• DigitalDealer-horizontal-Logo
  • ATTEND LAS VEGAS
    • Attendee
      • Registration & Pricing
      • Agenda At-A-Glance
      • Exhibitor List/Floor Plan
      • Sponsor List
      • Hotel & Travel
      • Hosted Dealer Program
      • FAQ
      • Mobile App
    • Exhibitor
      • Exhibit/Sponsor
      • Advertising Opportunities
      • Exhibitor Resources
      • Exhibitor Tips
    • Education
      • Overview
      • Show Schedule
  • ABOUT
    • Conference Overview
    • Best Of Awards
    • Become a Speaker
    • Press Inquiries
    • Partnership Programs
    • Health & Safety
    • Contact Us
    • Get Updates
  • RESOURCES
    • Webinars
    • Downloads
  • NEWS
    • Auto Retail News
    • Digital Editions
    • Press Releases
    • Submit Editorial
    • Subscribe
  • .
  • ATTEND LAS VEGAS
    • Attendee
      • Registration & Pricing
      • Agenda At-A-Glance
      • Exhibitor List/Floor Plan
      • Sponsor List
      • Hotel & Travel
      • Hosted Dealer Program
      • FAQ
      • Mobile App
    • Exhibitor
      • Exhibit/Sponsor
      • Advertising Opportunities
      • Exhibitor Resources
      • Exhibitor Tips
    • Education
      • Overview
      • Show Schedule
  • ABOUT
    • Conference Overview
    • Best Of Awards
    • Become a Speaker
    • Press Inquiries
    • Partnership Programs
    • Health & Safety
    • Get Updates
  • RESOURCES
    • Webinars
    • Downloads
  • NEWS
    • Auto Retail News
    • Digital Editions
    • Press Releases
    • Submit Editorial
    • Subscribe

DealerPoint: May 21-23, 2024
Conference & Expo:
October 8-10, 2024

REGISTER NOW EXHIBIT / INQUIRE
Q

NEWS:

Sales & Variable Ops | Trending Industry News
November 21, 2022

The Best F&I Strategy for Declining Front-End Margins

Posts:
Sales & Variable Ops | Trending Industry News
November 21, 2022

The Best F&I Strategy for Declining Front-End Margins

By Scot Eisenfelder, CEO, APCO Holdings LLC

Most auto industry experts began 2022 predicting dealerships would have more inventory by now. But supply replenishment has taken longer than the experts predicted. Now, just as manufacturers hint at more supply, we may be heading into a recession. How will this impact dealers?

Even though sales volume typically drops during a recession, there is still plenty of pent-up demand for vehicles. Because of this, a recession will not reduce sales volume in line with historic norms. However, it will place downward pressure on pricing and margins, just as supplies increase. A simultaneous demand reduction and supply increase will be a double whammy for prices and margins.

Although front-end margins may not go as low as before the pandemic, they definitely will decline from their all-time highs. As in difficult times in the past, it’s a good time for dealers to start looking at other profit centers to make up the difference in revenue.

Service Challenges

The service department is the first profit center dealers typically pivot to in hard times. However, dealers may be challenged to increase service revenue for the following reasons.

First, the average number of units in operation (UIO) for dealerships has dropped significantly due to the supply crunch of the last two years. That means fewer new vehicle owners coming in for warranty and customer-paid work.

Second, dealerships have been selling more pre-owned, off-brand vehicles than ever before. The percentage of these buyers that return to the purchasing dealership for service is typically low.

Peak F&I Per Vehicle Retail (PVR)

In the F&I department, we’re already at record levels of PVR. How much further can dealers raise PVR to make up for the loss of front-end profitability, particularly in a recession? Realistically, not much.

The best F&I strategy to have right now is to focus on selling products that bring customers back into the service department. Here are two actions to take right now:

1. Sell more Pre-Paid Maintenance (PPM)

Based on a nationwide analysis of APCO’s dealers over the last ten years, customers with both a PPM and vehicle service contract (VSC) are 40 percent more likely to bring their vehicle back to the selling dealer or group for claims covered under their VSC.

—VSC customers without a PPM have a claims retention rate of 55 percent
—VSC customers that also have a PPM have a claims retention rate of 77 percent

Additionally, after analyzing franchise new, franchise used, and off-brand used customers, a PPM impacted off-brand used customer retention the most.

—Off-brand used customers with only a VSC had a claims retention rate of 29 percent
—Off-brand used customers with both a VSC and PPM had a claims retention rate of 44 percent

That is a 51 percent increase! Additionally, a PPM increased the selling dealer’s VSC claims yield by $142 on average per VSC written.

This analysis shows that a focus on selling PPMs can have a significant and positive impact on long-term service revenue and service retention.

The main problem with this strategy is that PPMs don’t have a high profit margin for dealerships, so F&I managers are not incentivized to sell them. You might want to think about providing that incentive, either by altering pay plans or offering a bonus for PPM sales objectives.

2. Advantage Selling

Advantage selling is when dealers add a product such as a lifetime warranty onto a vehicle’s transmission. These products are perceived as high value by the consumer, but they are not necessarily high cost for the dealer.

The primary benefit of advantage selling is brand-building for the dealership. Many dealers have pulled back from this practice during the recent supply crunch because they haven’t needed to focus on brand-building. But pulling back on advantage selling was short-sighted.

The long-term benefit is that it will help protect margins when we return to a normal supply situation. Additionally, advantage selling links the customer and the dealership, increasing service retention.

Think about how two years of significantly fewer units-in-operation (UIO) sets your dealership up for long-term service retention and revenue. By building value into the consumer experience with PPMs and advantage selling, you are creating a strategy that will alleviate the pain of declining front-end profit margins. But the time to make these changes to your F&I strategy is now, not six to nine months from now when we are back to a normal inventory situation.

About the Author

Scot Eisenfelder took the role of CEO of APCO Holdings in 2021, after joining the team in 2020 as Senior Vice President of Strategy and Planning to help grow the company in an increasingly digital and competitive auto retail environment.

Sales & Variable Ops•Trending Industry News

SHARE

Share on Email
Share on Linkedin
Share on Facebook
Share on Pinterest
Share on Twitter
← Previous Article Next Article →
Posts Dealer/GM News

CarGurus Deal Acquiring CarOffer is Completed; Zach Hallowell Named CEO

CarGurus completed the acquisition of CarOffer, purchasing the remaining minority equity interests for $75 million on Dec. 4. CarGurus acquired a 51% interest in CarOffer in January 2021 and announced plans last month to accelerate the purchase of th
Posts Industry Press Releases

Step One Automotive Group Announces 25 Days of Giving Across Alabama, Florida, and Georgia

Step One Automotive Group will dedicate 25 Days of Giving within the communities they serve in Alabama, Florida, and Georgia. Throughout the month, expect to see Step One Automotive Group team members spreading holiday cheer to those in need. “
Posts Dealer/GM News

CarGurus Deal Acquiring CarOffer is Completed; Zach Hallowell Named CEO

CarGurus completed the acquisition of CarOffer, purchasing the remaining minority equity interests for $75 million on Dec. 4. CarGurus acquired a 51% interest in CarOffer in January 2021 and announced plans last month to accelerate the purchase of th
Posts Dealer/GM News

Haig Report Finds Mixed Results In Dealership Deals–More Deals, Lower Prices

While values declined slightly this year, 2023 is on pace to be the third most active year for the selling of U.S auto dealerships. That is one of the main takeaways of the Haig Report for third quarter 2023 that stated at least 385 rooftops have tra
Posts Dealer/GM News

New Research Reveals Age and Gender Differences in Vehicle Add-On Purchases

When consumers purchase cars at an auto dealer, they often buy supplemental products and services called voluntary protection products (VPPs). These provide additional coverage and protection for certain vehicle components or services not covered by
Posts Dealer/GM News

Nearly 4,000 Car Dealers Ask President Biden to Slow Down EV Push

Car dealers are asking President Joe Biden to “tap the brakes” in his administration’s electric vehicle (EV) push. A total of 3,882 franchised car dealers the U.S., calling themselves the EV Voice of the Customer, published the letter on No
Posts Data & Analytics

Digital Retailing Continues to Grow at Auto Dealerships

A recent report found car dealers offering consumers the ability to do a deal online has grown to 40% in the last year—but an urgent need to cutdown on repetitive steps happening in the showroom. Nearly all car dealers currently using digital retai
Posts Dealer/GM News

Ciocca Agrees to Purchase 10 More Pennsylvania Dealerships

The Ciocca Dealership group is growing its holdings in Pennsylvania. The agreement has Ciocca purchasing Apple Automotive, the automotive division of York County, Pa- based Stewart Companies. Terms of the deal was not disclosed, with the final transa

NEWSLETTER

SUBSCRIBE

DEALER MAGAZINE

Dealer Magazine March/April 2023 Issue Featuring an Interview with NADA 2023 Chairman
MAGAZINE

Explore All Our Brands

FOLLOW US ON

  • Follow
  • Follow
  • Follow
  • Follow
  • Follow
© 2023 Emerald X, LLC. All Rights Reserved.

ABOUT    CAREERS    AUTHORIZED SERVICE PROVIDERS   DO NOT SELL MY PERSONAL INFORMATION   TERMS OF USE   PRIVACY POLICY