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High-Mileage Inventory Is a High-Profit Opportunity

High-Mileage Inventory Is a High-Profit Opportunity

What has experience told franchise dealers about trade-ins that show up with 60,000, 70,000, 80,000 or more miles? Historically, the higher the odometer has ticked, the easier the decision was to wholesale a vehicle. But things change — especially in the automotive industry.

A recent IHS Automotive report found that new-car buyers are holding on to their cars for an average of six and a half years. At 12,000 miles per year, you’re looking at an average trade-in mileage of nearly 80,000. Many factors contribute to this. Cars are built better today and they last longer. Extended loan terms in the market have customers in these cars longer too.

So today, if a franchise dealer subscribes to the old-school mentality that a vehicle with that much tread should just be shined up and shipped off to auction, they could be missing out on a major profit opportunity.

However, a simple shift in perspective can help franchise dealers uncover a whole new profit center from this previously overlooked segment of inventory. If a dealer stops viewing these high-mileage trades as a problem and starts viewing them as an opportunity, the only question that remains is what do they have to lose?

Or better yet, what do they have to gain?

There are countless reasons why retailing such inventory presented obstacles in the past. But most of those obstacles have gone by the wayside. That list includes the breakdown risk, the clientele in the market for these vehicles, lending troubles and F&I hurdles, just to name a few. In today’s automotive world, there are solutions for the most common high-mileage trepidations agents and dealers have — and these solutions hold the key to unlocking untapped profit potential.

1. My Dealers Can’t Turn a Profit from High-Mileage Vehicles.

True, higher-mileage vehicles cost less, which raises the question of whether it’s even worth your dealers’ time. It sounds like an easy solution to clean it up, send it off to auction and move on. But take a step back and look at the big picture.

It’s no secret that margin compression on new vehicles is an ongoing battle that all franchise dealers must wage. So why not combat that with vehicles for which they have greater control over the margins?

And let’s not overlook the post-sale revenue opportunities. It goes without saying that higher-mileage vehicles, regardless of improved quality and reconditioning efforts, will likely require additional maintenance and service at some point. That’s revenue a dealer could have missed by wholesaling the vehicle. There’s also the added F&I opportunity. Vehicle service contracts (VSCs) can be big moneymakers on used cars, as can additional F&I opportunities like maintenance plans, tire and wheel, dent and ding, GAP and more.

Going back to that big picture, by hanging on to a vehicle that would have previously been sent to auction, a dealer can now add up higher profits per unit because of margin control, post-sale service revenue and added F&I profit — all sources of income that don’t exist when wholesaling a trade.

2. You Can’t Put a Quality VSC on a High-Mileage Vehicle.

Hold that thought. If you’ve had trouble finding a VSC for high-mileage inventory, you haven’t looked hard enough. A VSC provider who knows their stuff, has longevity in the space and is backed by a reputable insurance company will be able to predict how vehicles will perform, reserve properly and offer a product set capable of meeting high-mileage demands. When all this comes together, it results in a VSC offering that is both affordable and sustainable.

The second part of this equation is getting a customer to buy into the value of a VSC on a high-mileage vehicle. It is possible — and when done correctly, could be even easier than putting one a more lightly used vehicle. In most cases, customers in the market for a high-mileage vehicle are working on a tight budget. Tight budgets don’t jell with unexpected repair costs. Customers with such sensitive budgets need VSCs more than the average Joe. Protecting them from unexpected repair bills keeps their vehicles on the road while also protecting your dealers’ reputations and lender relationships.

3. My Dealers Can’t Put Their Lender Relationships at Risk with High-Mileage and Subprime Customers.

Again, this is where the VSC comes into play. By consistently presenting VSC options to these customers and asking lenders for the back-end advance, dealers are actually doing their lenders a favor.

What’s one of the top reasons that drivers default? Plain and simple, it’s when repairs on the vehicle prevent a customer from making their payments. A quality VSC that passes the test we outlined earlier takes all these fears away. If a breakdown occurs, the claim is paid, the driver avoids a budget disruption and the lender continues to get paid. If you think about it, experiences such as these can do the exact opposite of putting lender relationships at risk — they most likely will only strengthen them.

4. High-Mileage Vehicles Are Bad for CSI.

This is only true if dealers make it so. It’s also another reason a VSC is so important for high-mileage buyers. At the end of the day, these are used cars. They are inherently more likely to break down than a new vehicle, regardless of their improving quality and longevity. And this is why shifting the perspective of high-mileage inventory from a problem to an opportunity is so important.

When it comes to your dealers’ reputations, especially on the internet, the high-mileage or subprime buyer has the exact same voice and wields just as much influence as a new-car customer. Having the right approach to protecting these customers after purchase is just as important as it is with new-car buyers. The comments and reviews they leave online will impact future customers’ decisions to buy from a dealership, so their needs can’t be ignored. In fact, a consistently positive experience for high-mileage customers can go a long way toward improving your online reputation as well.

5. High-Mileage Vehicles Offer No Long-Term Business Opportunity for Franchise Dealers.

The best time to capture a customer is when they make their first car purchase. Sell a customer their first car, provide a great experience and they’ll come back to that dealership again and again. It’s an age-old philosophy applied to new-car purchasers, but the same can apply to subprime customers or those in the market for a higher-mileage vehicle.

These types of customers present a great opportunity to acquire their lifelong business at an earlier purchase. In many cases, these customers will improve their credit over time. This makes it absolutely vital that they receive an amazing experience before, during and after the sale. Today they might be buying a six-year-old vehicle with 80,000 miles. But in a few years, when they’re in the market again, they won’t soon forget the experience they had with their previous purchase. And best of all, they’ll return with better credit and a bigger budget.

The fears and worries that once existed for franchise dealers when deciding whether to retail or wholesale a high-mileage vehicle are no longer issues today. The old-school thinking of “shine it up and get it off to auction” should be put to bed. With a valuable VSC partner by your dealers’ sides, they can open up a new profit channel with high-mileage vehicles, sell more F&I products, protect your lender relationships, maintain strong CSI and establish long-term business opportunities.

So, are your dealers still thinking about wholesaling that six-and-a-half-year-old, 80,000-mile car?

If so, maybe they should think again.

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What to Look for in a VSC Provider

What to Look for in a VSC Provider

It’s Friday afternoon. The sun is beaming through your office window and the images of weekend plans for 18 holes on your favorite course and a graduation party for your nephew are dancing through your head. You just have to tie up a few loose ends before heading out the door.

And then, at 4:45, it happens. The phone rings and it’s your biggest account. A service contract they sold on a random Tuesday 18 months ago has come back to bite them. A repeat customer had an issue with a covered repair, they don’t know why, and now it’s your problem.

What do you do?

You handle the problem, do what you need to save the account, and then you seriously consider whether it’s worth switching service contract providers. But what do you look for? You have your current provider because every one of your dealers says they’re concerned about price. But where did that get you? You want someone with all the options, but you don’t want to send prices soaring through the roof.

It’s no secret how important service contracts are to your dealers’ CSI and profitability, and you don’t need a reminder of why they matter for your bottom line. But once you’ve been burned, it’s difficult to hide the scar. And finding the right provider that makes you more valuable to your dealers while improving their CSI and increasing profitability is no easy task.

Knowing just what to look for in a service contract provider is the first step. Your service contract business is too important to put at risk by making a decision based on price and price alone. Here are some additional aspects to consider:

1. Reputation

Your service contract provider is a reflection of you and your dealers. You both strive to operate reputable businesses, so why should you look for anything less in your service contract provider?

Don’t sell short the value of a company’s longevity in the marketplace and its ownership. A company with decades of experience will have proven stability through volatile times — a level of security that’s a product of success-minded ownership.

The service contract business is an easy one to get into, and it’s an even easier one to find your way out of. The dangerous road that looms from under-reserved contracts is littered with warning signs of problems to come — which we’ll cover later — that can lead to major headaches for you and your dealers.

It’s also important to learn about the insurance backing of your service contract provider. Is it rated highly by A.M. Best? Is it in good standing with the BBB? What do people have to say on the Internet, and is it an accurate sample that represents the business as a whole?

It’s important to be thorough when assessing a company’s reputation, because asking just one of these questions won’t paint the full picture of the service contract options you’re considering.

2. Industry Knowledge

The biggest benefit you stand to gain from partnering with an experienced service contract provider is the industry knowledge that company brings to the table.

Take, for instance, a company with decades of experience administering service contracts. Those years are more than just candles on a cake. They’re evidence the company has been able to properly assess vehicle risk and reserve accordingly. In doing so, claims will always be paid and there is little risk of that 4:45 Friday afternoon call.

Conversely, take a service contract provider with little experience and bargain basement prices. In these instances, it’s important to proceed with caution and ask the right questions. Do the low prices mean that contracts aren’t properly reserved? What is the claims approval process like if we’re working with a limited reserve account? Are claims decisions made fairly and consistently?

When prices are insufficient to cover required reserves, over time, you stand to see substantial price increases to correct course. Then you can expect tighter claims approvals. And when the belt can’t be tightened any more, you’re left stranded when the provider exits the service contract space altogether.

A reputable service contract provider with a proven track record of industry knowledge and experience can alleviate these fears.

3. Portfolio Performance

At the end of the day, it is all about remaining profitable. An added benefit of working with a service contract provider that has the knowledge to reserve properly is the protection it provides for back-end profit opportunities. And that’s something from which both agents and dealers stand to benefit.

When it comes to used and high-mileage vehicles in particular, having a secondary provider that specializes in this niche will help keep those vehicles out of your dealers’ reinsurance pools. It will also optimize the reserve performance on those vehicles since the contract is built to withstand repairs most likely to occur.

When a service contract provider has the experience and knowledge to know how a vehicle will perform and what components will break down over the life of the contract, you and your dealers have the security to continue with business worry-free.

4. Paid Claims

If a service contract provider can do one thing — and one thing only — for you, it would need to pay claims.

Don’t be hesitant to get into numbers. How many claims have they paid? What is the amount of the claims paid? How quick is the claims process? Ask about staffing and expertise in claims adjudication. See how they work with shops in your area. And for that matter, find out how many shops a provider works with across the country. After all, breakdowns don’t only occur close to home.

Flexibility is also an important aspect of paying claims. Not all providers are willing to make custom programs to fit your business. Every service contract partner and agent relationship is unique. Variables like labor rates, sales tax coverage, commissions and other terms and conditions aren’t one-size-fits-all. Find out if your new provider is willing to work with you so you can offer the products and service your dealers demand.

5. Technology

Everything in today’s world is going digital, and the service contract business is no exception. It’s estimated that upwards of 75% of all service contracts are now filed electronically. At this point, it’s no longer a matter of being trendy. Being technologically savvy should be a prerequisite for a service contract provider to win your business. It starts with being able to accept service contract applications electronically, but it should extend well beyond that.

A quality service contract partner should be able to prove engagement and successful integrations with DMS providers. It’s all about ease of use for the dealer, so having a service contract available in the same software they’re already using is vital.

And let’s not forget about capabilities like online claims, which can make life easier on a dealership service facility. Online training could be another point of emphasis. You can’t be in a dealership every second of every day, so ask your service contract provider what online resources are available to assist in onboarding dealerships with their new product.

6. Other Partners

Nothing is more powerful than a reference or referral. It’s not uncommon for the best agents to partner with the best service contract providers. A good sign of the quality of a service contract provider is the company it keeps, so ask about some of the other clients the company works with.

Just like the restaurant that caters to the stars, the best and brightest agents will partner with the service contract provider that delivers the best service and aligns with their values. Getting to know a provider from the inside out — meaning becoming acquainted with company culture and values — will help instill confidence that you’re entering into a relationship with a partner who has your best interests at heart.

7. Price

All this leads us to end with the point of consideration with which most conversations will begin: price. If you’ve made it to this point of the article, you can understand why price, while important, is less of a focal point than these other traits to look for in a service contract provider.

It goes without saying that you don’t want to price out your dealers and their customers, but it’s vital to stress that nothing is more important than their reputation. Having the right service contract provider in a store might not always be the cheapest option, but when it comes to improving CSI, protecting reinsurance portfolios and enhancing profitability, your choice in a service contract provider makes all the difference in the world.

If you’re still asking yourself whether making the switch to a new service contract provider really worth it, think about the next time the phone rings at 4:45 on a sunny Friday afternoon. With the right provider in place, you won’t have to worry about what’s on the other end. You’ll know your dealers are satisfied, selling more cars and making more money.

So, the only question you’ll need to answer is what you’re bringing to the weekend barbeque.

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