I joked in a previous post about the desperate salesperson who says “I’m losing money on this deal,” but sometimes it is true. If you ever wondered why some dealers refuse to work with Internet shoppers or why the turnover rate is so high, here’s an insider’s take on how dealers “protect” their profit at the expense of their staff.
Our insider, “Brandon” was both a salesperson and an assistant manager for a major dealership franchise. He talks about how dealers use what is called “PAC,” which stands for “Protected Against Commission, to ensure they make money on every car they sell, even if that means the salesperson walks away with only a few dollars.
When a vehicle is taken in on trade (where PACs are usually the largest, if a dealership even places one on new vehicles), there is an Actual Cash Value assigned, which is determined by reviewing auction and market prices. If you’ve done some research, you know how this number can be manipulated in your deal to make the consumer think they are getting more for the trade. Despite this, it’s a fixed number in the dealer’s paperwork that the used car manager places.
This ACV figure is why you can go to a variety of third party sites like Edmunds, Kelley Blue Book or NADA and get all kinds of different numbers for your trade. Always keep in mind these figures should be treated as “ballpark” numbers and remember that many of these sites make money from dealerships leads and advertisements. So it is in their interest to give you trade figures that a friendly to the dealership. However, it really comes down to what people are paying for these cars in real time. One thing to realize is that vehicles kind of like real estate, location and demand influence how a specific car is priced.
This “market based pricing” plays a big role in how much a salesperson will make.
So if you traded in a vehicle with an ACV of $10,000, they would assume $1,000 for reconditioning (shop bill), $150 to pay the detailer to prep it for the lot, $900 PAC, and an estimated profit of $1,000. So they would hope to list that vehicle at $13,050 with the likely scenario of it being rounded up to $13,499.
Now, what is that $900 of PAC? $900 of profit to the dealership which is protected against the commission of the salesperson, who is paid a percentage of the profit the dealership makes on the sale of the vehicle. So if I am able to sell that vehicle at “full pop”, meaning without a discount, I am only paid on the $1,000 profit the dealership says I will get paid on, while it makes $1,900 less the commission which is usually 20% to 30%.
Let’s say a good negotiator comes in, and buys that same car for $12,400. That’s considered a $100 “loser” deal for me the salesperson, but a positive $800 for the dealership, plus they only have to pay me my $100 minimum commission!
Plus they’ll earn the dealer fee that’s pre-printed on all of our contracts so no one can sue us. Did I mention in my store at the time it was $699? Also profit to the dealership that I didn’t get paid on.
Of course the PAC, doesn’t just apply to pre-owned vehicles, some stores will apply this model to new cars as well and this is why some salespeople will try to “low-ball” your trade so that they can balance out the PAC and keep some cash for themselves.
So a sedan that has $600 between the invoice and MSRP may have a $500 PAC, meaning that the salesperson has to underallow on the trade in, or at most they can have a $100 profit on the deal. So if I sold a that car at invoice, it was considered a $500 “loser” for the dealership in my world/commissions, even though they were being paid what they bought the car for, kept the dealer fee, the holdback (usually two percent of the MSRP), and any additional funds gained in the F&I office.
I said all that to say this: if a salesperson says that they are losing money to sell you a car, they probably are. However, the dealership isn’t.
It should be noted that not every dealer operates this way, but most of your mainstream non-luxury brands do. This information does not mean you should roll over and pay full sticker, because your salesperson may only make $100 on the deal. However, this anecdote does explain why your trade offers are often lower and should shed some light on why some salespeople might act differently towards you if they get the sense that you are a savvy shopper.
I’ve said it time and again, while there are plenty of stealerships selling cars, most salespeople are just regular folks trying to make a living and take care of their family. Maybe there is better way.
Perhaps if the model was changed and salespeople were paid a reasonable salary, car buyers would not have deal with all the tedious negotiations. Some dealers don’t pay based on the profit of the car but rather how many units the salesperson sells. Of course there are a number of you that will say you would rather shop for a car without a salesperson, but until that lobby releases its grip on state politics, we are stuck with the system as it stands.
Just like any other industry where you try to get something with the biggest discount possible, you should know how your killer deal impacts the paycheck of the person serving you.
If you have a question, a tip, or something you would like to to share about car-buying, drop me a line at AutomatchConsulting@gmail.com and be sure to include your Kinja handle.