How to Establish Product Pricing Guidelines

Most of our clients have established a product pricing guideline to help the F&I manager in pricing decisions and processes. Using this internal guideline helps a dealer to sell products, make a fair profit and, hopefully, establish a defense against price gouging.

But establishing a pricing guideline takes some thought and an understanding of state requirements, finance source limitations and industry standards.

Background

There is not a national regulatory pricing guideline. As a substitute for a national pricing guideline, dealers rely on one of three sources to establish an internal pricing guideline: state statutes, finance source limits and industry standard.

In establishing a pricing guideline, agents and dealers should start with any pricing guidance from the state in which the dealer operates. Some states provide pricing guidance for some of the products an F&I manager sells. Florida, for example, requires dealers to file the rates at which it sells a variety of service contracts. Florida dealers, therefore, have set guidelines for service contract pricing, but are free to establish transactional pricing for maintenance or surface protection products. A declining number of states are dictating the pricing for GAP, while all states determine the pricing for credit life and A&H.

The second consideration in establishing a pricing guideline is the finance source. The most common pricing limitations from finance sources are with rate markup on GAP and vehicle service contracts. Understanding the finance source limitations helps establish a pricing guideline on a portfolio basis, but it can be modified by a transactional credit decision. When establishing a pricing guideline, focus on the portfolio finance source limitations.

The final consideration, in the absence of state regulatory pricing or finance source limitations, is the industry standard. This is an important consideration as a potential defense against price gouging claims. A judge or attorney general is not necessarily impressed if one of your competitors has similar pricing, but they do pay attention if your pricing is in line with your industry. Being able to label a pricing guideline as consistent with the industry standard requires some background work from the agent who is helping a dealer establish a pricing guideline.

Other Considerations

A few other considerations must be taken into account before starting down the path of developing a pricing guideline. The first consideration is whether to establish a pricing guideline by using a maximum retail price for the product or using a cost plus allowable profit model.

If the retail price of etch, for example, is $399, and the cost plus allowable profit is $250, this tells the F&I manager that the maximum selling price is either (a) $399 or (b) department cost for etch plus $250 profit.

Whenever possible, I prefer to use the cost plus allowable profit model. The pricing guideline must be constantly monitored and revised as prices change. Using the cost plus allowable profit model provides the flexibility to adjust product pricing without the need to generate a new pricing guideline.

Another consideration is establishing a pricing guideline for dealer groups with multistate locations. The group should have a consistent pricing guideline, but the guideline must be flexible enough to accommodate state-mandated pricing restrictions.

The same thought process exists for dealer groups with a mix of luxury and non-luxury franchises. Some of the same products at these two franchise types can have vastly different wholesale pricing and consumer pricing elasticity.

Here is a sample of what a pricing guideline can look like:

Hope this helps! Good luck and good selling.