How to Harness the Surging Ancillary Market

At 3:30 p.m. on Monday, May 21, attendees of Agent Summit 2018 crowded into a packed ballroom at the Venetian & Palazzo Resort Hotel Casinos in Las Vegas for “The Surging Ancillary Market.” The highly anticipated panel discussion was led by Ron Reahard, president of Reahard & Associates and one of the nation’s leading F&I trainers and consultants.

Shortly before the event, Reahard expressed hope that agents would leave his session with a clear idea of the value ancillary product sales represent to their dealer clients as well as car buyers.

“Virtually every purchase experience now begins online. Consumer demand for transparency and F&I products that offer genuine customer value requires dealers to continuously evaluate their product offerings to determine how those products are best presented and sold,” Reahard said. “Every agent needs to assist their dealers in maximizing customer acceptance rates for multiple ancillary products.”

Reahard was joined onstage by Scott Hendrix, IAS’s senior vice president and head of national accounts; Garret Lacour, CEO of RoadVantage; David Neuenschwander, president of National Automotive Experts (NAE)/NWAN; and Tony Wanderon, president and CEO of National Auto Care.

With much ground to cover and only 45 minutes in which to do it, the group started off by attempting to answer a concern common to the subject: Does adding ancillary products to the F&I menu overwhelm customers and create resistance that could derail production and profit per vehicle retailed?

How Many Products Is Too Many?

Asked for the appropriate number of F&I products to offer a given customer, RoadVantage’s Lacour suggested five or six for finance deals and three to five for cash deals, lease customers, and short-term financing. “This includes VSC, GAP, and maintenance,” he noted, adding that ancillary products should make up the balance.

“The other question is how many products the F&I manager has access to,” Lacour said. “I have seen groups reduce their ancillary offerings from 12 to four, and it resulted in much higher penetrations and PVRs and reduced the presentation time in finance. Choose the highest-value proposition products and focus on penetrations.”

Neuenschwander of NAE/NWAN said the right number is “hard to determine,” noting he considers expediency the most critical factor. “The amount of time it takes to present and educate a customer should dictate how many products is too many.”

National Auto Care’s Wanderon agreed, saying there is no “magic number” other than that arrived at by weighing such considerations as the dealership’s process and customer base. He advised agents to focus on whether the products their F&I teams present will bring value to car buyers in their times of need, are necessary to protect the financing deal, and are presented in an efficient, legally compliant manner.

“Dealers and agents need to spend more time focusing on the needs of their specific customer base, all while building consumer loyalty and retention-based products — which ultimately drive profits not only today but in the future — instead of the number of products offered,” Wanderon said.

“Even with menu selling, there can be too many options. Bundles can help,” said Hendrix of IAS, who believes customers are most concerned about mechanical breakdowns, financial risk, and appearance, in that order. That means agents and  dealers must first dispense with the service contract, GAP, tire-and-wheel, paint, and dent.

“Once those products are covered on the menu, you have enough products to address a customer’s concern,” Hendrix said. “Manufacturers want the F&I process to be completed in 45 minutes or less. Ultimately, the goal needs to be to reduce the number of contracts that a customer has to sign and speed up the F&I process.”

Which Are More Profitable: Standalone Products or Bundles?

Making the profitable choice between multiple standalone products and a bundled offering requires agents to dig into the specifics of each dealership’s operations, Wanderon said. He suggests agents present a pro forma breakdown of how each model could play out for each client.

Lacour acknowledged that bundles are the trend, despite the common sentiment that bundling requires agents and dealers to give up multiple profit centers in exchange for one. So why do it?

“The simple answer is the four standalones never penetrate equally. So you’re not giving up four profits, and the bundle value proposition can support a higher margin,” Lacour said, advising agents who bundle products to focus on penetration rates.

“McDonald’s sells Happy Meals for a reason,” Hendrix said. “They don’t just like to sell a burger, then fries and maybe a Coke. They package it for a reason: higher perceived values for a reasonable price.”

Hendrix believes that, by building more value more quickly, the customer’s time in F&I is better spent. The bundled product also multiplies opportunities for fixed ops revenue. “The retention aspect today is huge for our dealers. Bundling creates more opportunities to get someone back to the service drive and maintain lower loss ratios.”

Neuenschwander suggested agents pay close attention to the way each bundle is structured. If it can be customized by the business manager during the presentation, profit and commission can be protected.

“Bundled products are much more common today because of ease of presentation, but if coverage is simply ‘thrown in’ to help close the deal, margin will shrink,” Neuenschwander said.

Do Banks and Finance Companies Support Bundles? 

Asked whether lending guidelines affect the sale of bundled products, Lacour was unequivocal. “Ancillaries have not reached the level of equal consideration with the OEM VSC programs that independent VSC providers fought for years. It’s going to require more pressure from the industry and dealers to push for an even playing field.”

Despite that, ancillaries have risen “from the bottom shelf to the top shelf” in the F&I product library, Lacour said. But for independent providers to reach an equal footing with factory programs, agents will have to do their homework. “Dealers have a choice of what VSC provider they offer, and equally should have a choice of what ancillary product provider they choose to offer.”

“We need to look at this from the viewpoint of a dealer as a four-legged stool,” Hendrix said. “You’ve got dealer reserve, VSC, GAP, and ancillary products. You have state regulations that are always changing, and you’ve got lender rules that are always changing. If you spread your profits and your look across those four different areas, you’ll protect yourself and your dealer as time goes on.”

The proliferation of advanced in-vehicle technology puts the onus on providers to adapt and evolve their offerings to maintain value, Hendrix added, noting that, “About four or five years ago, cars were being totaled in a ratio of about 2-to-7. Now it’s 4-to-7. As cars get more complex, we need to look at more ancillary products that fit customers’ needs.”

Neuenschwander said banks and finance companies “definitely” impact the sale of products and said dealers and business managers must work with their finance sources to understand their requirements and limitations. “Dealers can influence lenders’ willingness and acceptance of these products, but it comes down to open communication.”

“In most cases, lenders are very dealer-friendly as it relates to most products,” Wanderon said, allowing that there are exceptions. “Once a product is submitted for approval, some providers send in their sales team to ask the dealer why they are not using their products. In those cases, it almost seems like the approval process is delayed until they can try to sell the dealer on their products.”

If dealers feel their approvals are being blocked, he added, agents should join their side, get a clear understanding of why the denials or delays are occurring, and refuse to tolerate it.

“If the reason for denial is due to not meeting the lender’s requirements, that needs to be addressed with the agent or TPA. If the reason does not point to clear guidelines not adhered to, then the industry should do all they can do to not allow this to ensure fair practices for all,” Wanderon said.

Are Sales of Bundled Products Safe? 

To ensure sales of bundled products are sanctioned in each of the markets you serve, Wanderon advised agents to do whatever legwork is necessary.

“Make sure the companies have proper licenses to do business in the state, that the underwriter has the product filed and approved – typically when they use a ‘follow-the-form’-type clip – and, most important, make sure that the underwriter will pick up dollar one risk in the event the administrator goes out of business,” Wanderon said.

Neuenschwander listed years in business, experience with ancillaries, and a sound process backed by a compliance department as key provider considerations. Hendrix suggested agents have a conversation with each provider’s compliance director and ask to which industry associations each provider belongs and whether they employ in-house counsel. Lacour added that each ancillary benefit “must have defensibility” in whichever product category it falls.

“Ancillary regulations are fairly new and still developing. The regulations are numerous, not uniform from state to state, and require careful navigation,” Lacour warned.

When Should the Customer Be Introduced to Ancillaries? 

Acknowledging the growing appetite among consumers for information about F&I products on dealer and provider websites, Reahard asked the panel how agents can help promote the existence and value of ancillary products.

“Today’s customers do more research and are more knowledgeable than ever before,” Neuenschwander said. “Dealers need to provide information about products to customers as they are ‘shopping’ before they enter the F&I office. Making videos and digital material available to customers is necessary.”

Wanderon suggested adding information about every available F&I product to each dealer’s website, providing customers with point-of-sale materials, and training the sales team to tee up the sale for F&I. Hendrix concurred, saying showroom staff must provide “enough information to transfer the authority to the F&I manager.”

Can Ancillary Products Be Preloaded? 

Theft, identity theft protection, prepaid maintenance, chemical treatments, and key replacement are high-value, low-cost products that “lend themselves” to preloading, Hendrix said. Neuenschwander said preloads also should give F&I an upsell opportunity and be noncancelable to protect front-end profits.

Lacour described theft as a “low value proposition” for which penetration rates are on the decline. “Also, when you read about a state attorney general fining a dealer, etch is generally the culprit.”

The key, Wanderon said, is to be sure your ancillary benefits drive value and retention.

“This sometimes is hard to determine upfront,” he noted, “so tracking their impact on customer satisfaction, retention both on the service and sales side, and whether they drive higher closing ratios need to be looked at each month.”

When ancillary products are preloaded, Hendrix suggested, they should be offered, explained, and sold “at time of first pencil” to maximize sales.

What’s the Big Deal? 

In the final analysis, where should agents rank ancillaries on their “big board” of F&I products? Higher than some may think, said Lacour, who believes sales of ancillary products are just as important to dealers as the service contract.

“Ancillaries are the second most profitable category of products in F&I and are the primary reason PVRs are reaching new heights,” Lacour said. He listed service contracts, ancillary products, GAP, and prepaid maintenance in declining order of profitability and estimated that ancillaries are responsible for about 25% of F&I profits today. “Without ancillaries, PVRs would be 15% less that what we are seeing today. In today’s market, ancillaries are contributing between $175 and $250 to PVR.”

Considering the recent surge in popularity for leasing, Lacour added, door ding, key replacement, windshield protection, interior/exterior coverage, and a lease-end benefit should be on every agent’s radar. Hendrix said ancillaries drive value in every deal by promoting a lasting relationship between dealers and car buyers, contributing to service retention and higher profits. Wanderon agreed, noting that the customer is exactly where the conversation around these offerings should be focused.

“Our job — from the dealership to agents and TPAs in this industry — is to understand our customer,” Wanderon said. “When we understand the needs, desires, and goals of our client base and then provide the solutions for them, we are all in a win-win situation.”