I get calls and e-mails every day asking many of the same questions and complaining of the same things. “Who do you know that is buying in this market?” “The finance companies aren’t buying anything!” “You just can’t make any money in special finance anymore.”
In a nutshell, yes, the market has tightened, but those of you who believe special finance doesn’t work or that you can’t make any money anymore have been drinking the wrong Kool-Aid. You are just flat wrong and have created a self-fulfilling prophecy.
Yes, advances have declined. I, along with others in the media, have been chronicling this for months. Judging by the losses incurred by the finance companies from their 2006 and 2007 paper, they were way out of control (just like they were a decade earlier when the market tightened).
Guess what else declined while the advances were retreating—wholesale used vehicle prices. That allows dealers to still structure deals and make good gross profits on them. Benchmark gross profits have not declined any more than they had during the late second and early third quarters of 2008. The benchmark gross profit (combined front and back) for franchised dealers is still $2,860 per vehicle.
So, what does that mean to dealers today?
First, conventional floor traffic is down significantly. Consumer confidence has reached the lowest level ever recorded. Not many people are buying on impulse or emotion.
Second, due to an unprecedented number of foreclosures and the highest unemployment level in 16 years, more consumers have had their credit become impaired. Longtime prime credit customers have become near prime and subprime.
Third, the banks and finance companies, after suffering through poorly performing portfolios and reduced sources of funds, have not only tightened advances, as previously mentioned, but have also tightened credit decisioning.
These three factors have given dealers the feeling that SF credit is tighter than it really is and that you can’t get deals bought.
Let me go back to my original statement; that is just flat wrong. In surveying my bellwether SF clients and dealers around the country, the market has indeed stabilized. As I stated months ago, dealers had to adjust. Those who did have found ongoing success – not as easy as it had been before, but success nonetheless.
That success has been sustained by focusing hard on two of my 10 Critical Components for Success: Inventory and the Sales Process.
As mentioned above, wholesale prices fell drastically over the third and fourth quarters. Dealers who were nimble and selective were able to take advantage of some amazing inventory buys, which allowed them to continue to structure profitable deals even with reduced advances, as long as they didn’t botch the sales process.
Longtime readers of my column have long since been aware of my Green and Red Balloon practice. For new readers, I have always said it would be ideal if dealers could place a balloon kiosk in the customer parking area, and upon arriving, customers would be required to select one of two colored balloons to walk around the dealership with—either a green balloon for those with good credit or a red balloon for those with subprime credit.
That would make the sales process so easy. It would help keep a salesperson from directing customers to, and working deals on, vehicles the customer could never qualify for nor afford. Red Balloon (RB) customers would be identified immediately, and after the meet–and-greet, they would immediately be directed into the finance loop. With Green Balloon (GB) customers, nothing in the process would change from the tried and true.
In order to maximize our opportunities as well as make the customer experience as good as possible, we must put a technique in place that allows us to identify the customer as early as possible. With fewer showroom opportunities, there has never been a more important time to properly identify your customers.
The key, regardless of the department structure, is to insert a simple, non-offending qualifying question or two into your meet-and-greet process. This can be as simple as asking, “Are you here for the big sale today? Great! Are you interested in our special [insert the appropriate number] percent APR interest rate program for preferred credit customers?” If the customer says yes, you have a GB and you’d proceed with your traditional road to the sale.
If the customer says no, then you can say, “Then would you be here to take advantage of our special financing programs to help you establish or re-establish credit? … Great, please follow me inside and we can get you quickly pre-approved.” In this scenario, you have a RB and you’d proceed with the traditional SF sales process.
You can certainly ask different questions. “Is the car you are currently driving financed?” If the customer says yes, you can ask, “Who with, if you don’t mind me asking?” If they tell you it’s financed with Wells Fargo, that’s a mixed signal because it could be a prime or special finance deal. Then you can ask, “And how has your experience been with them?”
If the customer says, “I hate them, they are always calling me,” that’s a RB signal telling you the collections department has been calling them, so you can assume SF.
From here, in some stores the RB signal will mean turning over the customer to the special finance sales team or department. In others, it will mean bringing them inside to begin the finance loop and privately discuss their credit background. Ultimately, with the SF customer, it means the focus shifts to qualifying for financing rather than looking at a specific vehicle.
If a qualifying question is used early in the sales process, SF customers are much less likely to be shown vehicles they cannot qualify for, meaning the dealership will have a much better opportunity to deliver a vehicle, and the sales process for these customers will provide a much more positive buying experience.
Other qualifying methods could be to ask: “Mr. Jones, would you like our assistance to help find you competitive financing or leasing options on this purchase?” If the customer says yes, you can respond witn, “No problem, we will be happy to. Let me ask you, on a scale of one to five, five being great (not good, but great), how would you rate your credit?” If they reply a five, work them as a GB. One through four, RB.
No matter what selling system you are using, I have seen this process successfully integrated into all the traditional approaches with ongoing training and consistent practice. Salespeople, sales managers, finance managers and SF managers must be educated as to what needs to take place, when it should take place and how it will be executed. Following that up by measuring the results allows you to manage the progress as well.
Keep in mind that this process not only will boost your ability to properly select and structure SF deals, but it will enhance your ability to sell and earn gross profit on the green balloon deals as well.
If you would like more information on the SF sales process, you can find more detail in the archives of AutoDealerMonthly.com. Even more about it is detailed in my book “The Complete Guide to Special Finance,” also found on our Web site.
Selling opportunities have always been too precious to squander, but now, it can cost a dealer the store. The bottom line is that in order to succeed in today’s special finance market, you must be able to quickly distinguish a subprime credit customer from a prime credit customer. If you are a subprime-only store, you must be able to quickly differentiate from a traditional SF customer and a deep-tiered customer, and even a buy here pay here customer. Doing so will allow you to succeed at a time when most are convinced that it can’t be done. That, folks, means extra market share for you.
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