How the Internet Changed Car Dealerships’ Gross Margin Profitability

September 30, 2016

There’s little doubt the Internet has helped boost business across a wide range of industries. From advertising and customer engagement to online retail, the Internet can be credited as the best employee at companies everywhere.

One exception, however, has been at car dealerships. While the digital age has improved profit margins in many industries, car dealerships are finding that the Internet has actually been working against them in more ways than one. In fact, 2014 marked the third consecutive year that net pretax profit at new-car dealerships remained unchanged at 2.2%.

How are car dealership profit margins becoming stale while so many other industries are seeing substantial booms? In short, the Internet provides more information to car shoppers. And armed with this wealth of knowledge, consumers are now beating car salesman at their own game. Let’s examine how car dealerships can better protect their gross margin profitability in a more Internet-centric market.

Pricing vehicles appropriately

In yesteryear, car shoppers would have to visit multiple dealerships to compare prices and get a feel for where the good deals were. Not so today. In just a matter of minutes, a consumer can compare prices for a car from every dealership in town without ever getting off the couch.

What does this mean for dealerships?

It means you can no longer count on the lazy car shopper who doesn’t take the time to shop around for quotes. After all, the Internet makes it easy to never leave your pajamas while still being a smart shopper. Today’s consumers know how your prices stack up against the competition often before you do. In order to get foot traffic on your lot, you must pay attention to the market and price competitively.

However, market-based pricing has resulted in another conundrum that is eating away at the bottom line of car dealerships: Unnecessary discounting.

When dealerships slash their prices to remain competitive in the market, they have already discounted the car once. Then when the consumer begins negotiating, the price is often discounted a second time. This second discount often eliminates any real profit to be made from the vehicle.

In order to avoid falling victim to this double discount, dealerships must align their in-store negotiating tactics with their online prices so they can arrive at a number that still makes business sense.

Acquire the right inventory

A surfboard store probably wouldn’t have much success in the middle of Kansas. Car dealerships must also know their audience, especially what people are buying. A Chevy dealership in a blue collar farming town should be stocking up on pickup trucks while a Chevy dealership in an urban area should be rolling out compact cars and hybrids.

The Internet is a great tool to learn about your community’s demographics and purchasing trends. You can leverage the Internet to learn what cars the people in your area are interested in, when they last purchased a vehicle, if they’ve ever brought their car to your dealership for service, when they are due for their next oil change — and so much more.

What’s more is that there are software programs available that do all of this dirty work for you.

Invest in service

At most new car dealerships, the most profitable area is the service and parts department. With every sale of a new car comes an opportunity for a future repair, replacement, or tuneup. The Internet creates a lot of competition for an oil change or a new muffler, so dealerships must commit to operating a service department that will maximize customer satisfaction and retention.

It may be the most profitable area of your dealership. It can’t afford to sit in the backseat.

Don’t neglect used inventory

Fact: The profit to be gained from a used vehicle is nearly double than that of a new one.

Another fact: The number of used car sales is more than double that of new car sales.

It’s simple math. Don’t neglect the online inventory listings, advertising, and customer engagement for your used cars. It may be easy to overlook that 2003 Ford Taurus sitting in the corner of your lot because of the small gross revenue it’s likely to bring in. But the math say it’s a net profit margin gold mine.

Turn on the Tube

It’s important to remember that the Internet isn’t made up of just words and pictures. One other element has proved critical in the car buying process.

Would you believe that 70% of car shoppers who viewed videos on YouTube as part of the car buying experience were influenced by such videos? Driving demonstrations, footage of features and options and walk-throughs of technology are all things absorbed online by car shoppers. If you’re not taking advantage of this engagement opportunity, you should be.

Take advantage of technology

By now we’ve established that there are a number of ways in which car dealerships can get a better grip on their gross margin profitability through better use of the Internet. But the digital age of car selling isn’t limited to third-party sites, social media and YouTube.

MAX Digital helps car dealers win over today’s consumers through online solutions centered around the acquisition, pricing, merchandising and selling of their vehicles. Schedule a free demonstration to see how we can work with you to put your gross margin profitability into gear.