Many OEMs offer dealer incentives to push factory warranty programs. Some manufacturers are incentivizing flooring and inventory availability, while others incentivize co-op and P&A discounts. Some OEMs incentivize all of the above. Have you ever asked yourself why?
Make no mistake about it — manufacturers and insurance companies make lots of money from products like extended service contracts. You owe it to yourself to take a hard look at the value of the OEM incentives versus cash in hand.
To analyze the value to your dealership, you will need to put a dollar amount on each dealer incentive. CO-OP, P&A discounts, flooring and other perks all can be associated with a hard dollar value. You will need to compare this value to the cash value you would gain by recovering the reserves on your VSC sales. Incentives are nice, but cash is king!
Profit sharing programs allow dealers to earn underwriting and investment profits on the sale of service contracts and priority maintenance agreements. Some of the most successful dealers in the industry have taken advantage of these programs to add an additional profit center and/or fund the owner’s retirement plan.
There are two major programs designed to capture the VSC reserves and return them to the selling dealership. The deciding factor is largely based on your VSC volume.
Reinsurance plans have many benefits for large dealers writing an average of 75 VSCs a month. Most reinsurance programs retain 100 percent of the underwriting and investment profits. Start-up capitalization and annual operating costs do exist with these programs. These programs also maximize the tax-preferred treatment to the shareholders/owners. The only prerequisite is that you feed your reinsurance company with a high volume of VSC contracts to offset claims. Reinsurance companies can roll the dividends back into the company or pay them out. These programs allow the dealership to insure the contracts and maintain more control of the financial process.
Retroactive plans are great for dealerships as well. You can still retain up to 100 percent of underwriting and investment profits based on the eligibility guidelines of the program and your contract performance. There are no capitalization or annual costs to overcome with this type of program. This turn-key program simply allows your dealership to enjoy profit from the unused reserves when the program guidelines are met. If you are a lower volume dealership or have yet to get your VSC penetrations in check, retro may be the way to go. This type of program generally pays the dealership twice annually once the contracts have matured.
A 500-unit metric dealership with a solid F&I department can inject an additional $40,000-plus into the bank annually. We currently see results like this, year after year, from our dealers with their hand firmly on the throttle. The maturity date of these contracts occurs years behind the sale, creating an economic lag. Once your F&I department achieves and maintains benchmark penetrations, all you have to do is wait for the contracts to mature. What would you do with this extra cash in hand?
Does your OEM incentive package for selling the factory warranty meet or exceed the profit potential? If you are a multi-line dealership, your efforts are divided with the OEMs, but united with your own profit sharing program. Complete this simple analysis on your dealership. Only then will you be able to make a conscience decision.
The answer may not be an all or none proposition. Some of the most profitable dealerships in the country watch their OEM quotas like a hawk. The reason they do this is because they are winning the benefit of the OEM incentives and capitalizing on their profit reserves. How, you ask? The formula is simple.
• Ensure your VSC penetration is more than 50 percent
• Determine the OEM incentive threshold
• Transition all VSC sales to a reinsurance or retro plan once the threshold is met
The reality is both propositions have value. Look at your options closely to determine the best route for your business. You should already be driving your F&I department to keep high VSC penetrations. That is the first step to success. How you manage the ancillary benefit is the point of this article.
Your VSC provider should be able to help you put some different scenarios together. Furthermore, you should expect your provider to help train your staff and review your ceding statements to maximize the profit center.
RPMOne is a leading provider of F&I products and dealer development services dedicated to serving the Powersports market. Due to its comprehensive experience with dealerships, lenders and insurance companies, RPMOne has created top-tier F&I programs, web-based tools, training programs, and sales and marketing systems to meet the unique demands of the industry. The RPMOne mission is to increase client profit to its fullest potential. Got questions or comments? Send an email to [email protected].
