Pricing and Profit

Pricing and Profit

Do dealerships need a system for pricing F&I products?  I’ve never seen a specific formula, consistently applied to all products in a store, though there may be a few dealers out there who are trying to execute one.  As an agent installing new products, one of the most common questions I am asked by a new account is about where to price those products.  Usually, they just want to know what other dealers are charging, and I use some regional averages as the starting point of my answer – but that’s no answer by itself, and it’s different for every dealership.

Profit is good, and it is the means by which we stay in business.  However, the days of old-school auto sales and F&I departments charging ‘whatever the market will bear’ – that is, when that is translated into whatever the customer can be manipulated into paying, by packing payments and other deceptive practices – are over.  Those violations of Reg. Z, Reg. M, etc., are now today’s felonies.  So let’s look at a few legal and ethical criteria for pricing:

  • State-mandated limits on pricing
  • Vendor-imposed limits
  • Lender guidelines

Those constitute the obvious starting-place for any pricing strategy.  The next criteria is to determine the immediate competition to your prices:  this is most often faced by customers who insist on arranging their financing at their own bank or credit union, where you know they will be confronted with their lender’s attempt to piggy-back or steal away your sale by simply offering a lower price for that Service Contract or Gap waiver.  So, that adds one more point to consider:

  • Competitor pricing

Next, what is your Dealership’s market position:  are you known as the low-price leader, or for superior customer service and full amenities, etc.?  Whatever that position is, it will be eroded by not keeping it coherent throughout the store.  Obviously, that means you can’t be positioned as a ‘one-price’ ‘no-haggle’ dealership if your F&I department is trying to make up for lost front-end gross by overcharging on their products; customers are alert to those differences, and with F&I being the last experience they have, that experience, whether contrary or consistent with their expectations, is the one they will remember most.  So, consider that carefully:

  • Your Dealership’s market position

Also, customers generally are still not well-armed with competitor pricing when they are sitting in F&I, but something even more interesting is at work:  a great benefit presentation can lead them into buying thousands of dollars’ worth of product in less time than they’ll spend buying a pair of socks.  If there are thresholds to what you can charge, they are mostly based on the fear of the F&I manager, not the customer.  That’s the first thing to overcome.  There is ultimately a threshold for any particular customer, though, and that is usually based on the relative value of the product, and the ratio of payment bump to base payment, or the ratio of product/package price to vehicle price.  It would seem that asking for over a 25% bump in the base payment or of the car price is going to require the most compelling of benefit presentations, but always let the customer decide what’s most important.

So, let’s add those to the list of criteria:

  • Presentation-driven Customer-perceived product values and payment/price-ratios

 

Here are a few final points that should be taken into consideration:

  • Keep pricing consistent, within the department, over time, to eliminate complaints or charges of discrimination
  • Don’t devalue the product by underpricing it or negotiating lower prices by dropping them in large $$ increments
  • Disclose price as well as payment ‘bump’ for the products; a Menu is invaluable for this as well as for overall presentation purposes
  • If the customer wants you to sell for less, reaffirm the product value, or accommodate that request only by removing at least one benefit of the product.

I’m not sure there is any moral limit to pricing.  If Grandma left you a Buick valued at $10,000, what should you sell if for?  The fact that you paid little or nothing for something is completely irrelevant to what you decide you are willing to accept for it.  A buyer looking for a good deal has a maximum amount he is willing to pay, and, when he gets that same Buick of yours for $8000, no one would consider it theft.  The best price (not the value) of a product or service is simply the amount someone is willing to pay for it, agreeable to the seller, at that moment.

Now, go out and test your pricing by working to increase your current margins by at least 10%.  If you succeed in increasing your average over the next month – and you’re staying within the guidelines listed above – you’ve probably been underpricing your products.