Adapting to Tariffs: Key Strategies for Car Dealerships to Protect Profits and Stay Competitive

The automotive industry is about to face some big changes, thanks to the new auto tariffs. A 25% tariff on all foreign-made passenger vehicles and light trucks kicked in at the beginning of the month, and will soon start to have an impact on dealerships across the country. On top of that, tariffs on parts imported from China, Mexico, and Canada are already pushing up costs, with more pressure coming when a 25% tariff on certain foreign-made auto parts like engines, transmissions, and powertrain components, takes effect no later than May 3. 

While it may take some time for the full impact of these tariffs to be felt, there’s no doubt they will affect everything from pricing to parts availability and even consumer behavior.  The real question isn’t if these changes will happen—it’s how dealerships can adapt and remain competitive as they unfold.  In this post, we’ll break down the five biggest impacts these tariffs could have on your dealership and offer some practical strategies to help you protect your profits and be prepared for what’s coming.

The 5 Most Significant Impacts of Tariffs on Your Dealership

The tariffs have been announced, and while we won’t feel the full impact right away, they’re going to significantly affect how your dealership operates.  Let’s take a closer look at the five most significant impacts of these tariffs and explore how each could play out in the coming months.

1. Higher Vehicle Prices and Their Effect on Sales

Auto tariffs will drive up the price of most new cars, even for the Detroit 3.  Why? Around 40% to 50% of parts and components used in vehicles produced in the U.S. are imported.  For instance, the average cost of a new car from American manufacturers is about $56,000.  If automakers pass on the full cost of the tariffs, this could mean a price increase of $5,600 to $7,000 depending on the percentage of imported parts in each vehicle.  For foreign-owned automakers producing in the US, especially for makes and models that rely significantly on imported components- price hikes could even be steeper.  That’s a big price increase for your customers to absorb.

What this means for your dealership:

As prices climb, customers—especially those in the $30,000–$40,000 range—will start to hesitate. These buyers are often the most price-sensitive and are already stretching their budgets. You might notice your usual customers are holding off on purchases, shopping around more or taking longer to make decisions.  Higher prices won’t just impact your sales volume; they’ll also stretch out your sales cycles as customers grow more cautious.

2. Inventory Challenges and Holding Costs

Inventory management is already challenging, but with auto tariffs driving up prices and the growing shift toward used vehicles—caused by the widening price gap between new and used cars—the pressure is only increasing. Vehicles that once sold quickly are now sitting on your lot as customers hesitate, weighing the long-term financial impact of the tariffs.

What this means for your dealership: 

Each day a vehicle remains unsold on your lot adds to your costs—floorplan interest, property taxes, insurance.  if you’re sitting on millions of dollars of slower moving new car inventory, that’s tied-up capital  that could be better utilized elsewhere in your business.

This issue isn’t just temporary. The longer these cars sit, the more you risk having to offer heavier discounts or special financing deals just to clear them out.  But that’s not an easy pill to swallow when you’re also paying higher prices for parts and new vehicles. 

As new vehicle prices climb, more buyers are expected to turn to the used car market. However, with fewer leased vehicles returning, a shortage of two- to three-year-old used cars is likely – just as demand increases. This shortage will intensify the pressure on your dealership to manage both new and used vehicle inventories.

3. Rising Parts Costs and Pressure on Your Service Department

The tariffs on auto parts are already rising, placing additional pressure on both new car pricing and your service department. With parts costs rising—everything from basic components like brake pads to complex electronics— you’re going to feel the squeeze in your service department.

What this means for your dealership: 

As parts prices rise, you’ll have to decide whether to pass the repair costs for your customers or absorb the increases yourself.  Either way, it affects your profitability. If you raise prices your customers may turn to lower cost alternatives while absorbing the costs will shrink your margins.  Take transmissions, for example—prices have already increased by 20% over the past year.  As these costs continue to climb, you’ll need to carefully manage how you price services to ensure customers still see the value of necessary repairs without feeling like they’re being overcharged.

4. Profitability Challenges and Margin Squeeze

Between the increased vehicle prices and rising parts costs, the impact of tariffs will lead to a margin squeeze for most dealerships.  While raising prices on vehicles makes sense to offset rising costs, higher costs don’t necessarily translate into higher profits if sales volume drops.  Consider how luxury SUVs might be harder to sell now at a higher price. These vehicles have tighter margins, and without volume, the numbers just don’t add up.

What this means for your dealership:

• Slower sales: Higher prices typically result in lower sales volume. If consumers are hesitant to buy, you’ll feel it in your top-line revenue.
• Discounting pressure: As demand slows, you might have to offer deeper discounts or special financing options to push vehicles out the door. But those discounts will eat into your gross profit, making the profitability squeeze even worse

Slower sales, combined with rising operating costs, can lead to tight cash flow. The real challenge is balancing higher prices with the need to keep cars moving off the lot.

5. Shifts in Consumer Behavior: Used Cars and Delayed Purchases

Rising vehicle prices and tariffs are already shifting consumer behavior. More buyers are turning to used cars or Certified Pre-Owned (CPO) vehicles as more affordable options. At the same time, the rising cost of new vehicles is driving consumers toward fuel-efficient and electric vehicles (EVs). For some, these higher prices may even push them to postpone buying a new car altogether. It’s not just hesitation—many consumers are uncertain about the full financial impact of the tariffs. With rising car insurance costs, the decision to buy or wait becomes more complicated, especially for families trying to make the best financial choice.

What this means for your dealership:

• Increased demand for used cars: As new car prices climb, used cars—particularly CPO vehicles—are becoming a better value. Consumers are looking for reliable options at a lower price point, and CPO cars fill that need well.
• Downsizing vehicle choices: Buyers may opt for smaller or less expensive models to manage budgets effectively. Subcompact cars and hybrids could see increased demand due to their affordability and efficiency
• Slower new car sales: The delayed purchasing decisions and shift toward used vehicles mean you could see slower foot traffic and longer sales cycles for new cars. This puts pressure on your new car sales volume, particularly for higher-priced models.

As auto tariffs raise prices and consumer behavior shifts, your inventory mix needs to evolve. You may need to focus more on affordable new vehicles and CPO inventory to meet changing demand without sacrificing profitability.

Smart Adjustments to Stay Competitive Amid the Impact of Tariffs

The full impact of these tariffs may take time, but the effects on your dealership are inevitable. While it may seem like a tough road ahead, it’s not all bad news. With the right adjustments, you can maintain profitability, stay competitive, and even capitalize on the changing market conditions. Let’s dive into the strategies that will help your dealership thrive in this new environment. 

1. Emphasize Used Cars, CPOs, and Fuel-Efficient Models

With new car prices climbing, the demand for used cars, especially Certified Pre-Owned (CPO) vehicles, is expected to grow. This shift isn’t just a reaction to tariff increases—it’s a long-term trend that’s already gaining momentum. As buyers look for more cost-effective options, CPOs are becoming an attractive choice, offering both value and peace of mind. Additionally, expect the demand for fuel-efficient vehicles, subcompacts, and hybrids to rise, as consumers seek vehicles that provide affordability and long-term savings.

Why this works:

• Higher margins: Used cars, particularly CPOs, often come with higher profit margins than new cars. Consumers are more drawn to used cars for their affordability while still providing the reliability they expect from new vehicles.
• Increased demand: With new car prices climbing, many buyers are shifting toward used cars as a more affordable alternative. CPO vehicles are particularly appealing due to their manufacturer-backed warranties and thorough inspections, providing buyers with confidence. Additionally, the rising popularity of fuel-efficient, subcompact, and hybrid vehicles reflects a broader trend toward lower ownership costs.

Actionable Tips:

• Source the right used cars: Focus on acquiring high-quality, low-mileage vehicles that meet current demand. Give extra attention to fuel-efficient and hybrid models, which are particularly appealing to budget-conscious buyers seeking efficiency and savings.
• Market CPO vehicles effectively: CPO vehicles are a strong selling point for customers who want the benefits of a new car but at a lower price.  Highlight the warranty and inspection processes in your marketing efforts—both online and in conversations with customers.
• Expand financing options for used cars: Many customers hesitate to finance used cars. Work with your finance partners to offer competitive financing rates and flexible terms to make it easier for them to buy. 

2. Offer Flexible Financing and Targeted Promotions

As vehicle prices rise, offering flexible financing options and targeted promotions becomes even more important. It’s not just about extending loan terms—consider offering low or zero down payments to make higher-priced vehicles more accessible. Cash-back rebates or trade-in bonuses can also be helpful to ease the burden on customers who are feeling the pinch.

Why this works:

• Affordability: Extended loan terms or lower down payments make it easier for customers to handle higher prices, helping them commit to a purchase without feeling financially stretched.
• Incentives drive action: Cash-back rebates, trade-in bonuses, and special financing rates help overcome the psychological barrier that higher prices create.

Actionable Tips: 

• Extend loan terms: Talk with your finance partners about offering longer loan terms (e.g., 72 or 84 months), making higher-priced vehicles feel more manageable for your customers.
• Offer cash-back and trade-in bonuses: Cash rebates or trade-in bonuses give customers instant relief. These promotions help lower the overall cost of the vehicle, making it more attractive..
• Highlight lease options: As leases become more appealing, offer low-mileage leases on both new and CPO vehicles. For customers hesitant about the price tag, a lease can provide a more budget-friendly option for hesitant buyers. 

3. Optimize Inventory to Focus on Vehicles with Less Tariff Exposure

Not all vehicles will be impacted by tariffs in the same way.  The extent of the damage will depend on the circumstances of each company’s supply chain.  Some luxury manufacturers might be in a stronger position to handle price increases than mass-market brands.  You can optimize your inventory to focus on makes and models that have less exposure to tariff increases.

Why this works:

• Lower price increases: Vehicles that are domestically produced or have fewer imported parts won’t experience the same steep price increases, allowing you to offer more affordable options to your customers. It’s a way to stay competitive in a market where prices are climbing
• Demand for Domestic Models: With uncertainty in the economy, more customers are looking for American-made vehicles. These cars often hold their value better and, in the current climate, are more attractive to buyers seeking stability.

Actionable Tips:

• Review your inventory: Take a close look at which vehicles in your inventory that have higher exposure to tariff price hikes. Focus on stocking American-made vehicles and those produced by foreign-owned automakers in the U.S.with fewer imported parts.
• Prioritize fast-moving models: Focus on cars that are always in demand, like fuel-efficient cars, hybrids, and popular SUVs. These are more likely to keep moving off your lot, even with price increases.
• Stay in regular contact with manufacturers: Keep an open line of communication with your manufacturers. Knowing about upcoming releases or pricing changes will help you adjust your stock and pricing strategies proactively.

4. Expand Service Offerings to Ensure a Steady Revenue Stream

As new car sales slow down, your service department is going to be even more critical to keeping the business afloat. As customers hold on to their vehicles longer, they’ll need more maintenance, which gives you a steady opportunity to generate income—if you position your service offerings right.

Why this works:

• Recurring revenue: Service is a consistent money-maker, and with customers keeping their cars longer, the likelihood of them coming back for maintenance and repairs grows. This creates a steady flow of income that can help offset any dips in new car sales
• Customer loyalty: Offering things like maintenance bundles or extended warranties helps build long-term relationships with your customers. They’ll keep coming back for both service and future vehicle purchases, helping ensure your business stays profitable in the long run.

Actionable Tips:

• Offer maintenance packages: Think about bundling things like oil changes, tire rotations, and brake checks into prepaid service packages. These packages lock in future revenue and provide value to your customers by saving them time and money
• Promote extended warranties: As customers hold onto their cars longer, extended service contracts or maintenance plans can give them peace of mind while ensuring you have long-term service commitments.
• Upsell accessories and upgrades: When customers bring their vehicles in for service, use that opportunity to recommend accessories or upgrades—like custom wheels, roof racks, or tech upgrades. It’s an easy way to increase your average transaction value and improve the customer experience..

5. Leverage Technology and Data Analytics to Maximize Existing Tools

You don’t need to make significant new investments in technology right now to stay competitive. The tools you already have—like your CRM and inventory management software—are powerful enough to help you adapt to these changes. By maximizing what you’ve already got, you can stay agile and responsive without breaking the bank.

Why this works:

• Efficiency gains: Fully utilizing your existing systems can help streamline operations, saving both time and money. You already have data that can help you make informed decisions—now it’s about putting that data to work for you..
• Data-driven decisions: Your CRM and inventory management tools are packed with valuable insights about your customers and inventory. By analyzing that data, you can make more precise decisions about pricing, promotions, and inventory management to stay ahead of the competition.

Actionable Tips:

• Fully utilize CRM data: Your CRM is a treasure trove of customer behavior data. Segment your customers based on their buying habits, preferences, and price sensitivity. Use this info to create targeted promotions or personalized email campaigns that speak directly to their needs, especially around financing or trade-in options.
• Optimize inventory management: Look at sales trends in your inventory management system to identify which vehicles are moving quickly or slowing down. Adjust your inventory accordingly, focusing on high-demand models and ensuring you’re not sitting on stock that’s likely to be impacted the most by tariff increases.
• Leverage dynamic pricing: Use your inventory system’s pricing features to adjust prices in real time based on market conditions. This ensures your prices stay competitive, and you’re not relying on blanket discounts that eat into your margins..

The Road Ahead

The impact of tariffs on the automotive industry is inevitable, but with the right strategies in place, you can navigate these challenges and come out ahead. By emphasizing used car sales, offering flexible financing, optimizing inventory, and making the most of your existing technology, you can stay competitive and protect your profitability in the months ahead.

The key to navigating these changes is preparation and flexibility. The automotive landscape is shifting, and those who respond quickly to these changes will not only survive—they’ll thrive. Stay agile, stay informed, and be ready to make the adjustments that will keep your dealership on track for long-term success.

For more tips on ensuring your dealership’s thriving future, read our post on automotive solutions for dealers that boost sales.