insurance product. It is regulated by the State’s Insurance Commissioner. The cost and selling price are fixed and there is no negotiation on its price. Because it’s an insurance product and is regulated, it’s guaranteed to pay off.
The second type of GAP is the “Gap Wavier.” The GAP wavier is not an insurance product, and is only as good as the company that issues it. A GAP wavier has a fixed cost; however the selling price is negotiable. Both GAP’s provide the same protection.
Here’s what GAP provides. In the event a vehicle is stolen or totaled in an accident, the insurance company is only required to pay “fair market value” on the policies they issue. If the fair market value of the vehicle is less than the amount that the customer owes the lending institution. That creates a deficiency balance. The customer is still responsible for the balance owed to the lending institution. GAP pays off that deficiency balance to the lending institution on behalf of the customer.
Some states do not allow GAP waivers. The Dealer’s choice is usually the GAP waiver if allowed by the state. This is due to the fact the Dealer can determine the mark up. The Contractor marks up the price from its cost which is usually around $200 to $250 and sells it to the customer. I’ve seen GAP sold for as much as $999 on deals. That would be a profit of over $700!
The next product is Life and Disability insurance. This is pretty much a dinosaur product. Most dealerships don’t offer it anymore. It’s expensive and the amount of profit it creates is a small margin compared to other selling opportunities the Contractor has available.
The next profit center for the Finance department is called “reserve.” Some lending institutions will pay a commission to the dealership for sending them the deal. The commission is paid in “points.” On the approval sheet from the lending institution, there will be a “buy rate” and a “sell rate.”
The dealership has the ability to “hold” those points and contract the customer at the “sell rate.” Most lending institutions “cap” the total points that the dealership may hold. Usually, it’s around 2 points.
Here’s an example of how reserve creates profit. A loan of $20,000 with the dealership holding 2 points would equal about $800. Some lending institutions pay a “flat,” like $150 to the dealership for sending them the deal. Remember, most dealerships have about 70 lenders at their disposal. It’s competitive out there, and the lending institutions all want the dealership’s business.
I’d like you to look at the amount of profit that was just generated in the last three examples. $1000 in warranty profit plus, let’s just say only $350 profit in GAP, and the reserve of $800, equals $2150 in back end profit in just about 20 minutes. And there’s more. Remember the “cost money” for the warranty and the GAP?
The dealer takes that money and invests it what is called “reinsurance.” The cost money is placed in a trust that is invested, creating more profit. Warranty and GAP claims are paid out of the trust, and as more warranties and GAP policies are sold, the reinsurance trust grows. Are you starting to see “why” it may appear that a dealer will “lose” money on a car and sell it thousand’s below cost!
I’m not going to spend much time on the other products and services that might be offered. They consist of paint and fabric protection, identity theft protection, etching, and an array of other items to part the customer from their money. Their names are somewhat self-explanatory.
In my career, I never liked them and saw very little value to the customer. There are people who buy them, mainly because of the selling system that is employed. I’ll discuss this in the chapter on “Selling Systems.”
In the next chapter I will explain the various selling systems dealerships employ to sell a customer a car. They have been around for years, and they’re not going away. Your comprehension of how these selling systems function will put you “light years” ahead of uneducated customers when entering into the negotiation process.
Understanding The Selling System
In this chapter, I’ll explain how the selling systems work that dealerships use to sell you a car. Before we start, I’d like to share some thoughts with you. If I could educate you on one ideal, it would be this statement; “don’t try to reinvent the wheel.” Dealerships have employed various selling systems and they have been in use for many years.
The advice you may have received from friends, family, or other books on this subject, usually tend to start you off on the wrong foot. Usually, the advice that is given is negative, such as; “this is what they’re gonna do to screw you and here’s how you put them in their place.”
Your knowledge of car buying is now no longer based off of fact, of what’s really happening. It’s based off of fear, the anticipation of negative. Believe me, if you walk into a dealership, anticipating negative, you will create it, and you will create a real life experience from the bad advice you received.
I happened to be reading an article the other day that was full of advice that I can’t put any other way than “Pure Stupid”! It stated that if you wanted to get the best price on a car, to go into the dealership and “ask” them for a car that you know they don’t have? Then, you pretend to not be interested in the car they show you.
The article further stated that the dealership will drop the price of the car you are pretending not to want? Only the “Mayor of the Village Idiots” would attempt that type of an approach! And by the way, It Won’t Work! It’s interesting to note, this advice came from someone supposedly in the car business!
In all my years of experience, I watched things like this happen over and over. People coming in with attitude, and telling the dealership how to sell them a car, telling the dealership that they knew how many thousands of dollars of profit were in the car, and if they didn’t do it “their way,” they were “gonna walk!”
Do you know what the dealerships attitude was in most cases? “OK walk!” What did that lack of education, combined with bad advice and attitude accomplish besides nothing? What would happen if you were able to understand the selling systems and use their process to your advantage? What if you combined that knowledge with a positive attitude?
There are basically two selling systems that dealerships use. The first one is referred to as “Pure Pricing.” The second one is “Negotiation.” Pure Pricing has been around since the early 1990’s. It’s been called by many other names. The only difference between the two selling systems is Pure Pricing does not negotiate on the selling price of the vehicle.
The concept behind Pure Pricing is this; people do not like negotiating the price of a vehicle. The dealership “pre-discounts” the selling price of the vehicle. That pre- discounted selling price was determined by market data on all similar makes and models of the same vehicles previously sold. The selling prices were then “averaged” to make it fair for everyone. The concept sounds interesting, but what is to stop you from going down the street and beating that price by $500 with a dealer that will negotiate?
I began my career in the car business at a Pure Pricing Dealership, and I was extremely successful, however, I was very customer service oriented, even after the sale. I made it a practice of retaining my customers by booking their service appointments long after they purchased their car.
I became their “point of contact” for anything they needed at the dealership, and in turn, it created a very loyal customer base. I wasn’t taught this, I just believed this was the way I would want someone to treat me.
In today’s market, I view Pure Pricing a little differently. Most dealerships
