Dealer Business Model – How do Dealers Make Money?

Distributors and dealers participate in a supply chain, with the distributor being a wholesaler selling directly to distributors and retailers.

Distribution of mechanical machinery and products – including cars, trucks, farming and building equipment, green goods like yard and garden goods, machineries like white goods, electronics, and industrial gear, is the most popular language for distributors. There are numerous modifications to this fundamental framework.

In truth, both distributors and dealers buy the items they market. Dealers manage part inventory and distributors offer ultimate consumers with service functions. Manufacturers, distributors, and dealers often have contractual relationships.

Dealers, and also distributors engage in incentive programs, such as subsidized advertising programs, incentives, and special discounts, that manufacturers give. Distributors and dealers are entitled to use their trademarks and logos.

Distributor and dealer connections with producers have many elements with franchises. National franchise rules may include sections directly affecting dealers and distributors.

Yet the idea of franchise differs substantially from the paradigm for distributors. Traditional dealers and distributors will not pay manufacturers a fee in advance to sell products from the manufacturer — but they may have to purchase a minimum quantity of items on a contract basis.

Distributors and dealers may be comparatively powerful or weak in relation to the manufacturer, but in all situations, something has been brought to the table, namely a well-established market.

Strong distributors and dealers often carry the goods of rival producers while one brand will be dominant in the majority of situations, while the other one will serve a lesser base of customers.

To understand how dealerships, make money, let us take the example of a car dealership;

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How Does a Car Dealership Make Money?

Car dealerships seem too many to be profitable. Most individuals are afraid they will get the benefit of purchasing a car and the dealer will make hundreds of dollars of them.

In actuality, auto dealerships are much like food stores – they rely mostly on volume for money and don’t generate a lot of money from every single transaction. Car dealers are earning money from three main areas of business; Sales, Service and Finance, and Insurance (F&I).

Car Sales are not the Primary Source

The idea that automobile dealerships don’t earn money selling vehicles appears counter-intuitive. Why are you in the vehicle industry if your name-producing product does not make you money?

That is a good question and its reply is closed in secret until you properly grasp how automobile dealerships work. The truth is that most auto dealers do not benefit much from the sale of automobiles. Car sales are not the majority of a dealer’s profits.

Car sales may be divided into two categories: new vehicles and used vehicles. Regardless of how a new or a used automobile is sold, the dealer is allowed to make money in two separate sections of a vehicle sale.

They are called the ‘front’ and ‘backend.’ The front of the deal is all that happens when you work with the seller. The background to the deal is everything that takes place after the seller is out and the Finance Manager takes a look.

In principle, you may sell old cars without a profit from the borders and with a lot of profit. Or you may get a new automobile deal with a lot of profits and no returns.

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Earnings from Insurance

The finance and insurance office are a rising area of importance for automobile dealerships. F&I has long been a big seller for automobile dealers, as it is lovingly termed, but is now more than ever a big driver of profit.

You’re quite aware of the documents you have to sign before your automobile is legally yours if you’ve ever acquired an auto before. It is a lot and can be bullying.

You start the second sales procedure after you are “passed off” to the financial manager. You believed that the customer had now finished selling? No way! Car dealers in several different ways generate money in F&I.

Offering Loans and Earning Markup

First of all, it’s crucial to understand that they will make money on the loan if you finance your purchase through a dealer.  Car dealerships provide you volume. Auto dealerships generally have access to loans at rates that ordinary consumers cannot afford.

Then dealers mark the loans and sell them to clients. Keep in mind that a dealer doesn’t have to finance your automobile. The next time you buy a car, in addition to seeing how the dealer can quote you, consider obtaining a pre-approval for a loan from a different lender.

Earning from Leases

Sellers have a technique to earn some profit if you do not buy a vehicle and instead, lease it. Distributors earn money by leasing the money factor.

The lenders levy a cash component of 50-75 or even 100 base points for the dealer. The difference between the purchase rate (what the borrower charges the dealer) and the marking rate (what you quote) is an added return on the dealer’s lease.

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Earning from Warranties

Besides profit produced by financing or renting a car, dealers earn money by offering various packages and warranties of insurance: extended warranties, tire protection, wheel protection, etc. The merchant makes some profit with every sale of an additional item.

Good finance managers are like gold and dealers want to keep them around in the automotive sector. Dealers are also ready to invest in software and technology that increases R&D.

The Real Profit Maker

You are now beginning to realize how automobile dealers are making their money. Car sales are merely a way of selling other items and services, and dealers make their money through those other items and services.

For items and services offered by a vehicle dealer, look for a variety of choices only in its parts and service department. The Parts and Services Department for all automotive dealerships is the main source of income and profit center.


Dealers and distributors make money in plenty of ways. Car dealers make money by not only selling cars but also the parts and services that come with them.

The major chunk of profits a dealer makes is through selling services and products that come with cars. There are many other ways that distributors and dealers make money too.