We in the car biz look at profit in two ways…the “Front End” and the “Back End”. Money made on the sale of a vehicle is considered Front End, while money made through finance, financial products and aftermarket sales is considered Back End. At the end of the day, dealerships don’t really care how money is made, as long as there is profit-somewhere. In fact-these days-it’s much easier to make money on the back end of the deal. Here are the main reasons why dealers have an easier time making money on the Back End of the deal.
1. It’s easier than the Front… you’re not expecting it. Consumers are so focused on the price of their vehicle they tend to blow off any other components of their deal, making it easy for dealerships to recoup lost car-sale profits by way of money made on the back end.
2. Along the same lines, most buyers think there is no way a dealer can lose money on the sale of their vehicle…therefore assuming the dealer is in state of perpetual profit-generation. As long as they assume this they will not consider that the ad unit sedan they are looking at-which just happens to be $1500 less than the non-ad units-leaves the dealer chomping at the bit to make money up…somewhere, anywhere, so as not to lose money. (Dealers lose money all the time…get over it. Most ad units are losers for the dealer. They exist to leave the impression that the dealer is ultra competitive and eager to slash prices. The ad units look like a great deal because they are! Secretly, dealers hope your salesman will switch you to a different vehicle-one that shows a profit.)
3. Dealers have already conceded defeat on the Front End, you just don’t know it. There are two types of vehicles that dealers sell. One is the vehicle that everyone wants-the latest, greatest, big demand, stand-in-line-to-get-it car, truck, SUV or crossover. Then there’s the other 95% of the vehicles out there for which supply greatly exceeds demand. So, unless you are looking at a break-through product, dealers concede that they need to be close to invoice, if not under, in order to get your business. In fact, selling at invoice, much of the time, is considered a victory. In any case, emphasis is shifted to the back end of the deal.
4. Oversupply of vehicles will continue to be a factor for some time to come. There are just too many vehicles out there…period. Too many manufacturers supply too many dealers. Your high school Econ teacher was right…too much supply and the price goes down.
5. Most buyers look at financing, financial products and after-sale products as accommodations to the sale, rather than profit potential for the dealership. Yes, dealers make money on financing! Yes, they make money on the sale of Extended Service Plans and other insurance related products, as well as making money on navigation and entertainment systems, bed liners, nerf bars, rims and whatever else you want on your vehicle. Dealers are no different from the restaurant that will run a special on their main course, then make it up on the appetizers, drinks, desserts, etc, that you purchase with your bargain meal.