Showroom Owners are given what is known as a Car Dealership Profit Margin (Dealership Margin)
There is a contract known as the OEM Dealer Contract also called ODC which bankers get to evaluate lending to a Showroom Dealer.
In this contract the Manufacturer (Toyota, Maruti etc) will offer a flat percentage to the Showroom for every single car sold.
This ranges from around 4% – 7% of Ex Showroom Price in India.
Maruti Offers the Highest Dealer Margin while Toyota offers very low Dealer margins but make up through other incentives (depending on the number of cars sold).
Within this margin – the Dealer can offer any discount to move his inventory
For instance – if a Dealer who has a 7% maximum Margin from the Manufacturer (OEM) – he can reduce his margin to 0% and give a big discount of Rs. 50,000/- or so to get rid of the inventory .
However he cannot go lower than 0% (As per contract) and usually Dealers who give large discounts have some obligation to fellow dealers in the same Vehicle.
The numbers are just for reference. Actually Dealership margins vary on the price range of the cars. Low cost cars have higher margins and high cost cars have lower margins.
So when you say Ex Showroom Price is 10 Lakh Rupees – the Dealer pays Rs. 9,30,000/- to Rs. 9,70,000/- depending on his margin to the Manufacturer and keeps Rs. 30,000/- (3%) to Rs. 70,000/- (7%).
Additionally Dealers also get money by :-
- Commissions from Third Party Insurance Companies (ICICI Prudential may pay upto 25% of the Policy Premium per car to the dealer)
- Accessories – Dealers get Accessories for around 25% less price and can mark up and sell the Accessories and make a profit
- Commissions from Banks – Private Banks offer incentives to Showrooms to steer loans towards them (not the Big ones but smaller ones like South Indian Bank etc)
- Service – Service is another area where Showrooms who own Service Facilities get a lot of money from.
- Second Hand Car Sales – Another source of revenue for Showrooms
Indian Showrooms have the lowest dealer margins in the World. US Dealers have a whopping 6.5 – 10% Margin whereas even in China there is a flat 4.7% margin and upto 8%.
In India they are agitating to a flat margin of 7% per car but so far there has been no consent to this.