Shopping new vehicle
When you’re shopping for a new vehicle, one figure that’s always on your mind is how much the salesman makes off of you. If he can convince you to pay more than sticker price, then he’ll take home a nice bonus. If you drive away with only the most basic model, though, he probably won’t get as big of a commission.
Two conditions account for this:
- Sales that generate only “mini” commissions
- Added cost of the dealer “pack.”
A mini commission is simply an abbreviated version of the typical percentage paid out by dealerships. For example, if your local dealership typically pays 20 percent in commissions, a salesperson who will make a mini commission would bring home a percentage that’s 20 percent less, such as 10 percent. This is typically awarded when the salesperson can’t get the customer to purchase certain optional add-ons.
A car dealership has many expenses, but one of the most expensive is often their physical location. Commissions are only part of their overhead costs, so they sell items called dealer packs to drum up more income.
In this situation, they may have an additional $500 added on top of every new car sale for things like floor mats and paint protection products. So while you’re still paying your normal price plus some extra cash on top of it, your salesman isn’t receiving all that much from this inflated price.
Commission of dealer
In the end, a car dealer that pays out mini commissions or uses a dealer pack may earn as little as 10 percent in commission on a new car sale. If there are factors beyond their control limiting their commission potential – for example, if they work at a dealership where the owner runs things through the bare minimum – then they might only bring home 5 percent of their profits.
In general, though, it’s safe to assume that most salespeople will make between 20 and 30 percent off of each vehicle sold. Keep in mind that dealership managers do not take part in these numbers; instead, they receive salary from dealerships that can range from $40,000 to an impressive six-figures depending upon how successful the dealership is.
When a salesperson is paid on the basis of his or her gross volume rather than net profits, it is called straight-commission. The traditional model in this case is 25 percent of each car sold in a given month, regardless of its final profit to the dealership. As with other types of commission plans, though, there are variations. Many dealerships start at 20 percent but pay 2 percent more if certain goals are met over time.
All commissions are based on the base price before any discounts are applied. But not all dealerships use identical formulas when calculating them. Some pay only 20 percent instead of 25 for low-profit models like minivans and “gas-guzzlers.” Others offer an additional bonus if the car in question is an SUV or heavy truck.
Discount on sale
Dealerships offer their floor people about 5 percent of the net profit on any vehicle sale. The actual amount is negotiable, and some dealers pay more than this and others less than this percentage. They do not include the destination charge, which is several hundred dollars, in calculating these percentages because it is not variable profit like dealer hold-back or incentives are.
Delivery of new vehicle
When it comes to taking delivery of your new vehicle and financing or leasing it, dealerships know exactly how much money they will make on the entire transaction. If you are buying an $11,000 vehicle, the dealership knows that it is making about $1,200 on your deal before tax and title charges.
This amount is not negotiable because everything has already been negotiated into the price of the vehicle. They also know exactly what their financing costs are going to be on your deal. If you finance with them, they earn nothing until they get paid off by GMAC or whomever through your monthly payment.
The only way that a new-vehicle salesperson can increase his income is by selling extended service contracts or perhaps selling you undercoating or some other product at sticker price or higher. A good salesperson makes a little bit more money on the deal when he sells you some aftermarket products.
What is a pack?
A “pack” is an arbitrary amount the dealer may add to the dealer invoice for preparation, carrying costs or any other cost the dealer chooses. It is just a way for the dealer to ensure he’s making money by reducing the sales commission.
If a vehicle has a suggested retail price of $30,000 and a 5-percent profit would be $1,500 and the 25-percent sales commission on that sale would be $375. But if you added a “pack” of $400, your adjusted cost would be “$30,400,” assuming you have no other add-ons such as rust proofing or extended warranties.
In this case, you’d break even at best with regards to your profit. If you add a pack of $400, the adjusted cost would be $30,400. In this case you’d break even at best with regards to making a profit.
How does a pack affect car sales?
The only effect the dealer’s pack has on the consumer is that it affects how much money you make on that sale. A $400 pack would reduce your commission to $275, and if this were on a new vehicle with no other charges, such as rust proofing or extended warranties, your adjusted cost before any financial adjustments would be $30,700. In this case you’d break even at best with regards to making a profit.
A $400 pack reduces your commissions from 25 percent to 22.5 percent of the sale price (a $100 reduction). If we assume all our calculations up until now have been based on a 5-percent profit factor and not a 4-percent profit factor, you’d have to add an extra $100 to your adjusted cost to break even with a 22.5 percent commission instead of 25 percent.
If we’re assuming all this up until now is based on a 5-percent profit factored and not 4 percent, in order to break even with the percents changing from 25% down to 22.5%, you’d need to add $100 more in costs in your adjusted cost in order for the equation to stay the same when it’s broken down into percents (an extra 100 bucks is what would be required).
What are some examples of when dealerships use packs?
A pack is just another way for dealerships across America to increase their profits by reducing the commission on new car sales. If you plan to be a successful car salesman, it will only benefit you if you know what every dealership in your area is packing and how much.
It’s also important that you first learn how to sell cars without packs because buyers, dealerships across America and the entire world are using this technique as an excuse not to pay full asking price for any vehicle. Most of us become reliant upon the pack system when we enter the business and don’t realize it until we’ve been there too long or we make a major mistake in our calculations somewhere along the way and lose big in the end (because most of these mistakes come at year-end).
Frequently Asked Questions
- In which deal the sale man get more commission?
During the deal of car, the dealer pack is best.
- Does the car salesman make good money?
No, the salesman does not make good money. Basically it depend on the sale, if sales are quick and good then he will get incentive and make good money.