Increasing Profit Margins the Right Way

Do you remember being eight years old and doing something you shouldn’t be doing, like throwing a ball against the side of the house? A parent walks outside and tells you to stop, and you do until they go back inside. Then, you start back up and before you know it, you break a window. Well, maybe that was just me, but I am sure you can relate.  With everything that’s going on in Washington right now, it’s easy to take your eye off the ball and focus on rate markup. After all, regulators are shifting their attention to other matters, and even lenders are reversing some of the policies they implemented after the CFPB entered the playing field.

However, taking out the regulatory aspect, it’s simply too risky to rely on rate markups. Over the years, many states and lenders have capped the amount dealers can markup buy rates. Also, while lenders have rolled back some of their policies around rate markups, they are still more stringent than they were in 2008. It would come as no surprise if rate markups continue to tighten, and possibly even disappear in the upcoming years.

We all know the correlations between excessive rate reserve and refinancing.  We also know that when a lender refinances one of our contracts, the first thing they recommend to the customer is to cancel any and all products purchased by the dealer.  It’s a lose/lose situation for the dealer.  Not only do you lose your rate reserve, you now give back all of your profits from VSC, GAP, and ancillary sales.  The customer’s payment is reduced by a substantial amount and the lender is a hero, while the dealer is painted as the villain.  And, we all wonder why CSI is down and customer loyalty seems to be a thing of the past?  So, if rate reserve isn’t the answer, what’s the right way to increase F&I margins?

Sometimes you just have to return to the basics.

• Is your F&I team trained properly?
• Do they have the right products?
• Does their pay plan focus on the results that you want?

If the answer to all of these questions is yes and you still aren’t getting the results, you have to ask one more question.  Do I have the right people in the right positions?

The formula of your PRU should also be evaluated.  Sticking with the basics, we know that the PRU is made up of penetrations and average profits from product sales and rate reserve.  With that being said, the penetrations and average profits should be evaluated on a monthly basis to ensure that there is always a healthy profit mix.

A good rule of thumb, at least 60 percent of the PRU should consist of product profits and 40 percent, preferably lower, should come from reserve.  This will help control chargebacks while maintaining your PRU.  Keep in mind that rate reserve isn’t the only factor that can lead to chargeback issues. Excessive profits on products can also lead to cancellations.  Remember, in F&I, it’s not all about gross, it is about how much of the gross you keep.

Think of it this way.

One team member consistently maintains a 60 percent penetration rate for vehicle service contracts (VSCs), with an average profit of $1,300. With six out of 10 deals closed, they generate $7,800 in dealership revenue.

Another team member is not consistent in selling VSCs, but when they do sell them, they up the profit to $2,000. They only close three out of 10 deals, and generate $6,000 in dealership revenue.

The first team member generates $1,800 more revenue and maintains a positive customer experience by providing a reasonable cost to benefit ratio. The other team member generates less revenue, and could potentially increase dealer chargebacks as their frustrated consumers get “sticker shock” and cancel their F&I products. Which team member generates more profit in the end? The first one, right?

This is why product penetration rates are so important. However, getting an entire team to operate the way the first team member did in the example above requires ongoing training, well-developed pay plans, and vigilance in reviewing team-member performance. With more than 40 years helping dealerships achieve their profitability goals, EFG Companies has the right training solutions and client engagement to keep your team accountable for increasing your margins the right way. Contact us today to get started.