June 15, 2021

Building relationships can lift profits long term

Dealers look at many metrics to gauge their business’ performance. In the F&I department, the metric that gets the most attention is profit per vehicle retail.

But it seems the focus is always on how to increase that profit without really thinking about how the higher profit per vehicle retail is achieved.

I believe how you achieve it can be as important as how much of it you get.

Would you rather sell a prepaid maintenance contract or an appearance protection product? The profit margin on appearance protection may be higher, but a prepaid maintenance contract sets up your dealership to have a long-term relationship with that customer, which results in more service dollars and potentially another vehicle sale.

What is that customer relationship worth?

Is building customer relationships part of your F&I strategy, or is your only strategy to increase profit per vehicle retail?

A major obstacle to selling products with more long-term profitability is pay plans.

Most F&I managers are incentivized to sell products with high profit margins, such as appearance products, so naturally those are prioritized.

Another consideration when the sole focus is raising profit per vehicle retail is that it’s tempting to raise prices.

But as prices increase, product penetration decreases. As a result, you’ve reached your profit per vehicle retail goal but haven’t sold as many contracts, which means fewer long-term relationships and lower future profits.

To provide an optimal experience, the products a customer buys should meet their needs. But how much profit per vehicle retail is generated from selling products the customer doesn’t need?

The only way to ensure you meet a customer’s needs is to do a needs analysis. As an industry, we talk about the importance of doing this, but are we doing it? We don’t know because most dealerships fail to document whether a needs analysis has been done on every customer.

The needs analysis is critical because from a consumer perspective, there’s nothing worse than buyer’s remorse. When a customer leaves your dealership feeling like they paid for something they won’t use, they will never come back. Even if a customer doesn’t feel immediate remorse, every day that goes by that the product isn’t used, the customer’s resentment rises.

Ideally, every customer makes at least one claim on a product they purchased. The ideal outcome is that someone buys several products that perfectly meet their needs and bring them back to the store. If that’s accomplished, you earn additional service revenue, maintain the relationship and the next time that customer purchases a vehicle, the original products become the baseline. I’ll accept a lower profit per vehicle retail upfront if I can make all those things happen.

Another often-overlooked aspect of profit per vehicle retail is claims yield. If you sell 100 contracts and each yields $500 in service revenue, who gets that $50,000? Not all of it will end up at your dealership. But if you sold a product that aligns with the customer’s needs and you have done a great job of explaining the benefits of getting service done at your store, the customer is more likely to bring his or her vehicle in for service. So, how you get to your profit per vehicle retail also determines how much of that claims yield you get to keep.

There is nothing wrong with optimizing how much money can be made on each deal, but the goal should not be on maximizing upfront profitability. Focusing on the right set of products and aligning those with customer needs yields greater long-term profitability for your store.