A Dead Initiative Reborn

Otis wears his heart on his sleeve; he also discusses pre-paid maintenance

Last month we were just breathing some life back into a failed initiative, the implementation of a pre-paid maintenance program. After being gone for about ten days, I returned and analyzed the Daily Operational Control spreadsheet (DOC) we wrote to see if anything happened while I was home.

We didn’t sell as many pre-paid maintenance programs as I would’ve liked, but we did sell four. According to the DOC, that’s about 8 percent penetration on 49 units for the month, which is still a long way from the 40 percent penetration that I know we can reach. We’ve reached as high as 40 percent with other dealerships, so I know it can be done.

All four sold in the last half of the month of December were for snowmobiles. We sold just over 25 of the 49 units in the last half of the month, so rough math tells me that we ran at about a 16 percent pace once we got the thing off the ground. Not a bad start for a program that nobody believed in at the beginning of the month.

None of the things the team had planned to do in support of the program have been implemented yet; we’re just doing this from the sales floor without the help and support of the rest of the dealership. Once those kick in, I’m expecting that 16 percent to climb pretty steadily. When we get into the spring season, motorcycle riders are traditionally far more open to a good maintenance program than snowmobile buyers, so, again, I expect some more incremental growth at that time.

So what does 40 percent penetration mean in terms of money?

The back end profit per unit sold was just under $250 at the beginning of December, but it went up in the second half of the month to a more respectable $302. This number does not include a documentation fee, because with the huge disparity in what you can charge for a DOC fee, we never found it a viable factor for comparison to other stores. Also, in this particular state, you can’t sell GAP or credit life and disability insurance, so $302 is pretty decent.

The increase in service department work is obviously to be determined, but we’re already able to schedule more buyers’ first services right at the time of delivery. That’s certainly going to help the service team predict their workload as time passes. My hope is that we’ll have our PG&A team up to speed with how they can serve the pre-paid maintenance customers by the time those first services begin to roll in.

The pre-paid maintenance program is a self-insured product. Your state may not allow selling a self-insured product, so check into it first. If not, there are a few fairly decent insured and/or underwritten products out there which may have an impact on your profitability.

We set our cost at 60 percent of the retail price. The average profit so far is $391. Most 20-groups suggest 50 percent cost, but I’d rather be safe than sorry. We’re tracking another client who began selling pre-paid maintenance about a year ago with the same 60 percent cost structure, and they’re pretty consistently at about 90 percent redemption of that 60 percent, so we feel pretty safe setting our cost at 60 percent. And remember, that’s billing the account at full retail.

Then we set up an actual bank account to hold the money. Again, in some states that money must not only be accounted for, but it must also be put into an escrow account and relieved under very specific conditions. We urge you to do your due diligence and to be fully informed of what your laws are before you try to implement a pre-paid maintenance program.

So, we’re barely up and running, therefore it’s a little tough to forecast what the actual dollar impact will be. At this point, with broad stroke measurements, we’re hoping for 25 percent or more penetration for 2010. Counting the 40 percent profit recognized as F&I profit alone, with 1,000 units projected, 25 percent penetration should show about a $100,000 increase in the dealerships gross profit, and none of the incremental service department income is in that equation.

I have to admit that the initiative has become very taxing mentally. I thought the program was dead, along with my credibility and confidence. I was really down on myself. Last month, the editors even had to remove some of what they called "self loathing" comments. I just need you all to know beyond a shadow of a doubt that I know what you’re going through — as the owner of my own business, I fight, win and lose many of the same battles you do. And as a manager of dealership managers, I can relate very directly to the battles you’re fighting.

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