How Much Commission Does A Car Salesman Make? (And How Much Comes From Your Wallet?)

February 23rd, 2019 by

Some incentives at negotiating dealerships can encourage a salesman to point you in the wrong direction. Here’s how to fight back.

You shouldn’t feel a sinking feeling in your stomach when you sign the paperwork on a car purchase. But there are a bunch of reasons why you might.

Buying a car is one of the biggest financial commitments you will make in your life. The average person takes out a loan for more than $30,000 to buy a new vehicle. And with how most dealerships operate, no one could blame you for wondering:

How much of that cash goes toward the car, and how much winds up in the salesman’s wallet thanks to commission?

That question would make anyone feel uneasy. That’s why we eliminated the profit-based commission model at Apple Autos dealerships more than 25 years ago. Our sales staff is paid the same no matter what car you buy. We do that because we want to make the process as easy and stress-free as possible.

But most other dealerships are different. There, how much commission a car salesman makes depends on their ability to sell high and buy low.

As in: The higher the price they can get you to pay on your new car, and the lower the amount they can get you to accept on your trade-in, the better their payday will be.

Related: Here’s how to make sure you don’t get screwed on your next trade-in.

You don’t have to take that. You can fight back. The key to shopping smart — and minimizing how much of your money goes toward your salesman’s next trip to Hawaii — is to understand how most  dealerships operate.

The Car Commission Game: A Lay of the Land

Let’s start with a big-picture look at the car buying process. That will help you see exactly where a car salesman can try and steer you into something you might not need.

Broadly speaking, the car buying process consists of two phases:

The Front End: This is everything that takes place out on the lot or at the salesman’s desk. It includes determining the value of your trade-in, and settling on the price of the car you want to buy or lease. (Unless you’re at a dealership like ours, where we give you our best price right upfront — you don’t have to haggle to get it.)

The Back End: This is everything that takes place inside the dealership at a finance manager’s desk. Loans and aftermarket warranties are two other places where the dealership makes money.

The Back End is the domain of a dealership’s finance manager. And we’ve created other resources to help you through it. Check out our guides to how to get the best car loan for your credit score, and how to determine if an extended car warranty will be “worth it” for you.

Since this article is about how much commission a car salesman makes, we’ll focus on the Front End. That’s where they earn their money.

To understand how things work — and how your decisions will affect their pocketbook — there are a few other key terms to know.

Car Commission Warning Signs: Terms You Need to Know

To understand how the cash flows when a deal is made, it’s important to grasp some key concepts. The car sales industry uses some very specific insider vocabulary.

From a salesperson’s perspective, there are several different types of commissions they can earn.

  • First, there are “Minis.” This term refers is short for “minimum commission.” It’s common for many new vehicles to be “Minis.” This is typically a low number, which can fall below $200.
  • Flats” are just what they sound like: Vehicles assigned a flat commision rate. A dealership or manufacturer may turn a model of vehicle into a flat to incentivize a car salesman to sell more of them.
  • Spiffs” are cash incentives that can end up on hard-to-sell stock. A “spiff” is meant to put heat on salespeople to move cars that are costing the dealership money by sitting on the lot. Buying a spiff doesn’t necessarily mean you’ve bought a bad car. In fact it can be a great deal if you don’t mind buying an older or less in-demand vehicle. But it definitely means a bigger payday for the salesman.
  • Dealer Cash is something car manufacturers will offer dealerships to move certain models. The amount enables dealers to sell the vehicle for less and still turn a profit. (As we’ve explained in other articles, this is why the dealer invoice price on a vehicle can be misleading.) Dealer Cash can mean that you save money. But it can also lead to a bigger commission for a salesperson. That’s not necessarily a big problem, unless they steer you toward a vehicle that isn’t a great fit for you to do it. (And some will try.)
  • Holdback is the amount a manufacturer pays a dealership after the sale of the vehicle. The amount is to offset some of the costs of financing needed to get a vehicle onto the dealer’s lot. (Dealers have to pay manufacturers for the cars that show up on their lot.) A typical holdback figure is between 2 and 3 percent of the vehicle’s MSRP or invoice price. It can vary based on supply and demand.

How to Protect Yourself from Excessive Car Commission

So how can you tell if you’re about to buy a mini — or a spiff?

Is there a way to gauge how much of your money is going into the salesman’s pocket?

There’s no hard-and-fast answer, unfortunately. But it’s safe to say that used car sales are the most profitable of all deals.

That’s because, as we explain in this video, the margins on used cars are much higher than on new vehicles. Statistics back this up. According to the National Automobile Dealers Association (NADA), in 2017 dealerships made 2.3 percent of net profits on new cars, and 3.7 percent on used ones.

So that leads us to the rules for protecting yourself from excessive car commissions…

Rule #1: Be Aware that Used Car Sales Can Mean Bigger Paydays for your Salesman. At a one-low price dealership like ours, that’s not true. As we said earlier, our staff gets paid the same no matter what car you buy. But at a dealership on a profit-based commission model, this might be why a salesman would steer you away from a new car toward something used. They’d tell you that they’re trying to save you money. But behind the scenes, the salesman could be taking a higher percentage of that total home with them.

Rule #2: Be Ready to Fight for Every Dollar of Your Trade in. Another way dealerships and their sales staff can make more money off of you is by offering less than the true value of your trade in. It’s a tactic called “underallowing.” Remember that, if you accept a lower total, it’s just like paying a higher price. (And follow these rules for getting the absolute best value for your trade in.)

Rule #3: Don’t Always Trust a Low Advertised Price. Prices that seem too good to be true can be a warning sign of underallowing or some other funny business. We explain more in this article.

Rule #4: It’s OK to Be Tough When Negotiating. Strange but true: Sales reps at negotiating dealerships say that customers who are the happiest usually get the crappiest deals. Here’s a telling quote from Motortrend’s Car Salesman Confidential:

“I would also like to point out that one of the couples we made the most money on — Mr. and Mrs. Happy — were also the most satisfied customers I had all month. In fact, these folks were so happy they sent me a nice “Thank You” card and bought me a gift certificate to a local restaurant. It’s a peculiar fact, but one that every experienced salesperson can attest to: the folks who pay the most are always the happiest, while those who get ridiculous deals are never satisfied — ever.”

Remember: The staff at dealerships that negotiate are trained to make customers feel as if they are winning — even if (and especially when) they are losing. (This is another reason why we’re different at Apple Autos. We don’t want to have a dishonest relationship with our customers. So we don’t negotiate, and instead give you our best price upfront instead.)

Rule #5: Be Human. There’s a fine line between being tough and being a jerk. And while we don’t love the tactics other dealerships use, we also don’t think they’re people deserve to be abused for them. (After all, they’re just working within the system that most other dealers use.)

While we joked about your money paying for a salesman’s trip to Hawaii earlier, most car salespeople earn a modest living. The average salary is between $40,000 and $50,000 — and a large percentage of salespeople wind up closer to $20,000. Some dealerships will even withhold money from a salesman if he’s had a down month — what’s known as being “in the bucket.” That could be another reason why some salespeople seem so desperate, and why car sales is so cutthroat, at dealerships that negotiate.

You don’t have to be a part of that system. You can shop at a dealership where salespeople are treated fairly. Where they have no incentive to sell you anything other than the perfect car for you. Your best bet: When you go to shop, ask the salesperson how they are paid, and if they’ll earn a higher commission by selling you one car or another. And after that, here are 9 other questions you should definitely ask.

Posted in Shopping Tips