Don’t punish your sales team for following the special finance process. With the right compensation plan in place, everybody wins.
Once again I find myself sending a dispatch from the road. We have had a very busy year so far, and it’s encouraging to see so many dealers enjoying the fruits of their special finance labors. Setting up a process to handle subprime customers is no easy task. It takes a serious commitment, and that commitment starts with the dealer and extends all the way through the store.
Before long, however, commitment can begin to wane. You can usually chalk that up to one of two main causes: The first is a growing stack of contracts in transit, an issue I tackled here last month. The second is a compensation plan that creates winners and losers among the staff.
More often than not, the “loser” is an experienced salesperson or F&I manager who is being underpaid for working subprime deals. That discourages the whole sales team from sending customers to the special finance desk and causes the finance office to try to wedge them into a prime structure.
I am loath to tell dealers to change their compensation plans. I know how precious those plans are to their staff and how demoralizing it can be to suddenly be asked to play by a new set of rules. That’s why it’s so important to have the right one in place to begin with. But if the existing plan is unworkable, you must be willing to change it.
Let’s take a look at four potential sources of conflict between prime and subprime:
1. Playing the Numbers Game
Many dealers who are new to subprime will decree that any customer with a “low” credit score must be sent to the special finance manager. This approach is problematic for several reasons.
First, where exactly do you draw the line? There’s no magic number that divides prime from subprime. A Chevrolet dealer might say that anything under 450 is special finance. The Jaguar dealer next door might say it’s more like 700.
Second, even if there were a clear dividing line, it wouldn’t help you decide how to work the deal. Credit scores don’t get deals bought; it’s all the other factors that make up each customer’s profile and determine their creditworthiness.
Finally, if the prime finance manager thinks he can get the deal bought, he’s going to work it to death. He will pull multiple bureaus to find the highest score. He won’t structure it properly. He will push the funder’s patience to the breaking point.
A week later, he’ll be no closer to getting it approved. And that’s not necessarily his fault. After all, he might just be…
2. The Right Manager in the Wrong Department
Another common mistake is to take a talented F&I manager — and their compensation plan — and put them in charge of special finance. Of course, their performance was judged based on profit per retail unit (PRU), which depends upon penetration rates for back-end products such as extended warranties and service contracts, credit life and GAP.
Now, they find themselves working with Tier 3 and Tier 4 finance companies that are not in the business of leaving room for F&I products. How on earth do you expect your finance manager to maintain a high PRU when there are no funds available?
The solution is to pay them out of the front-end profit on each sold deal. But then you run the risk of …
3. Cutting Out the Sales Team
It’s so vitally important to be able to identify special finance customers as early as possible. So you train your salespeople to ask qualifying questions and send them to the appropriate desk.
To compensate for wages lost on the back end, you give your special finance manager a share of the front-end profit. Specifically, you give them half of the salesperson’s share. That’s the same salesperson who sent the customer to the special finance manager and is now being punished for it.
And he’s not alone. Don’t forget that you’re also …
4. Leaving the Customer Hanging
You can’t expect subprime customers to get a prime deal. There are a few exceptions; for instance, GM Financial offers a subvented program for new Malibus. Try to put the same customer in a new Silverado. No chance.
Meanwhile, the F&I manager spends a week trying to get the deal bought and making life difficult for the funder. In the end, there’s no deal and no new truck. Good luck trying to switch them to the used car you should have been selling from the start.
Remember, your CSI score is based on surveys returned by customers who were actually delivered. It doesn’t account for those who walked away frustrated — or their friends.
What a shame that is. You got into the special finance business to serve those customers. You invested in training, rebuilt your inventory and opened up your finance company spread, only to see the whole enterprise undermined by a poorly constructed finance plan.
Let’s get the process back on track.
First, you cannot let your people suffer for following the rules. Your salespeople would rather have 100 percent of a prime deal than half a subprime deal, and rightfully so. Don’t punish them for sending customers to special finance.
If you’re asking your prime finance manager to work subprime deals, make it clear at the outset that you appreciate the extra effort and you will compensate them accordingly. If their income is based on PRU, don’t let a shortage of back-end funds hurt their average.
Let’s say their target is an average of $1,200 per unit. Then, one month, they get 10 deals funded by a subprime finance company that offers a maximum of $515 on the back end. They could sell the service contract on every single deal — a remarkable accomplishment — and still find themselves $685 below target.
The solution is to identify the finance companies that limit the back end and pay a flat commission on those deals. And don’t include them when you’re calculating PRU and penetration rates.
When a dealer asks me to set up a special finance operation at their store, I get started weeks in advance. I send a questionnaire that asks them everything but their underwear size. It sometimes takes two weeks to complete.
There’s a method to my madness. I have to know everything about their sales and finance process — and their compensation plans — to be sure we can achieve complete buy-in from everyone who will be affected by the new operation.
Investing in special finance can take your dealership to the next level, but it takes commitment to do it right. Don’t sabotage your efforts by failing to address the effect that subprime deals will have on your employees’ paychecks.
Until next month,