The margin on a new car is far smaller than most buyers assume, and it has been shrinking for years. Dealerships have restructured around other sources of income as a result.
Price transparency compressed the front end
Buyers can compare the same specification across many dealers within minutes, and brokers aggregate offers nationally, which removes any local pricing advantage.
That transparency turns a new car into something close to a commodity, and commodity margins converge towards the minimum a seller will accept.
Manufacturers add pressure by setting volume targets, since a dealer chasing a bonus will trade margin for units and set the market price for everyone else.
Used cars carry a different kind of margin
Every used car is unique in mileage, condition, specification and history, so direct comparison is far harder and pricing has more room to move.
Dealers can add value through reconditioning, warranty provision and preparation, none of which apply to a new car arriving from the factory.
Acquisition skill matters too, since a dealer who buys well at auction or through trade-ins earns margin at the point of purchase rather than at the point of sale.
Servicing provides the steady income
Workshop labour is sold at a rate well above its cost, and the work arrives continuously rather than in the cycles that affect vehicle sales.
Parts sales attach to that labour, and warranty work is paid by the manufacturer, which smooths demand further.
This is why dealers pursue service plans so persistently, since a plan secures the customer's return visits for years rather than for a single transaction.
Finance and insurance products complete the picture
Arranging a finance agreement earns a commission from the lender, and the amount can exceed the margin on the vehicle itself.
Related products such as paint protection, extended warranties and gap cover are sold at the same moment and carry their own margins.
Regulation of how these commissions are disclosed and structured has tightened in several markets, and the requirements differ by jurisdiction and continue to change.
What this means at the negotiating table
A dealer with little room on the vehicle price may have considerably more flexibility elsewhere in the transaction, including the trade-in valuation.
Separating the elements, so that the vehicle price, the trade-in and the finance are each examined on their own, makes the total easier to assess.
The dealer is optimising the whole transaction rather than any single line, which is why a concession in one place is often recovered in another.