Article

Benchmark Gross Profits And Beyond

August 2006, Auto Dealer Today - WebXclusive

by Greg Goebel - Also by this author

Gross profit. What you can spend. What the majority of Special Finance managers get compensated on. What dealers depend on. Why do some dealers do so well, while others struggle?

The questions posed to me are very similar. Whether over the phone, through countless e-mails, our seminars or a chat forum on AutoDealerDaily.com, dealers and Special Finance managers are either forever perplexed or are convinced that other dealers are using smoke and mirrors when reporting their gross profits. When people see the benchmark for total-deal gross profits are $3261 (with some dealers in our 20 Groups attaining well over $4200 per unit), they seem to be convinced that we are not measuring apples and apples. This is usually from those dealers that are struggling to break the $1500 per deal barrier.

Although many dealerships may question it, or try to justify their own lesser performance, these gross profits are real. Very real. As I write this, I return from spending three days at one of the most successful Special Finance dealerships in the country, training their entire team. (There is probably another message here as well.) This dealership is already in the $4000+ per unit world. The exciting part of my visit for them was they saw how they can still easily double their production in their existing locations. The exciting part for me was I was able to have reinforced how easy it is to increase your gross profit per deal.

There are really only four ways that you can increase your gross profits in a Special Finance deal. Each method is very simple, and all four rely on something in common – discipline. Certainly each of the four can be, and should be, used in conjunction with each other. It essentially becomes a philosophy or culture within an organization.
 
So much for the lead in. The first way to increase your gross profits (and I know this is not going to surprise any ongoing readers of my columns) is through your inventory. What may surprise you is that it doesn’t just focus on having the right inventory on the ground to sell.
 
Certainly, anyone that has ready my writings knows that I feel it is imperative that you have ample inventory on hand for Special Finance customers in order to be able to be successful. That means vehicles in the $7000 to $11,000 ACV range, under 50,000
miles, and at minimum $500 below “left-hand” book value (they should more often be closer to $2000 below).
 
Having the inventory on hand is only part of the equation however. Being able to properly qualify the customers as you begin working with them to land them or, yes, eventually move them to the correct vehicles is the rest of the story. This often it means moving them from a vehicle like a late model Eddie Bauer Expedition to a two-year old Explorer Sport, or even to a three-year old Taurus. The bottom line is, when you calculate the maximum advance, if you aren’t able to utilize the full multiplier of the book value, you are leaving gross profit on the table.
 
The second area where I see missed opportunities in gross profit is from the deal structure itself. As I have written in previous columns, “Bottoms-Up” is the key. In my training classes, I provide a Deal Structuring Test that I actually used during the hiring process in my dealerships. It is a simple test which uses a sample customer, a given vehicle and single lender’s guideline. I give the participants five to seven minutes to use a calculator to determine: a) Is there a deal possible; b) What is the maximum gross profit available with the minimum required down payment; and, c) What is the maximum amount financed possible, along with the corresponding payment?
 
As I said, I used this for years and it accomplishes two feats. First, many seasoned conventional F&I managers that claim they are pros in Special Finance fail it miserably. They simply don’t understand the process. Secondly, it gives a sales consultant (as well as a dealer) an appreciation for what the Special Finance manager has to do with every deal. Any person that works the desk knows that in real life, you feel like you have about 90 seconds to look at the application, the bureau and your inventory and make the call.
 
The resulting answers of this test never fail to provide some laughter and some pain. Most recently, at the one of the best Special Finance dealerships in the country, only one person out of the 35+ people (including the finance managers) got the answers correct. There was the usual spread of about $1600 from the lowest to the highest gross profit expected. (And, no, this isn’t an ad to go buy desking software - you have to know how to do it manually first.) This certainly isn’t meant to pick on a tremendous organization – it is just to exemplify how common and easy it is to think you have structured a deal for maximum gross, only to have really left a bunch of money on the table. To maximize gross (front-end first, please) you have to keenly know your lenders’ guidelines and be able to be work the process backwards from the vehicle’s cost and maximum advance. Often, in the heat of battle, it is much easier said than done.
 
Moving on, probably the best way I know to increase gross profit is to get more down payment. It is usually the last thing dealers really look for. The scenario is the usual. The customer comes in with $200 in their pocket and a fine trade-in that on a good day is worth $400. (See the definition of a $1 car.) The customer swears that the $200 is all they have to put down, and of course the only thing that they want is the Expedition at $200 per month.
 
The next thing you know, who is working who? It is usually the sales person working the desk, saying, “The customer emptied their pockets – it’s all they have!” I witnessed this first hand at the aforementioned dealership. Next I saw the finance manager come in and start working the Dealer. A few minutes later, the sales manager was working the dealer. They both were hoping to get the dealer to bless a $1000 (front-end) deal that they may have taken had he not been present. Finally, the salesman came in to make his attempt (I can hear it now, “If you think we are so weak, you go in and see if you can do any better”). The dealer,
 
God bless him, each time said – “No, if the customer wants that vehicle, they are going to have to come up with more money down. Go work the customer. I know you can’t get the job done” (then coaching him on how to do it).
You know where this is going. The $200 became $400, which then became $1400, which eventually became $1700. (I know what some of you are probably thinking…wrong. It was all cash – I watched them count it.) Guess what else happened. The approval became a better call from the lender with more money down, and the deal went from a $1000 deal to a $2800 front-end deal, just like that. Will you always have the ability to extract $1500 more from your customer or work them as long as this dealership did for the extra down-payment; maybe not. But if you never ask, 100 percent of the time you will never get it! Would this have happened if the dealer and I had not been sitting in the dealership, one office over? Maybe not, but I would like to think it would. More importantly, it builds the confidence of the sales person every time they are successful. And in this case, it put significantly more commission in their pocket!
 
Finally, the last way to add more gross profit to your deals appeared in the last scenario. With more down payment, the dealership got the lender to give a better advance. They re-hashed. They asked the lender for more. So often, people look at their computer screens or fax sheets and see that they (finally) have an approval, the deal is contracted, so let’s move on. With some lenders (not all, but certainly some) nearly every approval has some “wiggle-room”. (Lenders, please save your letters – I have participated in more than one meeting with the President or COO of companies that I respect but won’t name and been told that directly by them.)
 
Realize two things here. Relationships count. How good is your portfolio performing with the lender you are asking, and do you have a strong relationship with your buyer? Secondly, being from the Midwest, the old adage, “Pigs get fat and hogs get slaughtered,” applies. No one likes a whiner or a complainer. Realize though, often a percentage point in participation or reduction in the discount is available, just don’t get too greedy.

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