The automotive industry is a multi-billion dollar industry throughout the world, and dealers take home just a fraction of that. But just how much do dealers make when you buy a vehicle? Here's a look at the average dealership profit on a car and how it impacts you in 2022.
Average dealer profit in 2022. According to a recent study from J.D. Power, dealers are on track to make 126% more profit in the first quarter of 2022 compared to Q1 2021. This puts profit on pace to reach $5,013 per vehicle. This doesn't mean that every dealership is making over $5,000 on each car they sell, this is just an average, with many factors going into it.
In total, retailer profits for new-vehicle sales are projected to hit $14.2 billion in 2022 in the U.S., a whopping 95% increase in profit year-over-year. This increase is despite dropping sales volume, thanks in part to the ongoing supply chain and chip shortage issues still impacting the industry.
How do dealers make money on cars? Dealers make money on cars in two ways, the front end, such as the selling price of the car, and the back end, on products like tire and wheel protection or extended warranties. Dealers may only make a few hundred dollars over MSRP on some models but could rake in a few thousand in backend products such as GAP insurance, added accessories, and additional warranties.
In some cases though, dealers can make several thousand over MSRP on the front end, if the conditions are right in the automotive market.
Markups may increase costs. Dealers can make more on cars when the inventory is tight by using markups – selling vehicles above MSRP. In a typical year, you might find many deals and discounts below MSRP just to get vehicles moving and competition going.
Right now, though, with the ongoing inventory shortages, demand is outstripping supply and allowing for record markups. These markups are designed to help dealers make a profit since they're selling fewer vehicles.
Besides just marking up the price on the vehicles that are in stock, dealers also have the flexibility to markup your interest rate in some cases, such as when they set up the financing for you through a captive lender. However, lately, there's been a crackdown from manufacturers on the limit these markups can have; Audi and VW, for example, just lowed their cap to 1%. It was previously 3%.
Getting a good deal on a car. If you're looking for your next vehicle, right now may not be the time to shop if you're looking for a low-priced offer. With the industry-wide inventory shortage, prices are up not only on new cars but on used vehicles, as well. This means it's important to know what you can negotiate on your car, especially if you're also seeking financing. Try to shop with the brand that can offer you the biggest rebate or special incentive, and always know your credit situation before you start applying for loans.
