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.

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Now let’s say you’ve been the F&I manager at ABC Power Sports for the last two years. You’re not green, as you are an accomplished professional seeking ways to make your department more profitable. After all, you’re reading this publication, right?

Let’s say your store delivers 50 units per month like clockwork. You are also hitting 5 percent above the target penetration levels I spoke of earlier (VSC = 55 percent, PPM = 45 percent, TW = 30 percent and TP = 30 percent). However, you’re also selling your products at MSRP.

In 12 months, that means out of the 600 units you move, you’re selling:

330 VSC at $300 gross profit each = $99,000 or $165/copy

270 PPM at $250 gross profit each = $67,500 or $112.5/copy

180 TW at $199 gross profit each = $35,820 or $59.7/copy

180 TP at 4199 gross profit each = $35,820 or $59.7/copy

Total: $238,140 in back-end gross for $396.90/copy

You then need to ask yourself, where do you want to be in terms of dollar per copy? Remember, these goals aren’t just yours; they must also be the goals of your store. Also remember that I am not addressing reserve dollars here, since we have little control over those amounts. I do, however, strongly urge you to use markup and participative rates whenever possible, and to steer your customers toward installment loans vs. revolving as much as you can. We’ll save that discussion for another article.

Setting Price Targets

Now let’s say we decided that $700 per copy is where we want to be. Would you agree that it is easier to sell something you already know how to sell rather than learning a new product? Would you agree that there isn’t a lot of room for another product in your presentation, or in your customers’ approved credit allowances? Would you agree then that we need to examine our existing prices?

If we want $700 per copy and can get the penetration levels I targeted earlier, then we need to determine how much of that $700 per copy needs to come from each product. Remember high school algebra? We’re about to put those classroom hours to use, as we determine what the ratios truly are for our targeted profit dollars.

If you want $700 per copy and you deliver 600 units per year, then you’ll need $420,000 in total back-end gross. We’re generating $238,140 now, so how are we going to generate the extra $181,860, while also reducing our penetration levels?

Historically, our VSC sales have accounted for 41.57 percent of our total gross dollars. We’ll round that up to a target of 45 percent. Our PPM has brought us 28.34 percent of our gross profit. We’ll round that up to 35 percent. Why the weighting on these two products? Well, because they are what bring that customer back into your store again and again. With these two products weighted, we have now accounted for 80 percent of our gross profit dollar. That leaves 20 percent for both TW and TP.

45% of 700 = $315
(target gross profit dollars/unit)

315 / 50% = $630
(target gross per penetration)

630 – 330 = $300
(target gross less current gross = increase in price)

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So, we’ll now add $300 to our average VSC sale. You’ll have to do some more math to determine how many VSCs are five-year, four-year, etc. Determine those levels, then reestablish your prices so that your sales average shows an increase of $300 across the board.

35% of $700 = $245

$245 / 40% = $612.50

$612.50 – $250 = $362.50

10% of $700 = $70

$70 / 25% = $280

$280 – $199 = $81 (We’ll now add $81 to the selling price for both our TW and TP products.)

Now comes the challenging part. You, the F&I manager, need to sell the value of these products and services. Monitor your penetrations over the next 90 days. Are they up, down, steady? What were they for the first 30 days after the change, the second 30, and the last 30? Did your penetrations trend upward as time went on? Did you find yourself becoming more and more comfortable with the new pricing, which means you’re more adept at selling it? I’ll wager you will.

So, a year later, what do we have? You are still selling 600 units per year, though your new back-end grosses look like this:

300 VSC sales at $630 avg. gross = $189,000 annualized gross

240 PPM sales at $612.50 avg. gross = $147,000 annualized gross

150 TW sales at $280 avg. gross = $42,000 annualized gross

150 TP sales at $280 avg. gross = $42,000 annualized gross

Total: $420,000 in annualized gross

Here’s the last bit of math I’ll show you. Using your pay plan, what happens to your income when your production climbs from $238,140 annually to $420,000 annually? On second thought, I’ll let you figure that one out.

Jim Dirks is a former F&I manager with more than 16 years of experience in the automotive and powersports industries. He can be reached at
jim.dirks@bobit.com.