NAPA — AUL Corp., a provider of service contracts for used vehicles, has partnered with OptionSoft Technologies, a provider of automotive software solutions. The goal of the partnership is to allow both companies to continue offering their dealer networks the most advanced electronic business solutions.

“Partnering with OptionSoft will provide our mutual clients nationwide a simplified suite of F&I electronic business solutions that will streamline their F&I process and positively affect their profitability. It will also allow for a seamless integration with AUL’s Web portal for a paperless e-rating and remittance procedure,” said Jimmy Atkinson, COO of AUL.

“OptionSoft is very pleased to be part of AUL’s national provider network,” said Ken Tomaro, president of OptionSoft. “AUL is a leader in the vehicle service contract industry and are widely recognized for their innovative products and outstanding customer service. OptionSoft shares in those same product innovation and customer service ideals.”

Both companies said they will continue to find ways to assist dealers in selling F&I products and increasing profits on a compliant, customer-friendly platform. OptionSoft menus are specifically designed to increase the speed and accuracy of all information for improved remittance while decreasing the time and resources typically associated with sales, F&I and service drive sales operations.

A candid discussion of pre-paid scheduled maintenance: should the product maintain the status quo for most dealers as an also-ran offering, or should it morph into a core product? What would a core product pre-paid maintenance program look like, and who would be the winners and the losers?

The statistical improbability of many F&I products paying a claim, it could be argued, is directly proportional to how difficult they are to sell and why penetrations are not higher (Let’s call these products Low Statistical Probability products or LSP’s). An example would be a theft product, where the consumer is buying insurance, just in case the unlikely event occurs and his vehicle is stolen. We’re betting on that statistical improbability as well, hoping that we get to earn the premium without ever paying a claim.

If one accepts the argument above, the premise of a product that has an almost certain probability of paying a claim should have a correspondingly higher sell rate and penetration rate (Let’s call these products High Statistical Probability products or HSP’s). Of course, there are huge amounts of variables to consider in this unfair comparison, like premium pricing versus risk. All things considered, however, should we not take a very close look at product(s) that the consumer is very likely to use in order to drive revenues and profit? Further, can we make the equation profitable enough for the parties (provider, agent, dealer, and consumer) to where the adoption rate exceeds the historically low penetration rates of LSP’s?

Pre-paid scheduled maintenance (PSM) certainly fits the definition of an HSP. The consumer will ostensibly redeem their “coupons” at specific intervals. I use “ostensibly” here because there are few dealers that realize the potential for earned premium that exists with PSM from customers that do not redeem their coupons. Rumors persist that the non-redemption of coupons could be as high as 60%. Those dealers that are enlightened will demand to participate as the product earns out. Allowing the dealer to participate, or even to completely own the participation component, may be the key to reinvigorating this product.

There are independent PSM providers administering dealer owned PSM programs right now that are gaining traction. If the independent administrators can make a profitable business model with a dealer owned PSM program, perhaps it is time for us to consider this model or risk losing hard-earned market share to them.

It appears that we are at a crossroads and have two choices. One would be to stay on track and accept mediocre PSM penetration rates as they are. The second and more progressive option would be to capitalize on the new PSM approach and design a program that makes a dealer even more loyal to us.

Perhaps it is time to take another look at the essential elements of a successful PSM program, one that performs at extraordinary levels and leaves all of the parties content with their roles.

Let’s start where the rubber meets the road, with the consumer in the finance office completing the purchase of a vehicle. Why aren’t more consumers buying PSM? The answer is simple: most dealers allow the finance managers to price themselves right out of the market. The typical consumer, when asked to pay $895 for three years of scheduled maintenance, simply adds up the cost of nine or ten oil changes and a half dozen tire rotations and says, “No thanks!”

However, if the goal of offering PSM from a dealer’s perspective is to, 1) make a small profit in F&I to keep penetrations high because, 2) the real reason the dealer wants all or most of his customers to buy PSM is for retention in fixed operations first, then to turn those customers into repeat buyers later, then the dealer is on the right track.

Statistics tell us that up to 83% of customers will repurchase if the dealer can keep them returning to the service department for regularly scheduled maintenance.

PSM should be priced in such a way that even if a customer breaks out a calculator and walks back into service and gets the dealer’s pricing for oil changes and tire rotations, the total represents at least an equal, if not less amount than we’re charging them for the PSM in the first place.

Some dealers successfully turn a one year PSM giveaway into an up-sell opportunity in finance. The savvy consumer decides to lock in non-inflationary pricing today, and finance it, to save money overall on something he knows he will have to purchase tomorrow. PSM penetrations well over 50% are possible with this type of program, executed properly.

Assuming the dealer participates in most, if not all, of the earned premium, the administrator essentially becomes the marketing arm for the dealer’s PSM owners. This can be done entirely by polling the dealer’s DMS and marketing through automated email software programs, similar to what is used today by fixed operations retention software providers.

For providers of vehicle service contracts, promoting the bundling of a PSM with a VSC should be a natural evolution. Bundling will increase penetrations of both products if the producers are properly trained and the bundled pricing makes sense to the consumer. Priced separately, the best results are achieved when the dealer limits the markup of PSM to around $100 and realizes the big gains by up-selling in the service drive and taking a loyal customer and selling them another vehicle.

Selling PSM should not be limited to the F&I office. Why not market the program in the service drive while the customer is reaching into their pocket to pay for maintenance anyway? Again, training the service advisors to sell the program, plus consistently offering it to every customer and pricing the PSM competitively will drive adoption rates.

Since profit margins of HSP’s are inversely proportional to the margins of LSP’s, there must be serious volume production for the program to make sense for the provider. High volume PSM production is reasonable to expect from a properly designed, executed, and priced program with a committed dealer. A bigger footprint in the dealership, greater control of the dealer’s portfolio of F&I products, and providing another product to the dealer with an inherently more holistic approach to income development (increasing revenue for both fixed ops and variable ops), could be a win-win for the entire supply chain. I invite your comments.

The F&I industry has grown considerably over the last decade and the income generated for auto dealers from the sale of various products has become a significant source of income to offset the decline in income from the sale of the vehicles themselves.

As a result, regulation and scrutiny by lawmakers, consumer groups and the courts has increasingly been brought upon the industry. In response, the industry has gone to great lengths to educate all parties about F&I products and it has actively assisted in drafting the applicable laws and regulations in such a way that the F&I products are categorized and regulated properly.

In today’s business atmosphere it is important to minimize risks whenever possible. This is especially true in the automotive and F&I industry. Unfortunately, in spite of the efforts of the industry and regulatory groups, many areas in which risks could be reduced still exist. These problems can range from consumer confusion and dissatisfaction to negative media reports to regulatory enforcement actions to class-action lawsuits.

In my experience, I have found that may of these risks can be minimized or removed by simply knowing and understanding the product and using proper terminology. Below, I address several areas that commonly result in issues:

Retail Installment Sales Contract (RISC) vs. Loan

It is a common practice to use these terms interchangeably even by those who know better. Many times you hear that the dealer got the buyer a loan or loaned the buyer the money to purchase the vehicle. However, it is important to understand the difference between the two to prevent their misuse.

When a consumer purchases a vehicle from a dealer and finances the purchase through the dealer, they traditionally enter into an RISC. Under the RISC, the dealer is extending credit to the buyer for the vehicle purchase and the dealer is the initial “creditor.” Although the dealer/creditor could collect the agreed upon monthly payments from the buyer, in most situations the dealer subsequently assigns the RISC to a finance company.

In the loan scenario, the consumer, through a separate agreement with a third-party “lender” such as a bank or finance company, borrows money and uses the loan proceeds to pay the dealer for the vehicle. From the dealer’s point of view this should be considered a cash transaction because the dealer only received the proceeds of the loan and was not a party to the loan transaction.

Dealers do not “loan” money – they extended “credit.” Why is it important to know the difference? Most states have laws regulating RISCs and separate laws that regulate loans. These laws are two different animals. As a dealer, it is difficult enough to comply with the RISC laws let alone have to deal with the laws regulating loans.

GAP Waiver vs. GAP Insurance

Basically there are two kinds of guaranteed asset protection (GAP): waiver and insurance. Whether GAP is a waiver or insurance, the product is designed to do the same thing: in the event of a total loss, it takes care of any difference between the value of the vehicle and the amount owned under the RISC or loan. Most states permit the sale of the GAP waiver product.

GAP waiver is a contractual addendum to the finance contact, while GAP insurance is a separate contract that is just that – an insurance policy that pays in the event of a covered loss.

GAP waiver is most common in the RISC transaction discussed above. With GAP waiver, the parties to the RISC (buyer and dealer/creditor), through the use of an addendum to the RISC, contractually agree that if the buyer has a total loss and owes more on the vehicle that it’s worth, the creditor will WAIVE the balance. It is important to note that the GAP addendum can usually be purchased at the time the RISC is entered into between the buyer and dealer/creditor. GAP waiver is not an insurance product.

With GAP insurance, the buyer purchases an insurance policy that is designed to PAY the creditor the difference between the vehicle value and the amount owed. As an insurance product, the sale of GAP insurance is traditionally more highly regulated. GAP insurance is less common than GAP waiver, but is mischaracterized more often.

Warranty vs. Service Contract

A warranty is included in the price when a product is purchased and traditionally comes from the manufacturer or the seller of the product. A warranty cannot be sold separately from the product. A warranty can be either full or limited and is regulated by the federal Magnuson-Moss Warranty Act.

On the other hand, a service contract is purchased separately from the product itself and is usually administered by a third party. A service contract is in addition to any warranty on the product and only covers those items outlined in the contact. Most states regulate service contracts to varying degrees.

The confusion between the two terms is amplified when a service contract is referred to as an “extended warranty.” As a result, to prevent any confusion, the best practice is to not use the term extended warranty when referring to a service contact.

Insurance vs. Non-insurance Terms

A variety of insurance and non-insurance terms have been misused in the F&I industry. When discussing the terms and conditions of the products, pay close attention to the language used in the contracts themselves as it should give some guidance to the proper terminology to be used in discussing or describing the product. A few of these terms are briefly discussed below:

• Coverage vs. Contract Terms
  The use of the term “coverage” traditionally is an insurance term. It is usually seen in insurance-type products and will be used when describing the product, its benefits and its terms and conditions. However, when describing non-insurance-type products, the contractual terms will most often be referred to as “contract terms,” “terms and conditions” or something similar.
• Premium vs. Enrollment Charge/Purchase Price
  Premium is historically an insurance term and should not be used for non-insurance-type products. On the other hand, it is better to use terms such as enrollment charge or purchase price for describing the cost of non-insurance products.
• Contract vs. Policy
  In those situations in which both insurance and non-insurance products are being sold together, it is easy to refer to the various products as “policies.” Unfortunately, policy is a term usually associated with insurance. The better practice is to refer to all of these products as contracts or agreements even if they are an insurance product.