January 2009 - Feature
Playing the Pricing Game
How you price your products really depends on what your goals are. Veteran F&I manager provides his strategy for pricing F&I products.
By Jim Dirks
Determining how your store prices products is never an easy task. You have to make sure your price structure provides a value difference in the minds of your customers. You also have to make sure your prices are what the market can bear.
For this article, we’ll take a look at retail pricing for a vehicle service contract (VSC), pre-paid maintenance (PPM), tire-and-wheel (TW), and theft protection (TP) programs. Now, this strategy is what’s worked in my experience, but it might not be the right strategy for your store. That is something you and your store’s management team will need to determine.
Working it Backward
The first thing you need to do is look at your back-end gross per unit over the last 90 days. Is it where you want it to be? Are you over $500 per copy? Are you over $700? How about a $1,000 per copy? If these numbers are lower than yours, congratulations. For most dealers, however, $250 per copy seems to be the norm. Frankly, I find that unacceptable in terms of my earnings, let alone what that type of production does or doesn’t do for my store.
What is your penetration on VSC, PPM, TW and TP? Those are the answers you need in order to implement the strategies I’m going to put forth. For my purposes, I target 50 percent VSC, 40 percent PPM, 25 percent TW and 25 percent TP. If I hit those levels, then, at my pricing, both my store and I can be comfortably profitable. Some of you see that and are probably saying, “Fifty percent VSC, how?” Others will read it and think, “Fifty percent, why so low?”
The first thing is to reinforce the age-old adage for successful F&I — the 300 percent rule. Present 100 percent of your products to 100 percent of your customers, 100 percent of the time. Never decide for your customers what they do and don’t need. Allow your customers the opportunity to purchase what you have available for their own protection.
As for those wondering why my target penetration rates are so low, I’d wager that you’re selling a VSC at or below the manufacturer’s suggested retail price (MSRP). If that’s the case, I ask why? The same customer buying a VSC for their powersports vehicle is the same customer buying a service contract for his or her automobile. The difference is he or she is most likely paying more than $2,500 for a mileage-limited VSC. Selling my store’s service contract at $1,500 instead of $800 allows us to enhance our gross dollars, increase our profitability, and earn a greater commission.