How Car Dealerships Work

If you take a drive down any major street it’s likely that you will drive by either a new or used car dealership. There are plenty out there. These dealerships generally offer a wide variety of cars, SUV’s and other vehicles to the public, whether they are new or used. Car dealerships for the most part do good business because a lot of people are skeptical about buying privately, so the alternative and wise choice is to seek a reputable dealer.

Most dealerships will work in one of two way and sometimes both. They will either buy the vehicles and sell for profit, or will take cars on a consignment basis. We will discuss both options here.

How Consignment Works

This concept is not as complicated as it sounds. It’s very simple. A company that owns the cars will allow the car dealership to keep them on their lot in the hopes that they sell. The host dealership must also take care of the vehicles from cleaning to ensuring it starts, etc. The way how this works is that the dealership that supplies the cars expect to get a certain amount of money for each car. The host dealership can sell that vehicle at any price and the objective is to sell it for more, thus keeping the profit. The risks here are on both sides. If the cars don’t sell, the owners don’t get paid. Also, the host dealer is responsible for any damage to the vehicles. So, if they get damaged or worse, stolen, they are responsible to cover the losses.

Purchase for Sell

For this particular strategy, the dealership will need to decide on which vehicles they want to sell to the public. For each car they want to sell, they will typically buy one or two of these vehicles and they become demo cars. The objective here is for the demo car to be like a salesman, where the customer likes it so much that they order a new one. The dealership will then place an order with the manufacturer based on the customers needs. Options will be selected like color, trip, wheels and other options that the customer may prefer. In some cases customers that want to save money may opt to buy the demo vehicle. The dealer will then bargain with them but usually these can be sold at a loss. So the objective is a brand new order with a significant mark-up.

How Used Car Dealers Work

Used car dealers will get their vehicles from a number of places. They may purchase at an auction, buy from a bigger dealership on and off-lease or may re-sell a used car that someone brought in as a trade-in.

Used car dealers need to be careful in choosing their vehicles. They want to be sure that the cars they buy are in great condition and can sell them without issue. This usually takes some skill and knowledge about cars.

That’s pretty much how dealers work. It’s a simple model, just an expensive one. If you’re looking to get into the car industry, knowing this will give you some knowledge of the inner workings of a car dealership, whether it is a new or used model.


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