Start Thinking Products vs. Finance Reserve

One of the indicators we are stressing lately when working with our F&I clients is Products Sold per Retail Delivery, or PPR. This is simply the number of products sold in the F&I department divided by the number of retail deals delivered.

For example, if a dealer delivers 100 retail units and the F&I department sells 150 products, their PPR is 1.5. This would include all products such as life, A&H, GAP, service contracts, chemicals, theft, tire and wheel, windshield, etc. It does not count finance reserve as a product.

The reason this is becoming such an important factor is the current concerted effort by some very influential consumer groups to have the government take action to limit finance reserve to dealers. For example, The Center for Responsible Lending, a nonprofit organization and powerful lobbying group that fights predatory lending practices as a primary mission recently stated:

“The Center for Responsible Lending believes that the ability of automobile dealers to add to a consumer’s interest rate for compensation when financing a vehicle for a consumer can and should be considered unfair and deceptive. The effects of competition in the market should benefit the consumer, and should be based on true competitive forces instead of perverse incentives. The only effective way to ensure effective competition is to prohibit dealer compensation that varies based on the interest rate or other material terms of the loan other than the principal balance of the loan”.

But that’s not all.

In comments to the FTC’s information gathering process on February 1 of this year, six powerful consumer advocacy groups filed the following joint statement:

“The FTC Should Prohibit Dealers from Receiving Compensation Based on Increasing the Interest Rate...The FTC should write regulations banning dealer interest rate markups in the same way that the Federal Reserve and Congress in the Dodd-Frank Act have dealt with a similar issue of compensation in mortgage lending. The findings and substance of the rule have a direct bearing on the issue of car dealer interest rate markups.”

The bottom line is that we are very likely to see increasing pressure to limit or outright eliminate finance reserve as an income source. Many of you are already seeing your lenders trying to limit your reserve. They are doing this, voluntarily, to try to stave off restrictive regulation. Of course, some dealer associations and others are trying to make the case against this action, but as we have seen in other areas, the consumer groups have tremendous influence with the current administration and regulatory bodies.

And, of course, we can shake our fists at the sky and spend all day arguing that that the finance reserve we make is perfectly reasonable, that we get those buy rates because of the volume of business we do and should get the benefit of the huge investment it takes to operate, that consumers still get better rates from dealers than other lenders, and that we can’t run a Finance Department, meet all of the regulatory requirements already handed down, and then have to offer those low rates for no profit, etc., etc.

But all of that is falling on deaf ears in the consumer protection world.

PPR and Performance

Over the years, we have viewed this measurement as what we call a “casual” indicator simply because it can vary from dealer to dealer based upon product offerings. However, it has been a useful indicator when developing F&I processes.

Here’s the type of example we see quite often. Let’s take two F&I departments, both of which are posting $1200 total F&I income per retail unit delivered. However, there is a significant difference in these dealers’ PPR.

Dealer A:

Income Per Retail Unit Delivered $1200

Products Sold Per Retail Unit: 1.8

Dealer B:

Income Per Retail Unit Delivered $1200

Products Sold Per Retail Unit: 0.8

Both F&I departments can claim to be at $1200 per unit but the PPR clearly indicates that Dealer B is relying on finance reserve for a much larger percentage of the department income. Now, I can go into a long diatribe about the reasons Dealer A is going to have better overall performance, (and of course Dealer B will get all defensive. Money is money, right?), but let’s save that debate for another time.

The issue for F&I professionals to consider is that this trend is continuing, and they might want to start reviewing their processes to move away from relying too much on finance reserve and focus on product sales as a larger percentage of our income. We have accomplished this to a great extend with the Package Option process. Our F&I professionals’ PPR looks a lot more like Dealer A than Dealer B, simply because our process focuses on product sales over finance reserve. And the fact is, when we look at the top F&I performers in the country, one of the common traits they share is a very high PPR.

F&I professionals might want to start looking at PPR as a yardstick, not only for the coming regulatory reasons, but as an indicator of a well balanced, top performing process. And for agents, a good indicator of performance is to calculate your clients PPR from last month and see where their numbers fall. If that number is less than 1, you might want to start looking at your process to see how you can raise that number to help your clients emulate those top performers.