer to $500k). For every Mike, there were four other salesman not making crap (80/20 rule). Now many of the payplans include a flat salary, CSI pay, or a $200 mini (instead of the old $50 ones). Today's top sellers like Scott Reber don't make as much as the likes of Mike, but the average guy makes more so what has really happened is not a decrease in the average, but an increase in the median.
Click to expand...


You're right about all that Brandon. I was just making the point that there is now loyalty in the business. And now that goes all the way up to the manufacturer/owner relationship.

I could tell you hundreds of stories of lies, deceit, and downright meanness that is perpetrated by salesmen, managers, owners, etc on a daily basis.

Sounds like you worked for a good one. Seems like once they get more than two dealerships all the employees are cattle after that.
 
Car dealerships equal a den of thrives. My wife worked for Chapman Auto Group for a dozen years. Was the cooperate assistance manager of Finance. They get coming and going in a dealership. MSRP is for fools, your "trade in value" is once again designed for desperate people or fools. Dealer reserve, extended warranties, glass etching, tire warranties, etc and all pure profit for the "producers" the term used for the person in the finance department you sit across from while he/she tell you the exaggerated interest rate you supposedly qualified for (dealerships rate + 3 to 7 %). The extended warranties you pay $1000's for cost the dealership between $299 and $499, depending on the car type and length of warranty. You or anyone can buy these exact same warranties for the prices quoted above aftermarket, but the "producer" will lead you to beleive you must purchase his/her pure profit warranty from him/her.

Remember this next time you walk into a dealership. That "producer" and that service writer in the service department, you'll never encounter 1 that makes under $100,000 a year, and they make that money buy screwing you over.

If you live in the Phoenix metro area, and are ever in the market for a new car or truck, contact me and I will get nyou your vehicle for below "employee pricing" or "dealer invoice" which are more scams they play.

Example, my 2005 2500HD LT, loaded with every option available. MSRP $47,000 +. I paid $32,917 out the door, tax, license plates ($507.00), doc fees (another scam).
 
Jim Cooney said:
Car dealerships equal a den of thrives. My wife worked for Chapman Auto Group for a dozen years. Was the cooperate assistance manager of Finance. They get coming and going in a dealership. MSRP is for fools, your "trade in value" is once again designed for desperate people or fools. Dealer reserve, extended warranties, glass etching, tire warranties, etc and all pure profit for the "producers" the term used for the person in the finance department you sit across from while he/she tell you the exaggerated interest rate you supposedly qualified for (dealerships rate + 3 to 7 %). The extended warranties you pay $1000's for cost the dealership between $299 and $499, depending on the car type and length of warranty. You or anyone can buy these exact same warranties for the prices quoted above aftermarket, but the "producer" will lead you to beleive you must purchase his/her pure profit warranty from him/her.

Remember this next time you walk into a dealership. That "producer" and that service writer in the service department, you'll never encounter 1 that makes under $100,000 a year, and they make that money buy screwing you over.

If you live in the Phoenix metro area, and are ever in the market for a new car or truck, contact me and I will get nyou your vehicle for below "employee pricing" or "dealer invoice" which are more scams they play.

Example, my 2005 2500HD LT, loaded with every option available. MSRP $47,000 +. I paid $32,917 out the door, tax, license plates ($507.00), doc fees (another scam).
Click to expand...

We paid $1800 for 100k warranty on my wife's BMW. One of our customers bought the same warranty for $4400 the same week. I'm thankful we got it for cost, but do you really need to make $2600 skim off of something you have nothing to do with?
 
Jim Cooney said:
Car dealerships equal a den of thrives. My wife worked for Chapman Auto Group for a dozen years. Was the cooperate assistance manager of Finance. They get coming and going in a dealership. MSRP is for fools, your "trade in value" is once again designed for desperate people or fools. Dealer reserve, extended warranties, glass etching, tire warranties, etc and all pure profit for the "producers" the term used for the person in the finance department you sit across from while he/she tell you the exaggerated interest rate you supposedly qualified for (dealerships rate + 3 to 7 %). The extended warranties you pay $1000's for cost the dealership between $299 and $499, depending on the car type and length of warranty. You or anyone can buy these exact same warranties for the prices quoted above aftermarket, but the "producer" will lead you to beleive you must purchase his/her pure profit warranty from him/her.

Remember this next time you walk into a dealership. That "producer" and that service writer in the service department, you'll never encounter 1 that makes under $100,000 a year, and they make that money buy screwing you over.

If you live in the Phoenix metro area, and are ever in the market for a new car or truck, contact me and I will get nyou your vehicle for below "employee pricing" or "dealer invoice" which are more scams they play.

Example, my 2005 2500HD LT, loaded with every option available. MSRP $47,000 +. I paid $32,917 out the door, tax, license plates ($507.00), doc fees (another scam).
Click to expand...
How is it screwing somebody over to upsell them? Are you screwing your customer when you sell them window cleaning at $5/pane with a building wash when they could get a window guy in for $3/pane? They are making the buying decision based on being convinced of a value.

The only exception to my view above is padded payments (which used to be commonplace) and "including" crap people didn't know they were buying. That is total BS. After a few dealers got stung HARD for that, it's a little less common now. It still comes down to being an educated consumer, though since a vehicle is not a small purchase.
 
pb4ugo said:
How is it screwing somebody over to upsell them? Are you screwing your customer when you sell them window cleaning at $5/pane with a building wash when they could get a window guy in for $3/pane? They are making the buying decision based on being convinced of a value.

The only exception to my view above is padded payments (which used to be commonplace) and "including" crap people didn't know they were buying. That is total BS. After a few dealers got stung HARD for that, it's a little less common now. It still comes down to being an educated consumer, though since a vehicle is not a small purchase.
Click to expand...


As a consumer you have got to have some common sense when going in to make any purchase. With todays technology there is no reason why you should not have some idea to what you are buying and what it should cost you......
As far as the extended warranty on cars....it is a gamble when you buy one. I agree they should not be hammering people on the cost but a reasonable profit is good. One trip to the shop with an A/C issue will usually come close to covering what you spent on the warranty and you still have converage.
 
The detailing biz is a different animal... We get one customer in and they will never leave. This can be anywhere from $110-250 one guy regularly every month. We have gone the dealership route but they don't pay and there just isn't any money in it. Too many guys are only willing to get $7/hr for decent work. Just is tough road.
 
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