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Why car dealer’s profit is much lower than you think

Despite a widespread perception that new car dealers rake in the dough on every sale, the reality is the opposite of Apple.

Car dealers? The gross profit on a new vehicle sale in Canada is $1,000-$2,500 depending on the make and model, says DesRosiers Automotive Consultants. J.D. Power and Associates' Power Information Network (PIN) pegs the average front-end gross dealer profit at $1,100-$1,200. With earnings of about $300 per iPhone, Apple needs to sell just four to make what a dealer earns on the sale of a $25,000 or $30,000 new car.

A third of the public, however, believes dealer margins run to $3,000 on average, according to a survey by J.D. Power. Perhaps the confusion resides in the average markup between the invoice price – what dealers pay car makers – and the manufacturers suggested retail price (MSRP) or sticker price dealers advertise on the window.

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Andrew Tai, CEO of Unhaggle.com, says the margin is 8.7 per cent, which means, "For new vehicles today, on a $30,000 MSRP vehicle, that represents only $2,610 in gross profit for the dealer if they sold the vehicle at full price."

'If' being the operative word.

No one sells a car at full price in Canada in 2015. No one. The market is awash in consumer-pleasing, but profit-sapping sales sweeteners, both from the dealer and factory. That helps to explain why DesRosiers reports that the average return on sales for a Canadian dealer was 2.25 per cent in 2012, the latest year for which full figures are available. The average dealer, then, needs to pull in $1 million in revenue to make a profit of $22,500.

Which is why if you really want to dine on fat profits, take a bite of Apple. Reports show that Apple sold $74.5 billion (U.S.) worth of iPhones, iPads and Macs in its first fiscal quarter. Apple's overall profit margin: about 40 per cent. IHS estimates the margin on an iPhone 6 – by far Apple's most popular product – might be as high as 69 per cent on each of the 74.5 million sold in the first quarter.

Such astonishing profitability is far beyond anything possible in the automotive retailing game. Profits are slim for car dealers. Thus, while useful, the dealer invoice or "wholesale" price – available from pricing services such as Unhaggle.com or the Automobile Protection Association – is only a small part of getting the best deal.

You're always better off negotiating up from the wholesale number rather than down from the MSRP, but insiders say the biggest savings for consumers are found in the incentives. According to Unhaggle.com, the average new vehicle cash purchase incentive in May is $2,529, or about 10 per cent of the average transaction price of a passenger car in Canada.

"That is almost as much as the entire average new vehicle gross profit," says Tai.

Those incentives explain the huge gap between the price shoppers see on the showroom floor and the actual transaction price real buyers pay at the end of a typical deal. The latest PIN incentive spending data show vehicle prices listing at just a bit more than $33,000, while the transaction prices average about $4,000 less, at just more than $29,000.

The lesson: what you see in the window is not what you will pay when you do your research and bargain hard for all the incentive money on the table in every negotiation. The money is just sitting there. You should pick it up.

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