Car Dealer Profits

dealer-profitsCall it the car dealer’s conundrum.
TrueCar, the vehicle-pricing website did a survey earlier this year of more than 3,000 U.S. consumers. “Consumers think car dealers make about 20 percent” profit, said John Krafcik, TrueCar’s president. “They say a fair profit would be about 10 percent.”

The actual profit on new-vehicle sales, was 3.8 percent in 2013, down from 5.5 percent a decade earlier, TrueCar says, based on National Automobile Dealers Association data.

TrueCar isn’t a disinterested observer. It advertises its website as providing peace of mind to car buyers that they haven’t paid too much. Still, the survey demonstrates the disconnect between buyers and dealers.

For example, the survey found 26 percent of buyers say they overpaid when buying a car or truck and 32 percent said they wouldn’t go back to the same dealer out of dissatisfaction.

Krafcik, a former Ford and Hyundai executive, said in an interview it’s “the trust gap.”

Buyers, he said, know “there isn’t one price” for a vehicle. “Consumers have this innate anxiety.”

There is a minority that enjoys haggling, Krafcik said. “About 10 percent of car shoppers enjoy the process. They understand they’re not overpaying.”

Tesla, the electric-car maker, has developed a marketing system that takes that anxiety into account. The Palo Alto, Calif.-based company prefers selling its electric cars through stores it owns, similar to how Apple AAPL +0.28% sells tech products. General Motors GM and Ford Motor at one time experimented with company-owned outlets but gave up on the idea because of the friction it generated with dealers.

Krafcik said based on TrueCar data, consumers do consider more than price. Dealer proximity is also taken into account, including for service work, he said. Also, 75 percent of the time, a buyer also wants to trade in a used vehicle. Thus dealers have opportunities — if their outlets are convenient for customers or can satisfy buyers on their trade-in — to bridge the trust gap.

“In the end, the dealer is representing the brand to the consumer,” Krafcik said.


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