Dealership Economics, Part II: Service

In Part I of Dealership Economics, we looked at the financial reasons the car sales process is so perplexing.  In this (shorter) post, we'll look at where the service department fits in to the business.

ServiceWhen someone buys a new car, there is a widely-held myth that they are required to return to the dealer for service to keep their warranty valid.  In fact, you can service your car elsewhere, and the warranty still holds — and there is a section of your owner's manual which should state this fact.  But the superstition persists, and is often reinforced (or, at least, not refuted) during the sales process…. Why is this?

I think it goes back to the economics of the dealership.  As I looked over the financial statements of the dealership company, I saw one set of statistics which really jumped out at me:

  • 85% of a dealer's sales is generated from car sales (58% from new cars, 24% used cars, and the rest from finance, insurance, and "other").
  • The remaining 15% of sales comes from the service department.

That might not be so surprising… But here's where it gets interesting:

  • The service department generates almost half (45%) of the dealer's profit

The cars are expensive, but contribute relatively little profit to the business.  The service department is relatively small, but generates huge profits for the dealer…

It is to the dealer's benefit to maintain the warranty myth, and keep as much of that service business to themselves as possible. 

If you have a relatively new Toyota, Lexus, or Scion, and would like to service it at Lowell's, you shouldn't let concerns about the warranty hold you back. 

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