How Car Salespeople are Paid

Afundamental step in acquiring the knowledge that one needs in order to approach the car buying process from an informed point of view, is understanding how the car salesperson is paid. Although the media tends to stereotype us as loathesome bottom feeders, I found that the majority of the people in the profession to be honest hard working people who are just trying to provide an income for themselves and their families. The commission structure in most dealerships, however, does put the salesperson in a position of balancing what is in the best interest of the customer and what will put the most money in their pockets.

In most car dealerships, a customer negotiates the price of the vehicle with the salesperson or salesperson and sales manager. This can be a laborious and emotionally exhausting process. The customer is trying, of course, to obtain the lowest possible price that the dealership will sell a particular vehicle, and the salesperson is trying to find the highest possible price that the customer will pay. This is because car sales people in general, are paid based on some type of commission or bonus system, and in the typical negotiating dealership, the salesperson is paid a percentage of the gross profit of the sale.

Gross profit is, in the case of a new vehicle, anything over dealer invoice. In the case of a used vehicle, gross profit is the difference between the selling price and what the dealer paid for the vehicle, plus whatever was spent in reconditioning. Typically, the sales commission is 25 to 35 percent of gross profit. In a car deal with little or no gross profit, the salesperson is paid a "mini" or minimum commission, and that amount varies depending upon the dealership policy but is usually about $100, which is a pittance considering the time that the salesperson spends in selling a vehicle.

The negotiating process, therefore, often becomes a game of cat and mouse. This can involve such antics as trying to move the customer into a vehicle with the greatest potential for gross profit and playing the "nut and shell game" with trade-in value, shifting the customer's focus away from the difference price to an inflated trade-in allowance.

With the amount of information available today, consumers are better informed as to the cost of new vehicles, and are less likely to pay more than a few hundred dollars over invoice for a new vehicle unless it is a vehicle that carries a higher market value due to supply and demand. Unfortunately, a lot of consumers, while having access to information, do not know how to interpret that data in the context of the real world automobile retail market, and therefore, go into a dealership with unrealistic expectations as to how much they should pay for a particular vehicle and the value of their trade-in, thus not recognizing a good deal when it is presented to them. I will discuss this in more detail in the next section.

In a few of the more progressive dealerships across the country, customers are offered the dealer's lowest price up front, without having to endure the laborious step of negotiating. In a one price or "Only Price" dealership, the salesperson, has no control over the gross profit of the sale since he or she does not control the price that the customer pays for the vehicle. The dealership, therefore, does not pay a commission based upon the gross profit. Instead of making the salesperson's income dependent on how much you pay for a vehicle, the salesperson is paid via a bonus system that is based upon total volume of individual sales within a given month. In this type of a bonus system, each vehicle sale pays the salesperson the same amount of money, whether a customer buys a high demand - hard to find vehicle that is sold at MSRP, or a vehicle that is being sold at or near invoice. This puts the sales person into more of the role of a consultant, who is truly interested in finding the vehicle that best fits the needs and desires of the customer.

The one price automotive retail model offers many benefits to both the customer and the dealership. One of the biggest benefits to the customer is that those who are trading in a vehicle are shown the actual cash value (ACV) of their trade in rather than a trade-in allowance. In this way, the customer gets to see the real numbers rather than a "nut and shell" game of over allowance. Paradoxically, revealing the ACV also presents one of the biggest hurdles in the sales process, due to a general misperceiving of the meaning of the term "trade in allowance". The difference in terminology is something that I will address in the next section.