Preloading products boosts per-car F&I sales
Some dealers see a downside. Here's why
Dealer Joel Weinberger won't preload. It turns off customers, he says.
Ed Morse Cadillac Tampa is surrounded by big oak trees.
And the sap from those trees can damage the paint on the dealership's new cars.
So Morse puts paint protection on all new vehicles there and at its 15 other Florida locations. That's because if it isn't tree sap, Florida is plagued with other paint-damaging forces such as acid rain and lovebugs.
"By adding paint protection to our cars, we're saving thousands of dollars in repainting hoods, decklids and so on," says Randy Hoffman, senior director of Ed Morse Automotive Group in Delray Beach, Fla. The group sells 10 brands.
Besides protecting its inventory, many dealers say that preloading products on vehicles brings in thousands of additional finance and insurance dollars monthly.
But there are pitfalls. The practice can make a dealer trade for a non-preloaded vehicle difficult. Also, some customers refuse to pay for the preloaded product and that could cost a sale or result in a poor customer satisfaction index score. And depending on the state it also could expose a dealership to fines and/or lawsuits.
"There's nothing inherently wrongful about preloading options to vehicles; it's how they are disclosed that matters," says Terrence O'Loughlin, director of compliance for Reynolds and Reynolds in Fort Lauderdale, Fla. O'Loughlin was Florida's attorney general from 1989 to 2006.
For example, a preloaded product must be itemized and fully disclosed on an addendum to the window sticker, O'Loughlin says. If not, a dealer could face a fine. Fines vary by state, he says. For example, in Florida the fine is $10,000, in Illinois it's $25,000, he says.
The secret to successfully selling preloaded products is in the presentation, Morse's Hoffman says.
"The salesperson, from the beginning, lets the customer know the vehicle has paint and fabric protection on it to protect the vehicle while we have it as well," he says. "If we get that into our salesperson's presentation over and over, we're going to sell more of the product."
If the customer does not want the protection, the product stays on the car, although the customer does not buy the warranty. Those warranties range in retail price from $250 to $700, depending on the contract coverage and the vehicle, Hoffman says. It's about a 40 to 50 percent markup for the dealership.
Morse's stores also preload all vehicles with window etching to protect from theft. They charge a 200 percent markup on it, Hoffman says.
Hoffman says the preloaded products have about a 20 to 30 percent penetration sales rate, Hoffman says.
"We're able to preload etch for less than $2 a vehicle, so that was a no brainer," Hoffman says. "If you sell 5 percent penetration, you're profitable. And if we offer every product to every customer every time, you're naturally going to sell more than 5 percent penetration."
Pitches and profits
Brian Allan, general manager at Galpin Premier Collection in Los Angeles, says LoJack is preinstalled on each new vehicle for all its brands: Jaguar, Volvo, Lincoln, Aston Martin and Lotus.
The LoJack device uses radio direction-finding technology. In markets where LoJack operates, police can home in on a stolen car. The LoJack device in the stolen car emits a signal and the closer the police get to the car, the stronger the signal gets.
Allan's salespeople explain to customers that, on average, police find a stolen vehicle with LoJack in less than 20 minutes.
"What's inside the car is often more valuable than the car itself," Allan says. "Typically, a customer will say, 'That's why I have insurance.' What they don't realize is you typically have to wait 30 days for a claim check. And the chance of vandalism skyrockets the longer you wait for your car."
Allan knows because LoJack protects Galpin, too. About five vehicles a year are stolen from Galpin's property and recovered, Allan says.
The luxury-brand dealership also preloads paint protection on the upper-end Jaguar and Aston Martin vehicles, Allan says.
Paint protection retails for $895, and LoJack retails for $695. Allan declined to disclose his profit, but he calls it "lucrative," saying most customers purchase a preloaded product.
That's what Bob Smith BMW is counting on. On Sept. 28, the dealership began preloading all its Mini vehicles with LoJack, says Megan Jacoby, finance director at Bob Smith BMW in Calabasas, Calif. The store put LoJack on six Mini cars. In just eight days, it sold each car with the LoJack on it for $695 retail. That garnered a profit of about $378 per vehicle or $2,268 in additional revenue for the F&I department, Jacoby says.
Jacoby says she pays the salespeople 5 percent of the backend.
Neither Allan nor Jacoby has ever had a customer walk out or feel angry about having to buy a preloaded product, they say.
LoJack's technicians install the product for Bob Smith BMW and Galpin Premier Collection. LoJack does a brief training for salespeople on how to sell LoJack and what to do if a customer refuses it. LoJack cannot be removed, so it's sold in the car but not activated and the customer is not charged for it, Allan says.
"We explain to the customer there will be no warranty on it because they have not purchased it," Allan says. "They have no certificate for a discount on their auto insurance."
Jacoby says if a customer refuses to pay for LoJack, her dealership is prepared to "eat the cost" on the installation, which she declined to disclose. But, she adds, the profit potential is so strong that "it's not a huge cost, so if we have to eat one here and there, we're not upset."
Another downside to preloading is that dealer trades can be difficult. Many dealers will not pay for a preloaded product, Jacoby and Allan say. Fortunately, Allan sells about 3,600 new and used vehicles a year so his high-volume store is sought after for inventory by other dealers in his market who know that "if they want one of our cars, they have to pay for the LoJack," he says.
No 'fairy tale'
Several years ago, Morrie's Automotive Group in Long Lake, Minn., preloaded window etching on its new vehicles hoping for added profits.
"You see all these great penetrations from dealers across the country who do it successfully," says Aaron Vilick, director of finance at Morrie's. "You want to have 30, 40 or 50 percent penetration and so you preload your cars and expect it to be a fairy tale. But it doesn't work that way."
After six months, Vilick stopped preloading and never has resumed it.
"It's a big source of customer dissatisfaction," Vilick says. "It also was a problem with dealer trades, so it hampered our sales and didn't help our penetration."
Vilick says preloading hurt his service technician's productivity because they had to spend time installing or removing the preloaded product.
Then there are the state regulations and other consumer protection issues he had to contend with.
"The state we're in is very customer-friendly. The attorney general investigated some larger car dealers about seven years ago who were preloading etching and found there was no value in it and fined two of the larger dealers in the state for it," Vilick says.
"We felt it opened us up to a class-action lawsuit."
But former Florida attorney general O'Loughlin, says as long as dealers disclose the preloaded product and its price to consumers, there is very little chance they'll have legal problems.
"Preloading is not a problem unless it's misrepresented to the consuming public," O'Loughlin says.
Still, dealer Joel Weinberger of Continental Motors Group in Naperville, Ill., won't preload, saying it would make him less competitive and turn off customers.
Says Weinberger: "We don't want to put our salespeople and our potential buyers in a type of adversarial position where the salesman feels he has to sell something because it's already on the car or make the customer feel they have to buy something they didn't really want in the first place."
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