Serving the Right Mix of F&I Products

It seems that casual-dining restaurant chains are always adding or taking away items on their menus, trying to find the right mix to satisfy the greatest number of customers and make the most profit. Similarly, achieving the right balance of products to sell in a dealership’s F&I office can take some time and periodic tweaking of the menu.

According to the National Automobile Dealers Association’s 2011 Data report, dealerships experienced a year-over-year increase of 15 percent in F&I income, as a percent of new- and used-vehicle gross profit. As consumers try to shake off the effects of the recession and the market recovers, it is the perfect time for dealers to re-evaluate their F&I menus and make sure their product lineups allow for the most opportunities for additional profit.*

So what will you serve on your dealership menu?

Dealership Specialties
These are the core products of most F&I departments’ menus. These products tend to have high perceived value by consumers, perform well as standalone offerings, and have the potential for high penetration levels and/or profit margins.

Vehicle Service Contract (VSC)
This is arguably the top product in the majority of dealerships in terms of both penetration and profit margins, with the possible exception of stores with very high lease penetration. According to the NADA’s 2011 Data report, service contract penetration on both new and used vehicles increased from 2009 to 2010, with service contract dollars up 7 percent. The increase could be due to an increasing number of customers who plan to keep their vehicles past the expiration of the manufacturer’s warranty.

Often incorrectly referred to as extended warranties (a warranty, by definition, comes with a product and is included in the purchase price), vehicle service contracts have a wide range of coverage options at various price points. They not only offer potentially high profit margins for the dealer, but also have the added benefits of aiding customer retention and oftentimes additional service warranty work. However, the sale of VSCs can be challenging for dealers in a few states where a VSC is considered to be an insurance product and regulated as such.

Guaranteed Asset Protection (GAP)
Profit margins on GAP will vary for dealers around the country due to different states’ regulations, and profits per deal are normally much smaller than on VSCs, but the price point often allows a high volume of sales. Consumers know how quickly vehicles depreciate in value, and those who finance most or all of their vehicle’s purchase price often can’t afford to absorb the cost of a total loss or theft. Offering a solution to cover the gap between the value of the vehicle and the amount owed to the finance company can make the customer feel even more secure with their purchase.

Of course, GAP will not be as strong a performer for dealerships that do a high volume of leasing since most leases will include some form of GAP coverage (however, this is not always the case: Toyota Financial, for example, does not include GAP in its leases).

Dealership Side Items
While not quite in the same league with VSCs and GAP, these products still have a reasonably high perceived value with customers, can work well as standalone offerings and offer healthy profit margins for dealers.

Tire and Wheel Protection
This can be an excellent addition to any dealership’s F&I menu. Most customers can see a lot of value in this kind of protection product, which typically covers not only the replacement or repair costs for tires and/or wheels due to damage from road hazards, but also the cost of mounting, balancing and valve stems. Many dealers have actually found this to be their top performer after VSC and GAP. This product has an especially high perceived value to customers in certain areas of the country where dramatic weather changes are the norm, creating some very harsh and unforgiving roads.

Tire and wheel protection can also be a great product to market to lease customers because while tire tread wear might be covered, replacement of a tire damaged due to a road hazard is not. The cost to the dealer for this kind of product tends to be fairly low and the potential profit margin is excellent. Dealers who have “tires for life” programs also tend to do very well selling tire and wheel protection because it’s a logical upgrade to the “tires for life” programs, which typically cover tires for wear, not for damage from road hazards.

Paint and Fabric Protection
Although they have been around for quite a while, paint and fabric protection products are still very good performers for many dealers, generally carrying a very low cost and a generous profit margin. Most customers want to preserve the look of their vehicles for as long as possible, and many will see value in a product that can help protect them from damage caused by acid rain, bird droppings and tree sap. Any customer with small children can appreciate the value of fabric protection. This strong performer has the added benefit of being a “hard” (non-cancellable) add, eliminating the possibility of chargebacks.

Prepaid Planned Maintenance (PPM)
This product has gained some popularity in recent years. Today’s more frugal-minded customer wants to get as many miles as possible from their new or used vehicle and understands that regular maintenance will help them accomplish that. PPM programs, which usually offer recommended maintenance services at a discount, are not designed solely for F&I profit; they are intended to be part of a larger dealership strategy. PPM aids in customer retention and creates future opportunity for the dealership to upsell customers in the service department for additional services or repairs beyond the scheduled maintenance.

While some manufacturers offer free maintenance as an added incentive on new vehicles, dealers selling those brands can still offer an additional PPM program for used vehicles or for other unrelated brands they sell new. Customers leasing new vehicles have no use for VSCs, and in those cases, PPM can be a great menu substitution since they are required to maintain their vehicles in accordance with the manufacturer’s minimum maintenance recommendations.

Etch/Security Labels
Despite some stigma associated with abuses early in the history of etch, this kind of product is still a very viable one for dealers and is typically an inexpensive one. Traditional etch, which is designed to be a theft deterrent, has given rise to a number of derivative products, including tamper-resistant code labels and microdots (which can also be used to mark the engine and other smaller parts). These products typically also have a theft benefit that is paid if the vehicle is stolen and not recovered.

There are two ways dealers sell this product—as a theft-deterrent and as a theft insurance benefit in the event the car is stolen and not recovered. Dealers who sell it as a theft-deterrent only etch the vehicle if the customer agrees to purchase. However, dealers who position the product as a theft insurance benefit have achieved success by pre-etching the inventory. Those dealers essentially provide the theft-deterrent aspect of the product for free, since the inventory is pre-marked at no cost to the customer. (It is illegal to pre-mark the inventory and then require the customer to pay for it.) The cost incurred by the dealer to pre-etch the vehicle is minimal. Customers then have the option to purchase the theft insurance product from the dealership F&I office.

Dealership A la Carte Choices
These products can be useful additions to round out a dealer’s F&I menu, although not all will perform well as standalones. Dealers who are looking to remix their ancillary product bundles can find some low-cost options among these offerings, and some dealers can benefit from offering a few smaller, lower-priced items for customers who can’t or won’t purchase the more expensive F&I products.

Lease Excess Wear and Tear
This is more of a niche product, as leasing tends to represent the minority of transactions in the dealership; however, for dealers who do an extremely high amount of leasing, this product could be a reasonably good performer. While other F&I products such as paint and fabric protection and dent/ding protection can help a customer avoid some excess wear and tear charges at the end of their lease, there are a number of other things they may not even realize they could be responsible for at lease-end, such as excessive tire tread wear, bumper gouges, broken or cracked lamps, damaged trim, missing or broken hood ornaments, or damaged vehicle insignia, speakers, and so on.

Dent/Ding Protection or Paintless Dent Repair
There’s always the chance a dent/ding protection or paintless dent repair product could function as an independent offering on an F&I menu, but more times than not, this type of product doesn’t carry a high enough perceived value to customers on its own and works better when combined with other low-cost products like windshield repair or key replacement. Dent/ding protection or paintless dent repair can work well bundled with paint and fabric protection as part of an appearance package, and is a sensible option for lease customers who want to keep their vehicles looking nice.
 
Windshield Protection
Much like dent/ding protection, a windshield repair or replacement product is an item that tends to be overlooked by customers unless included in a bundle of products. Although it’s not typically offered as a standalone, this product is also another good opportunity for back-end profit on lease deals. Rather than packaging this product with things like dent/ding or key replacement, dealers should consider coupling it with tire and wheel protection to present to the customer as a road hazard package.

Key Replacement
This is a product that has gained some traction in recent times. High-tech keys are no longer exclusive to highline vehicle brands; practically all car makes now have keys equipped with electronic chips. This is good for vehicle security, of course, but it means replacing lost or stolen keys can be expensive for customers. Much like dent/ding protection and windshield protection, this product is not often sold as a standalone and seems to perform best as part of a bundle. Dealer cost tends to be extremely low, and some programs add extra value for the customer by including 24-hour roadside assistance and lockout service.

Roadside Assistance
Roadside assistance is sometimes included as part of another product like a VSC or tire and wheel protection program, or dealers will bundle it with other inexpensive items like dent/ding and windshield protection. It is not often sold as a standalone offering. However, it could have merit as an independent product. Cost to the dealer is extremely low, and it could work well being offered on a used vehicle. Customers not inclined to buy the more expensive back-end products could see an inexpensive roadside assistance program as a good value. Because of its low cost, this could also be a good product addition for a subprime deal where there may be little room for back-end products.

Vehicle Tracking/Recovery Devices
If you’re a dealer in the rural Midwest, a tracking and recovery device might not be the best addition to your F&I menu. However, dealers in or near a large metro area (where theft is more of an issue) can achieve good penetration numbers on these devices, which can operate by GPS, cellular signal or radio frequency. This kind of product can also be quite appealing to lease customers. Theft issues aside, GPS/cellular tracking devices also attract interest from parents of teenage drivers. Although this is a tangible product being sold to the customer, dealers should be aware that some providers may require the customer to have a subscription for tracking services while others may perform on-demand tracking and charge per use.

Credit Life and Disability Insurance/Involuntary Unemployment Insurance
At one time, credit life and disability insurance was one of the core products of the typical dealership’s F&I office. However, regulations have made selling this kind of product unprofitable in many states. Due to a handful of lawsuits in which dealers have been sued because a buyer was not offered credit life or disability and later became disabled, many trainers in the industry recommend that if a dealer offers it to one customer, it should offer it to every customer who finances a vehicle. While a number of dealerships still offer credit life and disability and/or involuntary unemployment insurance and do reasonably well with them, in many cases penetration percentages are in the single digits.
 
Bi-Weekly Payments/Accelerated Equity
This product is offered by a small number of dealerships, and penetration levels tend to be low. For the customer, the purpose of a bi-weekly payment program is to build equity more quickly and pay off the loan a few months early, and the dealer can benefit from the resulting reduced trade cycle. Instead of the customer making 12 monthly payments, half of the calculated monthly payment is automatically deducted from the customer’s bank account every two weeks by a third-party company, which in turn pays the bank or finance company, resulting in 26 half-payments per year, or 13 full payments.

Setting a customer up on a bi-weekly payment can make more room for the sale of additional products, but extra caution should be taken to make certain the customer understands exactly what he is paying. While this kind of program tends to carry no up-front costs for the dealer, there are fees for the customer. F&I managers need to properly explain the program and projections of potential savings to the customer. Dealers would be wise to consult their attorney and make certain they have a thorough understanding of the program and know how to present it in a compliant manner.

ID Theft Program
This is not the first thing that springs to mind when someone thinks about products to sell in a dealership’s F&I office, although there have been instances where a customer is unaware of an identity theft until it comes time to finance a vehicle purchase. For the most part, this is something of a niche product and does not seem to have gained as much traction in the dealership as the other products mentioned here.

Despite the product’s rather awkward fit in the F&I office, identity theft is a common crime and customers may see some value in this type of offering. Identity theft programs can involve prevention (monitoring the credit bureaus and providing alerts) and/or resolution (professional assistance to recover the victim’s identity). Some programs also offer an insurance benefit in the event of ID theft. 

*States have varying regulations for the products mentioned in this article, particularly ones pertaining to insurance. Before picking up any new product for F&I, dealers should thoroughly research the product and vendor and consult their attorney.

Vol. 8, Issue 9