Profitable for dealers, good for customers

Selling extended vehicle warranty agreements and insurance is tough for some dealers and intimidating and confusing to some customers. But both the dealers and the customers are linked by the need for such products.

Because some dealer profit has been taken away by Internet sales, dealerships rely heavily on vehicle service agreements, insurance and other services to make a profit, says Kimberly Greenhut, director of learning at Automotive Professionals Inc. (API).

Customers need the warranties because of the high costs of vehicle repairs. “There is such a market for them because people are keeping cars longer than three years and people can suffer great expenses. It can be really expensive to fix because of the high technical nature of cars these days,” Ms. Greenhut says.

This year F&I product sales are doing well, says consultant and author Ron Martin of The Vision of F&I Inc. “In most cases F&I product sales are trending upward,” he says.

Guaranteed Auto Protection (GAP) is one product that is doing well because it is relatively affordable ($6-$7 per month), says Mr. Martin.

Adding elements to service agreements tends to make them more valuable to dealers while offering customers more choices, says Rob Mancuso, senior vice president of e-commerce for AON Warranty Group.

“In the past few years a lot of value has been added, such as roadside assistance, maintenance programs, rental cars and trip-interruption coverage.”
Rob Mancuso
AON Warranty Group

“In the past few years a lot of value has been added, such as roadside assistance, maintenance programs, rental cars and trip interruption coverage,” he says.

These additional services are helpful to the customers as long as they understand what they are buying and know it is the right product for them, Ms. Greenhut notes.

The difference between a warranty and a service agreement is enough to confuse customers who are not familiar with the dealer lingo. Ms. Greenhut does not use the word “warranty” when referring to vehicle service agreements because she says the words can be misleading and inaccurate.

The Magnuson-Moss Warranty Act states that a warranty is included in the price of the product while a vehicle service agreement is sold separately, Ms. Greenhut says. She notes that others have their own interpretations of the act and may still refer to agreements as warranties, which is why it is so important for business managers to understand their products and be able to explain them to customers.

Mr. Martin says a “warranty” is something only a manufacturer can sell; he prefers the term “service contract.”

He adds service contracts are probably the most popular F&I product currently, even though many manufacturers have an increased warranty period and certified used vehicles are becoming more popular.

“I think we have conditioned the customer to expect the vehicle to have warranty coverage, and if it has expired they want to make sure they are protected,” Mr. Martin says.

A recent challenge in selling extended warranties is the price of agreements. When purchasing a car, the customer has that payment and then additional payments to make for added services. It then takes a good sales pitch from dealership personnel to overcome customers' fear of price and payment.

“The challenge is the customers' preconceived notions. Dealers have to help customers get over their inhibitions and find products that are right for them,” Ms. Greenhut says.

Says Mr. Martin, a former F&I manager, “The biggest challenge is probably us. Either we don't offer the product because we're rushed, or we rationalize to ourselves that the customer already has the manufacturer's warranty. Sometimes, we as F&I managers, don't get the opportunity to rationalize for ourselves because the sales department does it for us and fails to let us talk to the customer at point of sale.”

Ed Bradley, JM&A vice president of sales administration and financial services, says “You're not going to sell much unless you offer it.”

He adds, “It's a proven fact customers will buy more when you offer them a choice of F&I products, lay out the options and disclose the financial implications.”

A regulatory issue that dealers are now facing comes with Congress passing the Gramm-Leach-Bliley Act, says Ms. Greenhut.

This act aims to protect customers' information from being shared between companies. Because of the threat of identity theft, this kind of act is necessary to protect customer's privacy, say advocates.

Dealers must offer customers the opportunity to “opt-out” of information sharing with non-affiliated third parties. The law calls for dealers — and others — to disclose to customers the dealerships' privacy policies, categories and type of information shared and the companies it's shared with beforehand.

F&I managers are getting better at selling products, rather than using deceptive practices, like payment packing, says Mr. Martin. This is when other products are included in the price of a vehicle without the customer's knowledge.

“A dealership is just as profitable if their F&I managers sell the value of the F&I products, instead of trying to slide something in on the customer,” he says. “Unfortunately, some old-timers have a hard time making the transition from being deceptive to selling their products with enthusiasm. The new F&I manager has a passion for what they do, and is a much more CSI-driven employee.”