Now that you have a general overview of how dealerships, as a whole, operate to create profit, lets break it down and get specific on how the Sales Department functions and creates profit. It's important to understand how the Sales Department generates revenue.
When you understand the “how,” it becomes easy to comprehend “why” it's possible to buy a car below cost. This is crucial to your success in negotiating your car deal. How we will apply this knowledge to put you in control of the selling process will be discussed in a future article.
Let's start with some of the general areas of profit the Sales Department is responsible for, and then discuss each one in detail. The first area of profit is the car deal itself. The car deal is broken down into two distinct groups of profit known as “the front end profit” and “the back end profit.”
Front end profit is generated based on the selling price of the car, less its cost. This is also known as the “front end gross.” The back end profit is usually generated by the Finance Department. Back end profit or “back end gross” is generated by the profit from extended warranty sales, GAP insurance and an array of other products and services offered by the Finance Department. The items that were purchased are then added into the contract.
The Finance Department also generates revenue by securing financing on behalf of the customer. That profit is known as “reserve.” Back end profit will be discussed in greater detail in a future article.
A second area that the Sales Department generates profit is on programs put out by the manufacturer. Some of the programs may include “dealer cash,” “stair step incentives,” or contest. These programs are designed to target and incentivize a dealerships performance in areas the manufacturer wants to promote growth or move inventory that has become “aged,” or in stock for a long time.
These programs are not normally advertised to the general public, nor should they be confused with rebates or consumer cash. The programs are usually not long running, and are available to the dealer until the manufacturer's objective is meant.
Let's look at dealer cash for a minute and how this might benefit you as a buyer. Dealer cash is usually provided to dealers to move “aged” or stale inventory. First, I would like to point out something I think is very important. This is the Dealer's money! Not the customers. They may use this money in a number of ways. They can keep it all, when they sell the qualifying unit, they can use it to discount the unit, or bury negative trade equity with it.
In my career, I have witnessed dealer cash amounts as high as $ 4,500! Imagine a dealer discounting a new pickup truck $ 4500 plus the available rebate for the customer of $ 3,500! The objective is to identify those units where the dealer cash may be available. I'll discuss how to do that in future articles as we start putting everything together that we've learned.