Let me ‘splain dealerships to you (car, m/c, boat, etc). Next time you pass by a dealership take a look at it and try to imagine how much it must cost to run that place. It’s huge so the lease or whatever must be huge. How do they pay for that? They have to make a bunch on each car right? No, wrong. The gross profit on the car is usually the least of their concerns. The more, however, the merrier. There are 5 money making machines in a dealership – Sales (new and used), F&I, Parts and Service. First you’re met by the barracuda, the salesman (new or used). He usually gets paid a commission on the gross profit from the sale. So, the more the gross profit the more the commission. A savvy buyer will minimize the gross profit. So how do they pay the bill for that huge dealership? Well, the next step in the process is the Great White Shark, the F&I manager. In most cases he’ll make some good money off the buyer, however, from me maybe a few bucks on the Extended Service Agreement (AKA Extended Warranty). Again, how do they pay the bills? The other 2 departments are Parts and Service. The parts department will generally make at least 40% on all parts sold to customers and to customers through the service department. There is a thing called the absorption ratio. That is the combined net profit of the parts and service departments. A good dealership with have an absorption ratio of 100% or more. What that means is the profit from parts and service are covering 100% or more of the expenses for the entire dealership. So, they didn’t make anything on me in sales and F&I but they’ll make some money from me on parts and service. We know parts makes 40% gross profit but how does service make money. How well a service department does is determined by their productivity and efficiency. Productivity means how much work management is able to bring in. For instance, if they have one technician and he is there for 8 hours and they bring in 4 hours of work then they are 50% productive (should be over 90%); 8 hours – 100% productive, 100 hours – 100% productive - they can’t do more than 8 hours so the maximum is 100%. Next is efficiency. That is the technician’s ability. He may have only worked 8 hours but he may have billed out 16 hours of work. So, he’d be 200% efficient. If he had 8 hours of work and it took him 16 hours to do it, he’d be 50% efficient (get rid of him). Good technicians are usually over 150% efficient. So, the profits in a really well run dealership are not made on how much they got from you on the sale of the vehicle but instead on the ability of the parts and service departments to cover the expenses of the dealership. So don’t worry about trying to bleed them dry on the sale.
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