How to increase profitability of "Auto Dealerships" ?


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How can Increase the value of my dealership?

How long is the piece of string in my pocket? The journey to Dealer profitability can be short and quick, or long and hard. The bottom line is to do the easy things first. "Low hanging fruit". Eliminate waste of all kind, and always put the customer at the center
 of any activity and decision. Look at each and every POTENTIAL revenue stream, and exploit it to the max. Never increase revenue by loading the customer invoice.


1. Arrive realistic profitability 

2. Identifies Profit earners and Loss bearer 

3. Enhance the profitability to maximum extent 

4. Control on overheads

Let us discuss each principles in details

There are 4 pillars of wisdom: new car sales, parts sales, selling used cars and after sales. 

These businesses generate very low margins and must be optimized. Margins may be low but all departments must work profitably.

A knowledgeable consultant sets the standards and the plan of attack. They can also assist with obstacles. That's it. However their knowledge can remedy things at a much lower cost than personal education in and the pain that comes with it. Like going to medical school to learn how to do an operation. Not cost efficient,. go to someone who has been to school and charges for the operation. And if you have a store where labor is 50% of the invoice better known as the RO. You need a consultant really bad. There is nothing like experience. That's what consultants bring. And like football players there are good ones and better ones. Managing dealerships is like anything else. Once you figure it out is easy.

The discussion started with the term 'profitability', which indicates more of structural aspect of the business model, rather than 'profit' in absolute term. To my mind, we are talking on basically two models ie during business in up swing and during down tern. Earlier, those situations were coming in longer interval unlike now. So, we should have a business model which can adopt those changes fast. I believe, during down tern, we should focus on cost rationalization, interns of promo budget, working hours, focus on parts sale and service. At the same time we should focus on acquiring newer business avenues like adding new OEMs, better utilization for showroom's space. In a way, we should act as 'hunter'. During good times, we should utilize own resources with fullest potential, focusing sales and market penetration. In a way, to act like a 'farmer'.

Each dealership is different. They all have a unique set of circumstances that disallows the cookie cutter approach that everyone wants. If it was a "one size fits all" then someone would write a book and dealerships would all do the same thing the same way every time and be happily ever after. But they are not. So the path to profitability is very muddy. And you will get dirty. And you will fall down. And my advice to anyone on this path would be to ask someone who is profitable for help. Whether another dealer or a consultant, someone is doing a better job. There is no shame in seeking information. And that is all you are doing. Another dealer will tell you what he is doing. A consultant will show you. At the end of the day it boils down to what you do with the information. It is the dealer who is responsible for the execution of any process. An outsider looking in is a great way to identify areas in need of improvement but again it is up to the dealer to act. No magic pills. Hard work, dedication, great customer service and a sense of satisfaction for a job well done will go along way

The car business is a pennies business. If you watch the pennies you don't have to chase the dollars


Years ago Smith worked in a fast food management setting, Smith  counts cups which at that time was 4 cents for large cups which Smith thought at first was so foolish but as time went on it was apparent how quickly the pennies added to dollars and dollars to hundreds of dollars. 

In the car business we deal in thousands of dollars so to drop $50 or$100 seems so small but I am here to tell you take $100 times the number of cars you sell each year and see quickly it adds up. When negotiating a car deal instead of dropping $500 or a $1000 drop $50 or $100. See how many times people buy at the $100 dollar drop, after all they just want the assurance they have negotiated the best deal

Profitability gains are at the margins in this industry as dealers. Everything is in the details and the small gains. Under the effect of multiplying by volume, it can be great gains

Technically speaking, the basic components of profitability are inventory turnover and gross margin. If you have the ability to manage this in the best way, considering its market reality, then you will be able to celebrate an expected result on the bottom line and this is true whatever the business to be considered - new car, used car and parts sales

“ What Gets Monitored Get Improved ”  

Sample Financial Format for Monthly Performance Review


Elements Breakup


Many things influence profitability such as the product / brand they sell, volume, geographical and demographic characteristics of the markets as they linked positively with net profits.

The most significant related things to long term profitability increase is better dealer internal system with investing in a talented team & management in terms of training, coaching, motivating, inventory and KPI's. 

Another main key for profit is the top notch qualitative after-sales services to exceed customer satisfactions and that will insure retention, positive future referrals; customer loyalty. An internal goodwill program to maintain customer satisfaction will lead to increase profitability. Excellent retail business revolves around customer service and to create loyal and bond always with customers.

All the above points are very much valid until this point 

Most of the dealership runs their inventory on Bankers fund and because of this they lose their bottom line by paying huge interest and feels that its not profit making business.

It is necessary, approaching the market today so much more professional and structured in the market has reversed , the showrooms are less crowded.We feel this trend plans to "return to basics "

The key to profitability of a new car dealership lies in it's pre-owned sales department. When a pre-owned vehicle is sold all the other departments reap the benefits (service, parts, Finance and insurance, and even the new car dept). Of course you have to manage every department with great attention to detail, but ramping up sales and inventory in pre-owned has been very successful for many dealers in the past and I'm sure it will continue to be. Earlier the key to any sales department is how quickly you can turn your inventory and how much profit you keep in every transaction. Turning inventory quickly in pre-owned has everything to do with time to market through the recon process and being honest with yourself about your asking prices. The only reason a fully reconditioned car is not sold is that the price is too high.

I think Sales Team is one driving factor for the dealership profitability. The more conversions they will generate and the better numbers will come out.

Only a team can make a profit in the automotive industry. When I say this I mean both new and used cars and service. Further, the service must be able to sell more. It does not matter how many through puts you have, you should carry about sold hours. Only a sold hour or sold goods are your profit. It is important to sell goods and services at a time when customers need it. Cross selling is a powerful tool. 

We have to look at the life time value of your customer.Selling the new or used car is fantastic, however, you need to drive up the life time value of your customer and that is usually done by the back office with service. If that customer has a pleasant experience through the ownership of his car he will come back and buy another one or at least refer someone about the dealership.

Being a dealership there is a need to deploy the resources very effectively. It is mandatory for the dealership to sustain a competitive advantage among the odds.

I remember one of my dealers saying " in the automotive business, you win seconds and you lose minutes"

It's a hard way to securing profitability, and each dealer should watch carefully all his expenses and save $, £, € one by one to keep the fixed costs as low as possible. 

Fixed costs in a dealership, the ones which are not related to volume, i.e. salaries, real estate, marketing expenses account for about 90% of total costs.

Needless to say that a small downturn in sales has a dramatic effect on your profitability.

The other driver for profitability is to control your grosses. Don't let your salesmen give up say $50 customer discount without you or your sales manager approving it and checking it is really needed to close the deal.

Another dealer told me "we are greengrocers... managing a dealership is not rocket science it is just down to earth day to day practice"

Looking at the margins we get from the manufacturers it is a very big question on the dealership viability.
We are aware that we will not be able to change the mind set of the manufacturers and hence we all need to change ourselves and focus on the following enablers responsible for the profitability

1.Accessories sales through sales/service/body shop,selling extended warranty which will retain vehicle reporting, tyre sales, battery sales, used car sales through exchange of vehicles and many other value added services.

2.Vehicle retention will come from the customer satisfaction.

3.Referral sales will come from customer satisfaction.

4.Cost cutting on the expenses by saving energy, i have found in many dealerships a lot of energy/electricity is wasted.

5.Cost cutting on the events and activities which do not yield much results as we yield in customer satisfaction. 

Important conclusion is we need to focus on customer satisfaction which is an important enabler to the dealership survival.

Finally the conclusion will be

I think it is important to sell the "dealership" not just the vehicle. When you provide a positive experience for the customer from their buying experience, offer the first oil change free to get them used to coming into the service department and start building that relationship. That is where the money will continue to return to the dealership. Selling the vehicle brings a single revenue, getting the customer into the service department for maintenance and when something goes wrong, that is residual. Ever thought of focusing a mailing on the customer that just bought and will be needing to get an oil change in the next few months? Or making sure you have an SMS marketing program in place to send them a text message to remind them its been 3 months, getting close to monsoon season, etc? We have seen so many dealerships with massive revenue "wounds", losing HUGE amounts of profit due to bad customer service, no customer retention marketing, lack of strategic marketing. 

We hope this article helped you know about "How to increase the value (profitability) of the dealership?"

You may also want to see

"The Journey from a Good to Great Dealership!"

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