at a loss to a customer? The Dealer would still lose money on the vehicle. But the money the dealer loses could be significantly less than the alternative of sending it to the auction.
By selling it to a customer at a loss, it also creates an opportunity to make “back end profit.” This referred to as “balancing a deal.” A loss might be taken on the front end, but profit was created on the back end. The objective here is to identify those aged used units.
The examples I’ve just shown above are just a couple of ways the Sales Department generates profit outside of the front and back end gross of a car deal. Are you starting to see what might motivate a dealership to sell a unit below their cost, and still make a profit!
In the chapters to follow, I’ll assemble everything you’ve learned thus far, to create a strategy to target these opportunities. The next chapter you will learn how the Finance Department generates profit.
The Finance Department
In this chapter I’ll explain how the Finance Department operates and creates profit. This Department actually functions as a division of the Sales Department. There are two major areas of the sales process for which the Finance Department is responsible.
The first area of responsibility is the processing and funding of the car deal. Contracts and other official paperwork from the deal are processed, packaged and sent to the lending institution for funding.
Once the lending institution receives the package, they verify all the information, stipulations the lending institution may have imposed as a condition of approval, and fund the package. This is referred to as “funding the deal.” The lending institution, in most cases, electronically transfers the money to the Dealer’s account.
The second area of responsibility is creating profit. It is the job of the Finance Department to “enhance” the gross profit of the car deal. You may recall in the previous chapter, I explained the difference between “front end gross” and “back end gross.”
This chapter explains how back end gross is created. Before I dive into the detail of how profit is created, it’s beneficial to understand the hierarchy of the Finance Department and the individual responsibilities of its personnel.
Larger dealerships employ a Finance Director who has a unique set of responsibilities. The first responsibility is to oversee the Finance Department operations and ensure that the dealerships profit objectives are meant.
The Director’s main functions are to build a rapport with lending institutions, monitor funding statuses and ensure compliance with state and federal laws on behalf of the dealership. The Director also assists the Sales Manager in assembling the “deal structure,” or how the loan proposal is presented to the lending institutions. This is a very important part of the selling process.
Most Directors have approximately seventy lending institutions at their disposal. Each one has their own specific lending guidelines, and it is the Director’s job to know what lending institution will buy a particular deal structure.
The Director’s job also entails using the rapport that has been established with the lending institutions, to buy “grey area deals,” or deals that may not fit the exact guidelines of the lending institution.
Finance Directors are normally paid based on the combined profit of the Sales and Finance Departments, plus bonuses for meeting the dealership’s objectives, such as warranty and GAP sales.
Below the Finance Director, are the Finance Mangers, also referred to as “Contractors.” These are the individuals customers meet with to sign all the necessary paperwork in regard to their car deal. The main function of the Contactor is that of a Sales Person.
The dealership has a number of products and services available for purchase that can be included in the total amount that the customer finances. These products and services are referred to as “add ons.” Some of the “add ons” include such things as; extended warranties, wheel and tire protection, GAP insurance, paint sealant, interior fabric protection, rust proof undercoating, and an array of other products and services that vary from Dealer to Dealer. I will cover the validity of these products and services in a later chapter.
It is the job of the Contractor to “upsell” the customer during the contracting process. The Contractors are normally paid a commission on the products and services they sell to the customer. Contractors, in most cases, also receive and incentive bonus or “penetration bonus” for the sale of certain products or services.
Here’s an example; if a Contractor were to sell 50 warranties in a month and contracted 100 customers, the Contractors penetration would be 50%. The Contractor would receive a $1,000 bonus on top of the commission earned for the month.
Why is this important for you to understand? Let’s say it’s the 29th of the month, the Contractor has 49 extended warranties sold for the month, and you would be interested in buying an extended warranty. Do you think the contractor would dump the price of the warranty to get you to buy it right now, and make their bonus?
Are you starting to see the reason I’m explaining all of this? If you can identify what another person’s motivation is, you can use that to potentially save thousands.
Now, let’s discuss how the Contractors generate profit for the dealership. There are essentially three profit categories in the Finance Department. They are Products, Services, and Reserve. These are all back end items.
You may be wondering why the profit of a car deal is divided into “the front end” and “the back end.” The answer is simple. Back end products are referred to as “cancellable” items. Front end profit, as you may remember, is the profit made on the sale of the car. Back end profit is created from the “add on” products as we previously discussed.
Lending institutions do not consider products, services, or reserve a part of the collateral that secures the loan. They will advance funds for the purchase of these items, but most of these items have termination or expiration dates.
The lending institutions consider them optional. Most of these items contain options in their specific agreements to cancel the service they provide “at will.” This is very important to be aware of when we start to put everything together in a later chapter.
Products consist of items such as extended warranties, GAP insurance, Life and Disability insurance, and wheel and tire warranties. Extended warranties, are really not warranties, they are Extended Service Contracts. Only a manufacturer can offer a warranty.
The general term that is used by the public is “Extended Warranty,” when referring to Extended Service Contracts, so to keep this simple, that is the term I’ll use. Extended warranties can be sold on new cars as well as used cars.
The purpose of purchasing one on a used car is obvious. But what about extended warranties on a new car? There are advantages depending on the customers driving habits. Extended warranties on new cars tend to be less expensive.
If the customer drives 20,000 miles a year, the manufacturer’s 3 year/36,000 warranty would expire in just a year and a half. It’s possible to extend the years and mileage and tailor it to the customer’s needs. Prices vary by make, model, term and the deductible that is chosen.
The specific cost is then marked up by the Contractor, usually $1,000 or more, and sold to the customer. The price the customer pays is negotiable, however most customers have no knowledge of extended warranty costs, and do not understand how to negotiate an “intangible.”
