The ABCs of maximum F&I effectiveness

From Chris Meier’s perspective, the current economy has made F&I products even more important for an auto dealership—and its customers.

With continued limited vehicle inventory, buyers are paying top dollar for their new vehicles. “People who are accustomed to trading up to a new car every three or four years may find themselves in an unusual situation,” says Meier, dealer principal at Herzog-Meier Auto Group in Beaverton, Oregon.

“Because they paid a premium price today, once the industry’s supply issues lessen and the regular depreciation cycle returns, they’re going to see that steep depreciation hit—and probably feel obligated to keep their current car longer than they’re used to.

“That makes it so important for a dealership to offer buyers a robust voluntary protection product like a vehicle service contract. That mechanical-breakdown coverage helps protect their investment over a longer period of time.”

Similarly, Meier says, given today’s new-car prices, buyers making a significant down payment, $5,000 to $10,000, on their new vehicle still may find themselves needing GAP coverage to protect themselves from a financial burden in the event of an accident or total loss if the value of their car is worth less than the amount they owe on the loan.

“Service contracts and GAP coverage are the two most important products you can offer to your customers, in my opinion,” says Meier, who also is the current Oregon state director for the National Automobile Dealers Association. “And that conversation with customers is much easier to have, and the value easier to explain, given that they’re paying substantial dollar amounts for vehicles today.”

F&I is especially important not only for today’s buyers, of course, but also for a dealership’s bottom line. “One of the priorities for dealer principals and their leadership teams is to maximize profits in a consumer-friendly way,” says Larry Guy, national training manager for Allstate Dealer Services.

For Chris Long of Northwest Dealer Direct, an Allstate Dealer Services agent in Seattle, maximizing the effectiveness of F&I starts at the beginning of the sales process. “There has to be the right culture for making profit in F&I,” Long says. “That starts with the dealer. And so much of the success of F&I is controlled by the salespeople and the sales managers.”

Meier agrees that for greatest success, dealerships need to start the F&I conversation early. “We don’t want salespeople selling F&I products,” he says. “But it’s important that salespeople help the customer understand that they’re not just purchasing a vehicle—we’re going to give them the opportunity to protect that purchase. That’s as deep as we want the salespeople to go.

“That way the customer goes into F&I more receptive and ready to listen and understand what’s available,” Meier adds.

Four key elements go into to making an F&I operation as effective as possible, Long says.

1. First, the dealer needs to be engaged.
2. Second, the dealer needs to communicate the importance of F&I to the sales managers.
3. Third, the dealership needs a compensation plan that will motivate salespeople to be part of the F&I process—even a small percentage of the back-end profit is important.
4. And finally, Long says the dealership needs an F&I partner to do the “heavy lifting.” The Northwest Dealer Direct team, for instance, visits clients’ stores weekly for planned training—mostly one-on-one sessions—in addition to regular performance check-ins.

Considering everything that has happened within the purchase process along with the economic environment over the past three years, it’s a great time for dealerships to step back, assess their F&I operations and fine-tune processes. The experts say these starting points and best practices not only can help maximize F&I effectiveness, but also improve F&I efficiency:

• First, make sure you have a good F&I partner who is on top of current conditions—including federal, state and local regulations; interest rates; and labor prices, Meier says. That partner also should be available to provide robust training and education to your staff. “Most importantly, the F&I system needs to fit your world, your processes,” Meier says. “Customers seeking a loan, or a protection product, don’t know they’re dealing with a third party—they’re dealing with you. The partner needs to help you do it your way.”
• Help buyers understand how GAP coverage works. Make sure they appreciate that even with a significant down payment, they could be financially exposed in case of an accident—especially with rising new-vehicle prices. Guy says that although 75-80 percent of customers know what GAP coverage is, they don’t understand that with today’s average vehicle price closing in on $50,000, even a $5,000 down payment may mean financing 80 percent to 90 percent of the purchase. As a result, a buyer with a big down payment still may need GAP coverage.
• Protect yourself and your relationship with your customers by avoiding chargebacks. With the average car payment approaching $700 a month, some buyers getting ready to make that first payment rethink the extra amounts included for service contracts and other voluntary protection products—and contact the dealership to cancel coverage. “It sounds simple,” Guy says, “but the best way to protect against chargebacks is to help the customer really understand the products’ value and benefits. When the dealership team shortcuts that part of the purchase process, that’s where we see chargebacks happening more often.” Also make sure the customer understands that when canceling coverage, any refund won’t decrease the monthly installment payment but instead reduces the principal balance and shortens the term of the loan.
• As interest rates rise, be sure your dealership also adjusts the rate reserve on loans and collects a fair fee for its work to help buyers secure financing. Dealerships make it convenient for buyers to finance a purchase—establishing relationships with lenders and, by virtue of those relationships, securing lower rates for customers—and should be fairly compensated for that work.
• Consider the balance of per-vehicle profit versus making a profit on a larger percentage of cars sold. Guy, a former F&I manager himself, says managers tend to focus on selling their top-value products—vehicle service contracts or VSCs—for the highest profit per vehicle. But in the long run, dealers may be more efficient and profitable by, for instance, increasing the overall sale of F&I products to a greater number of buyers. As Guy says, “If I’m earning the max profitability 35 percent of the time, is that really the most efficient strategy for my dealership?” He suggests looking at F&I from a different perspective: Not just focusing on the highest-ticket items like VSCs but explaining to customers the value of other similarly pragmatic products, such as GAP coverage, tire and wheel, as well as paint and fabric protection.
• Always look for second-chance opportunities to present F&I products to customers. Buyers who initially said no to a service contract, for instance, may rethink that decision when they stop in for their first oil change or checkup. Guy suggests that the service department let both sales and F&I know that the customer has an appointment so they can stop by to say hello, find out how the customer is enjoying the vehicle and gauge the customer’s current interest in protection products.
• Check that your F&I product prices and prices within your service department—including labor, parts and supplies—are set appropriately and keeping up with inflation.

Now is the time to take these steps to ensure that your F&I process is working as efficiently as possible. “As an industry, we tend to focus on the retail profit—on this one car sale, in the moment,” says Guy. “We lose sight of the big picture, and that may be especially true since profitability has been strong over the past two years.

“If inflationary pressures cause customers to pull back on major purchases or they try to reduce the amount of core monthly expenses such as car payments, we could see noticeable shifts in net profit.

“Everyone needs to be prepared.”