We Are the 64%

Are you in the majority? According to Experian, the average credit score for used-vehicle buyers who financed their purchase in the second quarter of 2014 was 641. That means the average score fell well below the mark for prime credit and within two points of subprime. (The average score for a customer financing a new vehicle was 711.)

Let’s combine that with some powerful proprietary data that John Palmer, CEO of ProMax Unlimited, recently shared with me. We will start with Illinois, where there are 1,060 registered dealers and more than 1 million residents with a credit score between 500 and 640 — the heart and soul of special finance.

Palmer found that, in the second quarter, 817 of those dealers pulled credit bureaus and came up with at least one score in that range. Ten percent of the 1 million potential SF customers had their credit pulled at a dealership and 20% of those customers purchased a vehicle at that dealership. Eighty percent did not buy a vehicle at that dealership; 29% did purchase at another dealership.

Of the 817 dealers who pulled bureaus, 521 (64%) had more customers who came into their dealership with those credit scores sold by competing dealers than they sold themselves. More telling, in the entire state of Illinois, a mere 18 dealers averaged selling at least 25 vehicles per month to customers in that credit range. Considering the recently announced total-deal SF benchmark of $3,567 for used vehicles and $3,775 for new vehicles, that is a colossal whiff — especially for the 64% whose competition outsold them on customers they already had in the store!

Worse yet, I scanned the list of dealers in the 64% club and spotted the names of some of the largest and most profitable dealerships in Illinois. How can that be? It is really very simple: a total lack of commitment to SF customers, who currently buy 33% of all vehicles sold. This is nothing new, but it certainly keeps me scratching my head.

If I were to poll the members of the 64% club, many would take umbrage with my comments about them not being committed. They may have a SF manager in place. They could be doing 10 to 15 deals a month. In their mind, they have already put their money where their commitment is. But they could be doing better, and perhaps so could you.

Fear of Commitment

Denial is easy. Commitment is hard, and it requires more than writing a few checks. I count dealers who “think” they are committed among our most valued clients and friends. If they were committed, their competitors wouldn’t be outselling them with their own customers. They would ensure the systems and processes they have learned are in place. They would commit to buying the correct inventory — in the correct quantities — to avoid aging and book-drop.

Simply put, they would be more committed. To follow through on your commitment to SF and ensure that your whole team is on board, you must uncover the issues that are holding you back.

Muddy Waters: Special finance is often the largest profit center not broken out separately on a dealer’s financial statement. The sales and gross numbers flow into the new-car department, the used-car department and F&I. If you can’t parse out your subprime sales and everything else is going well, you will assume your SF department is on track.

It may also be difficult to measure the number of true SF opportunities who visit the dealership or pop up as Internet leads. When my team and I are granted access to our clients’ CRMs, we are continually amazed at how ineffectively they have been set up. Without reasonably accurate information, you can neither manage production nor hold your people accountable. If the expected results don’t materialize, commitment wanes. You may think, “We just don’t get that type of customer in here” or “Our customers are different.” 

Nonsense. You must arm your BDC team, sales personnel, used-car manager, F&I managers and buyers with accurate, consistent means to break down the numbers and facilitate improvement. Measure activities, not results. If the process is consistent, results will follow.

On to Plan B: We often encounter compensation plans developed by F&I vendors and built around product sales and penetrations. They work — until the first Tier 3 customer is approved by a finance company that does not offer dealer participation or allow back-end product sales.

Going by benchmark gross profits, the store will make more than $3,200 on the deal, but the finance manager’s compensation will be negatively impacted. Do you honestly believe that your finance manager is going to work hard to put that deal on the books if it hurts their compensation?

Many dealers set a hard line of demarcation between their prime finance managers and SF manager(s), often based on a certain credit score. One manager must lose for the other to win, even though a credit score above or below the mark might have been better served by using the alternate sales process. No matter what, when a manager loses, the dealership loses as well.

Compensation issues also carry over to the sales team. In some stores, subprime sales commissions are reduced by 50% in order to help offset the compensation for the SF manager. Brilliant? Not so much. Every salesperson is going to work the deal as prime credit until it dies or a miracle occurs in the prime finance office which allows them to receive 100% of the commission, whichever comes first. If your dealership is set up this way, that scenario could be playing out as you read this.

Inflated Egos: I have had the good fortune of working with some of the best SF teams in the industry. They all have at least two things in common: They are experts at what they do, and they all believe there is more to achieve. One client is delivering up to 175 SF deals every month. That is easily 33% of their business. They are working hard to recommit to subprime, improve their processes and boost their average gross.

On the other hand, I continually chuckle at the inflated opinions many individuals have of their abilities when they are clearly performing well below average in every area. Their confidence and swagger makes them feel they have nothing to learn. “We just need more traffic,” they often say. When their bosses fail to adequately gauge their production, underperforming sales pros can get away with lame excuses, and nothing changes.

Somewhat along the same lines, some dealers are so profitable that they exhibit little motivation to improve their special finance efforts. They are happy to write checks, but their rationale is often, “I don’t want to do anything to upset the apple cart.”

Granted, $3 million to $4 million in net profits is nice, but an extra $1 million would be even better. All it takes is a commitment to convert the 33% of the business you are missing. We work with a group that operates about 20 stores. They could easily add another $10 million in gross profit per year. It must be too much work to think about, because they keep coming up with excuses to put it off until “next month.”

Fear of the Unknown: Several of our clients have processes in place that are holding them back. They are fully aware of this. They fear that, if they make a big change, they will lose staff. In some cases, one bad staffer or manager is holding the entire team back. Dealers worry that (a) the bad apples will learn they are going to be replaced and preemptively quit and (b) the new guy or gal may be no better than their predecessor.

Result? They stick with the status quo, no commitment and no improvement.

I am sure there are other factors that cause the 64-percenters to lack the commitment necessary to outsell their competition on the customers they already have in their own stores. But this list is a good start, and it’s likely that organizations that lack the total commitment necessary to excel in SF are dealing with at least one — or perhaps all — of these issues.

As you begin the process of forecasting and strategically planning for the year ahead, I challenge you to look for the opportunities that await dealers who fully commit to subprime sales. Keep your mind on the pertinent numbers: Fully one-third of all vehicles sold go to subprime credit customers, and the average credit score for used-vehicle financing is 641.

These customers are walking onto your lot every single day. Dealers operating at benchmark levels are delivering at least 28% of them at total deal gross profits of $3,500 and beyond. Are you getting your share? If one-third of your business isn’t being delivered to subprime customers, then you are most likely a member of the 64% team.

The tax-refund selling season is looming. Now is the time to get prepared. My readers know there are 10 critical components needed to excel in SF, but it takes the first one, commitment, to ensure that all the others can fall into place. Escape the 64% club, plan for success and make 2015 your best year ever.
Until next month, get committed!

Greg Goebel is the CEO of DealerStrong and the industry’s leading special finance trainer since 1989. He is an 18-year former dealer principal and a highly sought-after speaker, author and consultant. [email protected]