It’s been called everything from a parts-and-labor agreement to an extended warranty. And thanks to overzealous lawyers bent on making a fast buck by twisting what we mean in the F&I office, we’ve landed on the product’s current name: the vehicle service contract, or VSC. And let me tell you, it’s my favorite product on the menu.
But the VSC has taken some shots over the years. It has been the target of more than one consumer advocacy group, and the Internet is rife with articles advising customers not to buy it. There are also plenty of examples of failed companies that sold the product directly to consumers, never paid claims and then went out of business. It’s no wonder some customers are nervous about buying additional coverage.
Because of all that, vast amounts of money and time have been devoted to training seminars, point-of-sale materials and videos to help F&I producers break through objections. Most trainers preach presenting all products with equal emphasis, thereby not appearing to actually be “selling” anything. Offering “options” or “packages” seems to be a neutral position to take in F&I, because it empowers the customer to choose what they deem necessary to protect themselves. Whatever the case, I think we can all agree that the VSC always takes precedence in an F&I manager’s presentation.
Heck, ask any F&I manager how his or her month is going and you’ll usually hear a PVR average followed by a VSC penetration rate. It’s a badge of honor to be successful at selling service contracts. So, what makes the service contract such an important product? Let’s explore a few reasons.
1. Dealer 20 Focus Groups: To understand how important VSC sales are to a dealership’s bottom line, all you have to do is look at your dealer’s 20 Group reports, which break down several categories to reflect back-end profit. The VSC is most prominent, followed by GAP, credit insurance and other products, which are usually lumped together. But the service contract stands out like a beacon. The reason is obvious: the protection is valuable to customers, and the product is the easiest on which to hold gross.
2. Fixed Ops: Parts and service also benefit from the sale of mechanical breakdown coverage. Since the warranty (a.k.a. “confidence level”) for factory coverage is typically three years, it’s pretty easy to see why this coverage is so popular with fixed ops.
Automakers tend to limit what they will pay for parts and labor, so factory warranty repairs aren’t as lucrative as service-contract reimbursements. See, when a repair is underwritten by the VSC company, it is usually listed under the “customer pay” category. This is important because, in most cases, the dealer gets to charge the retail or “street” rate to the VSC provider for parts and labor instead of the fixed prices the OEM allows.
3. The F&I Manager: It’s often said that your pay plan is your job description. Well, most dealers make clear what they want sold, and most reward heavily for high VSC penetration percentages. This is why it really doesn’t matter whether we truly believe in the product in order to sell it. That’s not the case for me, but the pay plan can make great actors out of nonbelievers in a millisecond.
4. The Customer: This is the group that benefits the most from the VSC. There’s a good reason why the factory warranty only extends three years. Ever heard of the term “planned obsolescence”? It’s an industrial term Dictionary.com describes as “a method of stimulating consumer demand by designing products that wear out or become outmoded after limited use.” For automakers, planned obsolescence stimulates demand by encouraging purchasers to buy their next vehicle sooner.
Now, I know you’re probably back on your heels reeling at this and ready to start pounding the keyboard in revolt, but just hear me out: Common sense tells us that since car companies have been building these machines for as long as they have, they should’ve been able to get it right after more than 100 years of mass production, right? Sure, they could build a car that gets 100 miles per gallon and never breaks down, but why? Hey, there’s a reason why carmakers offer their own VSCs.
The VSC offers peace of mind because of the security of hedging against future claims. By freezing the cost at today’s dollars, the service contract’s importance is even further realized. Anyone retaining ownership longer than the three-year warranty period should consider this valued coverage. Whether you believe in it or not isn’t the point. The customer should have an opportunity to decide for themselves.
Marv Eleazer is a finance manager at Langdale Ford in Valdosta, Ga. E-mail him at [email protected]