As new-vehicle margins tighten, dealers should focus on services for used vehicles to make a healthy profit, experts say.
Much of that profit will come from parts and service, but if dealers have effective ancillary offerings, a bulky share of their profit will likely come from F&I, too.
Most dealerships have a large variety of F&I products that apply equally to new- and used-vehicle transactions. But the burgeoning used-vehicle market gives dealers an opportunity to rev sales of the F&I products that would particularly benefit used customers, especially service contracts.
A used-car customer is buying a vehicle that "had someone else's issues before they bought it," says Matt Woods, director of training and development at Service Group. "A vehicle with 30,000 miles is closer to having a potential problem than one with zero miles."
Because of that and because there is little or no factory warranty on a used vehicle, he says, used-vehicle buyers are "prime candidates" for service contracts.
"Cars are not break-proof; most people recognize that," says Rasheed Creary, business manager at Sutliff Volkswagen in Harrisburg, Pa., whose best-selling F&I products are service contracts.
Used-vehicle buyers tend to be budget-conscious, but "a service contract is an excellent choice because it is one of the main products that allows them to maintain their budget during their time of ownership," says Dwayne Wiggins, who trains for F&I University at American Financial & Automotive Services, an F&I development company offering training, products and services.
On used-vehicle transactions, service contract penetration "should be double new all day long," says Jim Maxim, president of MaximTrak Technologies. "So if you're not [at] 60 to 70 percent [penetration] on used, you're doing yourself a disservice," he says.
Service contracts appeal to used-vehicle buyers because they can foresee a day when their vehicles will break down as the result of age and mileage. But products that restore vehicles that fall victim to chance occurrences are also popular among used-car buyers. A situation where a tire-and-wheel product might be helpful "doesn't care how old your vehicle is," Woods points out.
Maxim says bundled products also can add value because customers can get the coverage they want that a service contract and guaranteed asset protection, or GAP, leave out.
Industry insider Greg Oltman warns, though, that F&I managers could be limited in what they can offer to some used-vehicle buyers because some used cars are ineligible for F&I products. For example: "Used cars are not all eligible for a service contract because they are too old" or the mileage is too high, says Oltman, director of business development at Dent Zone Cos. Inc.
If a dealership offers a service contract to cover such a vehicle, the price is usually very high because of the risk to the insurance company, he says. "On a new car, during the first three years of a service contract, there's really no risk to the insurance company."
Other ancillary products may be limited based on the year of the used vehicle, too, Oltman says, so F&I managers may not be able to sell them either.
Another difficulty in trying to sell F&I products on used vehicles is that used buyers aren't as inclined as new-car buyers to come back to the dealership for service work.
Used customers often first see a vehicle online and travel farther to buy it than they would for a new car, according to Maxim. So convincing them to come back to that faraway dealership for service could be a challenge.
Loyalty programs and perks such as free oil changes could help.
"One of the opportunities is to get more creative with used-car service contract sales in the service lane," Maxim says. "As a whole, as the used-car market grows, giving [customers] broader options with the proper parameters is going to be imperative."