7 Strategies to Increase Dealer Profitability

A group of professionals can be discussing the strategy to improve dealership profitability

One of the key struggles for dealerships in the automotive industry is the pursuit of profitability. It can seem like an insurmountable challenge with so many factors impacting it. However, it’s vital to success. By applying the right strategies that focus on data and insights, an increase in auto dealer profitability is more attainable for the short- and long-term. In this post, learn about seven strategies that can grow your revenue.

What is Dealership Profitability?

Dealership profitability as a metric is what you net on sales for new and pre-owned vehicles. Profits also come from financing, service and parts, and extended warranties.

These can all vary widely, but there are benchmarks. The average profit margin from a new vehicle sale for a dealership is 3.9%, according to data from NADA (National Automobile Dealers Association). Growing this margin can be challenging in a market with many years of volatility, from limitations in inventory to high interest rates.

Yet, this is still the quest for dealers. Increasing dealer profitability enables you to invest in many areas that will continue to add to your bottom line, including:

  • Acquiring top-quality inventory
  • Hiring and retaining skilled staff
  • Providing excellent customer service
  • Expanding your business
  • Adopting new technology to streamline processes and support marketing efforts

When your numbers rise, you also create a cushion when economic downturns or other disruptions occur. Many factors impact cost-efficiency and profitability—the diversity of inventory, consumer sentiment, incentives, turn rates, and more.

As a result, the strategies for increasing dealer profitability must be flexible and adaptable.

What Makes a Car Dealership Successful?

A chart shows the improvement in dealership profitability

The success of a car dealership comes from many sources. While the primary goal is selling cars, there are more ways you can make money. Steady streams of revenue don’t always translate to profits because of all the costs to run a business. There must be a balance to come out in the black. These are all the elements that impact overall profitability.

1. Vehicle Sales

As defined earlier, the profit margin on new car sales is low. For pre-owned vehicles, the numbers can be a wide range but tend to be higher. Even though this is the reason dealerships exist, the actual transaction of selling cars isn’t always the biggest moneymaker. The longer inventory sits also can plunge margins.

2. Operational Costs

Operational costs eat into auto dealer profitability. They encompass everything required to keep the business running—labor, rent, utilities, inventory, advertising, insurance, taxes, and more fall into this category. Finding ways to cut these costs and optimize spend is critical to ensuring they don’t overrun revenue.

3. Inventory Management

Inventory management can also negatively impact profitability. It’s a balance of supply and demand. You want to have desired vehicles on your lot and sell them fast so you can continue to bring in new inventory. Without careful and data-driven management of this, you may not really “know” your inventory. It can lead to waste and risk.  

4. Customer Satisfaction

If you have happy customers, they’ll contribute more to your revenue. After the sale, you can still expand their value with service and parts to ensure loyalty thrives. Automotive has the highest brand loyalty in the U.S., with a score of 14.31. However, you can’t depend on a consumer’s love for the brand to keep them as your customer. Competition is everywhere, which means you need concerted efforts to ensure they buy their next car from you for many years to come.

7 Strategies to Improve Dealership Profitability

Improving auto dealer profitability requires a collection of strategies that complement each other to boost your efficiency and financial health. Consider how you can apply all these to your business.

1. Provide Superior Customer Experiences

As just discussed, car buyers can be very loyal. Capitalize on their love for the brand and turn that into a love for your dealership. Superior customer relationships begin from having a customer-centric culture. Use methods like personalized interactions, such as sending customers an email celebrating their first year with their car. 

Potential customers also want transparent pricing and efficient after-sales support should they run into issues or have questions. Building all this good karma between your dealership and customers will have them coming back and referring family and friends.

2. Analyze Sales Processes and Techniques

Assessing sales approaches enables you to understand what’s working and where there are gaps. You can review data on sales team performance to identify any patterns. You’ll also want to ask your sales team what objections they’re hearing and brainstorm together on how to overcome them. Coaching and training salespeople should also be a constant part of your employee development.

In addition, create ways to identify upselling and cross-selling opportunities based on looking at customer data. For example, customers with cars at a certain age are more likely to be ready to trade in, and sales can initiate these conversations.

3. Deepen Product Knowledge

The more knowledgeable your salespeople are, the better they are at positioning value and answering complex questions. In today’s world, people don’t want a hard sell approach. Rather, they prefer someone who’s an expert to explain and educate. 

For example, EVs (electric vehicles) interest consumers, but they have worries and concerns. If sellers can address those with deep knowledge, they’ll feel more at ease, which could shift to stronger buyer intent.

If salespeople do a great job of delivering information, it can also reduce after-sales support and service department issues.

4. Enhance Service Department Efficiency

Service department budgets can become unsustainable if left unchecked. This can be a money maker for automotive dealerships, but only if efficiency is part of the operations. The costs of housing cars under repair, the time to complete them, and parts are all areas to focus on for optimization.

5. Boost Your Online Presence

Are you maximizing your online presence and staying in front of those most likely to need your services? Increasing your digital visibility means having an accurate, modern website that delivers an excellent user experience. It should also have all the components to make it a lead magnet by focusing on SEO (search engine optimization)and digital marketing best practices. When your digital footprint is optimal, you’ll bring in qualified leads and can reduce some operational costs if customers can shop online.

6. Prioritize Top-Talent Recruitment

The talent on your team is essential to increase auto dealer profitability. You want a group of high achievers, including salespeople, marketers, and service technicians. They all contribute to all the things that drive revenue. Providing a strong culture, fair wages, and opportunities to grow and advance supports customer retention, as well. Turnover is another expense that will impact profits. The cost to fill a role can be one-half to two times the employee’s salary.

7. Leverage Inventory Management Software

Improving auto dealership profitability depends greatly on the technology you use. Central to that is inventory management software. It’s a significant capital investment, but it provides the insight you need about inventory turnover and carrying costs. You can monitor these metrics in inventory management software.

While there are many options, seek a solution with a sophisticated environment of data intelligence. Lotlinx’s VIN Management Platform allows you to execute VIN-specific strategies with real-time market analysis and inventory management. These innovative features allow you to increase turn, reduce rate, improve margins, and control risk.

Maximize Profits with Lotlinx

In reviewing how to improve dealership profitability, it’s a balance of driving more revenue and finding ways to decrease operational expenses. By leveraging these strategies, your dealership can maximize profits. You’ll find it’s easier to make this a reality by partnering with Lotlinx.
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