How To Increase Dealer Profitability: 11 Expert Strategies in 2024

Running a car dealership business isn’t easy, and dealership profitability is an ongoing challenge for owners. With the average dealership netting only 3.9% of a car’s sale price in profits, owners are hard-pressed to keep their overhead costs down so their dealership remains profitable. This becomes increasingly difficult when you look at all of the factors influencing dealership margins and realize just how many are outside of the dealership’s control. Razor-thin margins make it harder to sell cars because they don’t leave much wiggle room for discounts or negotiating, key elements used in the sales process to increase customer satisfaction and ultimately close the deal.

So what’s a car dealership to do? If you’re wondering how to increase dealer profitability, you’ve come to the right place. Keep reading for a look at some of the key factors that make car dealerships successful and explore how Podium’s AI BDC can help automate processes and increase your dealership’s annual revenue. Plus, review 11 proven methods for enhancing profits while ensuring competitiveness and longevity.

How do car dealerships make money?

Before getting into tips and tricks, let’s quickly review how dealerships make money. There are four main avenues for generating revenue in a dealership setting:

1. Performing additional auto services (mechanical repairs, detailing, general maintenance, etc.)
2. Selling extended warranties for commissions from the warranty or insurance companies
3. Offering dealership loans and pocketing the interest
4. Selling cars to consumers

Dealership profitability is a measure of how much money a dealership takes home at the end of the day. In simple terms, this is the total revenue minus the total expenses.

Unfortunately, calculating total revenue and total expenses isn’t a simple process. On the revenue side, not all money coming in is considered revenue. For example, when a car is sold, the sale price is not the total dealership revenue on the sale—it’s the profit margin (the cost of the dealership acquiring the vehicle subtracted from the sale price of the vehicle) that counts toward the total revenue.

Similarly, on the expenses side, it’s not just inventory purchases; you also have to factor in all of the dealership’s overhead costs. Overhead costs include any additional expenses that aren’t auto-related but keep the dealership running. For example, employee pay, utilities and rent for the physical dealership location, snacks and drinks in the customer waiting area, etc. By taking all of these factors into account, a dealership can accurately determine its overall profitability.

What makes a car dealership successful?

A successful dealership is one with high profitability. While there are specific actions you can take to increase profitability (see the next section below for tips and tricks), there are also key characteristics that successful dealerships tend to have.

Check out these six attributes of successful car dealerships and see how your dealership measures up.

Customer Experience

Successful dealerships deliver exceptional customer experiences that keep customers coming back. This means offering top-notch customer service at every part of the car ownership journey, from that initial purchase to all subsequent servicing visits. When every interaction your customers have with your dealership ends on a positive note, it builds brand loyalty and increases sales over time.

Product Knowledge

Do your employees feel confident in their knowledge about cars in your inventory? Can they answer all customer questions both about specific cars in the inventory and about the dealership’s processes? Successful dealerships project an air of confidence by ensuring their employees know their stuff. This helps build trust with customers as they’re more inclined to reach out to you for help with questions and recommendations.

Efficient Operations

Efficiency has a large impact on dealership profitability. Dealerships who actively seek to optimize internal operations and streamline processes wherever possible are more successful than those who don’t prioritize operations because every boost in efficiency reduces costs. Efficiency is also important to customer relationships. Time is valuable, so the faster your dealership can complete requested services, the happier customers will be.

Adaptability and Innovation

Car dealerships are successful when they’re open to innovation and adaptable to changing circumstances. The more adaptable you are, the faster you can pivot your dealership marketing strategies and take advantage of prevailing trends. Additionally, being open to technological advancements will give you a leg up on the competition that’s more resistant to change. A great example of this is Artificial Intelligence (AI). There are multiple benefits of using AI for car dealerships, such as better lead management and improved response times, all of which shorten sales cycles so you can move more inventory and increase profits.

Strong Partnerships

Loyalty is transferable. It’s why endorsements are so effective. If a customer holds great trust in Company X and your car dealership partners with Company X, it suggests that you’re a trustworthy company too, and makes the customer more inclined to work with you. Successful dealerships maintain strong partnerships with other reputable businesses so they both benefit from each other’s reputations.

Marketing and Branding

Dealerships that clearly communicate with customers and are consistent with their branding across channels are more easily recognizable in the marketplace. A common tactic that’s helped many successful dealerships in the past is to choose a phrase or slogan that represents the dealership’s values and use it consistently in all advertising. Successful dealerships also take the time to learn what types of advertising work best for them so they can maximize their ROI (return on investment) and be more strategic in their marketing efforts.

Improve Dealership Profitability With These 11 Expert Tips

Bolster Your Online Presence

71% of consumers start car shopping online. Your dealership must have a strong online presence to get car sale leads and close deals. Review and update all existing digital content (your website, social media pages, etc.) and keep your online inventory accurate to ensure customers have everything they need to make a purchase. Consider implementing a webchat feature on your website with an AI chatbot that instantly answers customer questions and schedules appointments autonomously. Also, take stock of your current digital channels and consider where your target market is at. Maybe it’s time to expand your online presence and start using a new channel to expand your dealership’s reach.

Streamline Your Dealership’s Sales Process

Step back and take an honest look at your current sales process. Identify what parts take up the most time, both for you and for customers. Look for areas where there’s room for improvement and then take steps to improve them. This could look like upgrading your current system to a CRM or a lead-management system such as Podium to help you operate and respond to leads more efficiently. The more optimized your dealership’s sales process becomes, the less you’ll need to spend to capture leads and close deals.

Optimize the Online-to-in-Store Process for Customers

Most customers start online and finish in-store. The smoother and easier you make the online-to-in-store transition, the more likely it is you’ll close the sale. Consider setting up a virtual showroom or investing in a virtual assistant like Podium’s AI BDC, which can answer questions 24/7 and streamline the test-drive scheduling process, so all your customers have to do is choose a time and show up at your dealership.

Improve the Used Car Trade-In and Purchase Process

The potential revenue stream from used cars and trade-ins is not something you want to overlook. There are about three times more sales of used cars than new ones. That’s three times more leads, three times more potential sales, and three times the chances for more revenue. Ensuring your used car and trade-in purchase process is optimal is a must. Take time to review your current process. Perhaps survey past customers who traded in a vehicle to find out what parts of the process were most uncomfortable or challenging for them. Consider adding a page to your website that outlines the trade-in process at your dealership and links to an online form where users can input their vehicle’s information and receive a free quote online. Anything you can do to make the process smoother and easier for the customer will pay off in the long run.

Invest in Reconditioning

In sales, looks matter. Car reconditioning practices can greatly increase your sale prices. In addition to the usual professional-grade cleaning of the interior, take time to perform inspections to determine what types of mechanical repairs are needed. Making these repairs now instead of selling the vehicle as-is can significantly increase the value in the buyer’s eyes. Also, make sure all regular maintenance is up to date. Remember, small updates can go a long way. Buyers often feel like they’re getting something extra when they hear the car has recently been serviced and had a fresh oil change or new windshield wipers installed.

Work on Stock Management Processes

This process includes improving how you’re tracking and managing current inventory as well as how you acquire more inventory. Analyze processes on both sides and look for ways to optimize it. Collaborate with your current suppliers and discuss options for how to better plan and track deliveries. Work with your team to conduct an inventory analysis and then review your findings together to identify areas for improvement. This might require upgrading your current systems and investing in inventory management software to help you manage your inventory levels more accurately.

Pay Attention to Aftermarket Services

This is a highly profitable area of the business. When treated well, sales turn into loyal customers who return to your dealership for all of their automotive care and maintenance. Review your current services and look for ways to streamline operations and increase customer engagement. This could look like using AI to automate the appointment scheduling process. You could also use AI to send service updates to customers via text so they always know the current status of their vehicle. Don’t forget to also look at the post-service experience. This is another area AI can be used to automatically send appointment followup messages and requests for reviews.

Do Inventory Calculations Often

Regularly running inventory calculations will help you stay aware of what models and car types have the greatest profit margins. The market is always changing, so you need to regularly do inventory calculations to ensure you’re well-informed about all current market values.

Take Care of the Competition

Make an effort to stay aware of what your competitors are doing. Customers will shop around for the best deal and you want to make sure your prices are competitive enough to keep them coming to your dealership instead of the one across the street.

Market Survey for Potential Issues

Market research is an investment that pays off big time. Regularly conducting market surveys can bring small issues to light so you can implement solutions before they become glaring problems. It also allows your marketing team to gather deeper insights into your customers’ behaviors, thoughts, feelings, etc. so they can target them more effectively.

Increase Efficiency in Your Processes with Podium’s AI BDC

Time is money, so the shorter you can make your sales cycle, the greater your profits will be. Software like Podium’s AI BDC can help by automating many repetitive tasks. It’s the perfect assistant, working 24/7 to nurture leads, respond to customer questions, schedule test drives, and reach out to customers via text, all without any additional human oversight.

Watch a demo of Podium’s AI BDC and learn how our AI Employee can help to increase the profitability of your car dealership.