Thoughts about how to be successful with internet operations and secondary finance

January 8, 2009

Here’s a good question from a vAuto performance manager and my response…

Q:    Dale, I want to get your opinion regarding credit challenged buyers, bank fees and inventory pricing California is one of those states where the ad price of a vehicle, printed or internet, must be honored to any customer that comes in to purchase that vehicle. When one of those customers is credit challenged, often times the banks may charge large fees anywhere from $1000 to $2000 to do the deal. With our aggressive pricing strategy from 92% to 95%, the entire front gross may be swallowed up or even go negative if they do the deal. Since they can’t legally raise the price or charge the customer the bank fee on top of the sales price of the car, and most of the time the banks will not allow the dealer to sell any back end products because of the limited finance advance, our dealers are put in a difficult position.

Typically dealers maintain a few cars that are set aside for these conditions or we would try to put these customers into vehicles that we needed to make go away, ie. problem cars or aged units. However, with the current market conditions, this makes it very difficult.

I have been suggesting the following:

With book values being so erratic, the vehicles with the best equity positions will be the freshest units. Instead of holding onto vehicles priced high to accommodate credit challenged individuals or putting them into aged units where our equity is worse, put these credit challenged customers in fresh cars right from the start. We can price a few of these fresh cars slightly higher than our 92%, but after 21 days, we put the cars back on strategy and hopefully by then we’ll have replacement fresh cars for the credit challenged customers.

Do you have any other suggestions?

A:    I exactly understand the problem.  The unfortunate reality is that in California, and many other places it’s very difficult to run one operation that attempts to serve both the internet and credit challenged community.  To this extent, I recommend that dealers try and separate every aspect of these two operations as much as possible.  The strategies for each one couldn’t really be more diametrically opposed.  They are really two different businesses.  Trying to run both effectively with one web site, one inventory, one sales force creates a high degree of complexity.  Although your suggestion makes sense, you could see what I mean about it being complicated.  I always encourage dealers to recognize how different these two businesses are and try and get them to create two separate operations as much as possible.  To do otherwise will undoubtedly limit their success with each endeavor.