Finance and Insurance - The Profit Center
I would like to make myself clear on a few items of interest before I get too deep into the sales processes at any dealership, including: automobile, recreational vehicles, boats, motorcycle, and even furniture or other big ticket items. A business has to turn a fair profit in order to stay in business. I believe that they should make this profit and use it to pay better quality employees a premium wage in order to serve you better. The financial strengths or weaknesses of any business can definitely have a dramatic effect on your customer service and satisfaction. I do not, in any shape or form, wish to hurt a dealerships profitability, as it is essential for his survival. I merely want to advise people how to negotiate a little better in order to make the profit center more balanced.
Let's get right down to this! Every dealership has a finance and insurance department. This department is a huge profit center in any dealership. In some cases, it earns more money than the sale of the automobile itself. Profits are made from many things that most buyers do not understand.
You as a consumer should understand the "flow" of the sales process to understand the profit centers that are ahead of you. Most negotiating from the consumer seems to stop after the original price is negotiated and agreed upon. Let's examine just a small portion of what leads up to that point.
The first thing that every consumer should understand is that when you go to a dealership several things come into play. One of the most important things that I could point out to you is that you are dealing with a business that has been trained to get the most amount of money from you as they can. They are trained and they practice these tactics everyday, day after day, week after week, month after month, and year after year. Let me point out a couple of important facts that I have said in this paragraph. First, you'll notice that I said a dealership and not a salesman and secondly, I emphasized times of day after day, week after week, etc. etc. This was done to let you know that the salesman is working very closely with the sales managers in order to make as much money as he can. Your interests are really not their objective in most cases.
One tactic that is used heavily in the business is that the salesman says he is new to the business. This may be true or not, however; keep in mind that he does not work alone. He is working with store management, who gives him advice on what to say and when to say it. These guys or gals are very well trained on how to overcome every objection that you may have to buying from them. They have been trained in the psychology of the buyer and how to tell what your "hot buttons" are. They listen to things in your conversation that you may say to one another as well as to the salesman. They are trained to tell their desk managers everything that you say and then the desk manager is trained to tell the salesman exactly what and how to answer you. A seasoned salesman does not need as much advice from his desk and may negotiate a little more with you directly without going back and forth.
The process of negotiation begins the moment that you walk into the front door or step foot out of your car and begin to look at vehicles. Different stores display inventory in different ways. This is done for crowd control or more commonly known as "up control". Control is the first step in negotiating with a customer. Ever who asks the questions controls the situation. Let me give you an example: A salesman walks up to you and says "Welcome to ABC motors, my name is Joe, and what is yours?" The salesman has just asked the first question- you answer "My name is George." He then asks you what you are looking for today, or; the famous "Can I help You?" As you can see, step after step, question after question, he leads you down a path that he is trained to do.
Many times a well trained salesperson will not answer your questions directly. In some cases, they only respond to questions with other questions in order to avert the loss of control. An example of this could be something like you asking the salesman if he has this same car with an automatic rather than a stick shift. Two responses could come back to you. One would be yes or no, the other could very well be something along the lines of: 'don't you know how to drive a stick shift?" In the second response the salesman gained more information from you in order to close you. Closing means to overcome every objection and give your customer no way out other than where do I sign. The art of selling truly is a science of well scripted roll playing and rehearsal.
We have established that the negotiating process begins with a series of questions. These questions serve as two main elements of the sales process. First and foremost is to establish rapport and control. The more information that you are willing to share with you salesman in the first few minutes gives him a greater control of the sales process. He has gathered mental notes on our ability to purchase such as whether you have a trade in or not, if you have a down payment, how much can you afford, are you the only decision maker (is there a spouse?), how is your credit, or do you have a payoff on your trade in? These are one of many pieces of information that they collect immediately. Secondly, this information is used to begin a conversation with store management about who the salesman is with, what are they looking for, and what is their ability to purchase. Generally, a sales manager then directs the sales process from his seat in the "tower". A seat that generally overlooks the sales floor or the sales lot. He is kind of like a conductor of an orchestra, seeing all, and hearing all.
I cannot describe the entire sales process with you as this varies from dealer to dealer, however; the basic principals of the sale do not vary too much. Most dealerships get started after a demo or test drive. Usually a salesman gets a sheet of paper out that is called a four square. The four square is normally used to find the customer's "hot points". The four corners of the sheet have the following items addressed, not necessarily in this order. Number one is sales price, number two is trade value, number three is down payment, and number four is monthly payments. The idea here is to reduce three out of the four items and focus on YOUR hot button. Every person settles in on something different. The idea for the salesman is to get you to focus and commit to one or two of the hot buttons without even addressing the other two or three items. When you do settle in on one of the items on the four square, the process of closing you becomes much easier.
One thing to keep in mind is that all four items are usually negotiable and are usually submitted to you the first time in a manner as to maximize the profit that the dealer earns on the deal. Usually the MSRP is listed unless there is a sales price that is advertised (in may cases the vehicle is advertised, but; you are not aware). The trade value is usually first submitted to you as wholesale value. Most dealers request 25-33% down payment. Most monthly payments are inflated using maximum rate. What this all boils down to is that the price is usually always negotiable, the trade in is definitely negotiable, the down payment may be what you choose, and the monthly payment and interest rates are most certainly negotiable. If you do your homework prior to a dealership visit you can go into the negotiation process better armed. You still need to keep two things in mind through this process. The first item is that you are dealing with a sales TEAM that is usually highly skilled and money motivated. The more you pay the more they earn. The second item to remember is that you may have done your homework and think that you are getting a great deal and the dealer is still making a lot of money. The latter part of this statement goes back to the fact that it is essential for a dealer to make a "fair" profit in order to serve you better.
Once your negotiations are somewhat settled, you are then taken to the business or finance department to finalize your paperwork. Keep in mind that this too is another negotiating process. In fact, the finance manager is usually one of the top trained sales associates that definitely knows all the ins and outs of maximizing the dealerships profit. It is in the finance department that many dealers actually earn more than they earned by selling the car, boat, RV, or other large ticket item to you. We will break these profit centers down for you and enlighten you as to how the process usually works. Remember that finance people are more often than not a superior skilled negotiator that is still representing the dealership. It may seem that he or she has your best interests at heart, but; they are still profit centered.
The real problem with finance departments are that the average consumer has just put his or her guard down. They have just negotiated hard for what is assumed to be a good deal. They have taken this deal at full faced value and assume that all negotiations are done. The average consumer doesn't even have an understanding of finances or how the finance department functions. The average consumer nearly "lays down" for anything that the finance manager says. The interest rate is one of the largest profit centers in the finance department. For example, the dealership buys the interest rate from the bank the same way that he buys the car from the manufacturer. He may only have to pay 6% to the bank for a $25,000 loan. He can then charge you 8% for that same $25,000. The dealer is paid on the difference. If this is a five year loan that amount could very well be $2,000. So the dealer makes an additional $2,000 profit on the sale when the bank funds the loan. This is called a rate spread or "reserves". In mortgages, this is disclosed at time of closing on the HUD-1 statement as Yield Spread Premium. This may also be disclosed on the Good Faith Estimate or GFE. You can see why it becomes important to understand bank rates and financing.
Many finance managers use a menu to sell aftermarket products to you. This process is very similar to the four square process that I discussed in the beginning. There are usually items like gap insurance, extended service contracts, paint and fabric guard, as well as many other after market products available from this dealer. The menu again is usually stacked up to be presented to the consumer in a way that the dealer maximizes his profitability if you take the best plan available. The presentation is usually given in a manner in which the dealer wins no matter what options are chosen. With the additional items being pitched to you at closing, your mind becomes less entrenched on the rates and terms and your focus then turns to the after market products. Each aftermarket item can very well make the dealer up to 300-400% over what he pays for these items. Gap coverage for example may cost the dealer $195.00 and is sold to the consumer for $895.00. The $700.00 is pure profit to the dealer and is very rarely negotiated down during this process. The service contract may only cost a dealer $650.00 and is being sold for $2000.00. The difference in these items are pure profit to the dealer. You see, if you only paid $995.00 for the same contract, the dealer still earns $345.00 profit from you and you still have the same coverage that you would have had if you had paid the $2000.00. The same is true for the gap coverage. You are covered the same if you paid $395.00 or $895.00 if the dealers costs are only $195.00. The only difference is the amount of profit that you paid to the dealer. Another huge profit center is paint and fabric protector. In most cases the costs to apply the product are minimal (around $125.00 on average). In many cases the dealer charges you $1200-$1800 for this paint and fabric guard.
As you can see, these products sold in the finance department are huge profit centers and are negotiable. I also have to recommend the value of most all products sold in a finance department. It is in your best interest to get the best coverage possible at the best price possible. Always remember this: The dealer has to make a fair profit to stay in business. It just doesn't have to be all out of your pocket.
Ketika Anda Melihat Bungkusan Seperti Ini, Jangan Cuba Membuangnya!
Micro Finance - An Attractive Business Proposition
The booming economy of India coupled with a buoyant financial service sector has not penetrated to the rural segment as expected. Recent announcement from Finance ministry says that 73% of the Indian families have not availed any kind of services from banks. Further, 51.4% of families never availed any financial services from banks or private lenders and 21% of families availed loans from private money lenders. This shows the need of Micro Finance institutions in India.
MicroFinance broadly refers to a movement that envisions "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers"1. Thus, Micro-finance spreads its shadow across the group of people who are still not availed the benefit of global financial progress. Micro finance targets poor people who are also talented entrepreneurs. Thus, Microfinance means building financial systems that serve the poor
Today, lot of initiatives towards promoting micro-finance program is evidenced world over. The Consultative Group to Assist the Poor(CGAP) is one of the leading consortium which works towards expanding financial services access to poor people. But still, poor people are dependent on informal economy for their ventures, dwellings and other financial requirement. For poor Loans are inaccessible, Insurance is unknown and Savings - never done.
With a whopping 400 odd million people spread across 6 odd million villages in India signifies the need of professionally managed Micro-Finance institutions in India. Historically, credit to the poor was viewed as a government program that required large amounts of subsidy. A long evolution in the financial sector has seen a change in the above trend. Three major events in the post independence era have contributed to the said change. The first of these changes was the nationalization of Banks in the year 1969 which forced the commercial banks to open rural branches thus enabling easy access of formal finance to rural India, whose majority comprises of the poor people,.
The second one was the introduction of Integrated Rural Development Policy (IRDP) in the year 1978. This policy was regarded as one of the largest poverty alleviation programs in the world. The recent major contribution was the liberalization of the Indian financial sector in the early 1990s. This policy gains significance in the light that the interest rate controls for the poor was abolished thus enabling NABARD to transform the microfinance program to a full fledged program.
Apart from these Government bodies, many Self Help Groups (SHG), Non Governmental Organization (NGO)s are moving towards Micro Financing Institutions(MFI). In one of the recent study, it was found that India is leading in spreading micro financial services where 188 million accounts were opened constituting 18% of the national population.
Most risky factor for entering into micro finance is the fear of increasing Non Performing Asset (NPA). Further, the cost to handle the remotely located poor individual's financial needs is more as amount of financial services delivered to poor is less compared to urban financing requirements. Delivering wide range of financial products with single agency will help reduce the cost. Further the interest rate for these operations will be ranging between 3% and 5% pm, which is high compared to the rate in urban areas. This will meet the cost risk associated with micro financing. Along with this, revolutionary Individual Banking Programmes have entered into Micro Finance sector. ICICI, the largest private sector bank in India has entered into the micro finance business. With its vast experience in the financial market coupled with innovative business models and technology, it is already on its path to success with only 0.5% NPA in this business.
ICICI, outsourced the rural finance operations to existing SHGs and Trusts which are into rural development. One of ICICI's representative will be coordinating with these institution. One Coordinator manages 6 promoters where each promoter will be having an average of 20 SHGs. Here, banks main role is identify the promoters/partners, designing system, lending funds, building funds and monitoring. MFI / Promoter's role is to Social mobilization, Training and Credit enhancements. Currently ICICI is having 30 plus micro-finance institutions including BASIX, PSS, SHARE, Spandana, Nirantara etc. In four years of its operation I'e from 2002-2006,micro-finance portfolio grown to $600 million comprising of 3 mn customers. With its "10 by 10 plan" bank plans to partner with about 200 Microfinance Institutions (MFIs) and expand its reach into over 600 districts in India by 2010. Bank is targeting for 25 million client base by 2010, by which total asset outstanding will grown USD10 bn. ICICI's microfinance portfolio is growing faster than others operations of bank. This justifies the hypothesis Micro Finance is moving towards profitability from Charity or social responsibility.
The state and central governments have an important role to play in ensuring the growth and improvement of microfinance. Firstly, the service provider should be left to set interest rates, not the government. But Government should frame a policies to ensure transparency and full disclosure of rates and charges before lending. A proper regulatory framework helps in reducing undue advantages by service providers to needy poor.
Furthermore, government regulators should set clear criteria for allowing MFIs to mobilize savings for on-lending to the poor; this would allow for a large measure of financial independence amongst well-managed MFIs. Each Indian state could consider forming a multi-party working group to meet with microfinance leaders and have a dialogue with them about how the policy environment could be made more supportive and to clear up misperceptions.
Some valuable conclusions can be drawn from the successful operation of micro finance business. First, Structured approach in Micro finance brings down the risk associated with lending to poor. Secondly, micro finance institutions should not only lend, but they should also provide bouquet of services such as Credit, Savings, Insurance, Business Advise etc. Thus, Microfinance is one of the key growing sectors in financial services. This opportunity has a dual folded benefit - on one side social up-liftment by empowering the poor, especially the women and on the other hand increasing the profitability for the MFIs.
1. Robert Peck Christen, Richard Rosenberg & Veena Jayadeva. Financial institutions with a double-bottom line: implications for the future of microfinance. CGAP Occasional Paper, July 2004, pp. 2-3.
Author
Dr.Rakesh Ainapur ,
Education : M.Com., MBA(Finance), Ph.D (Supply Chain Management),
Experience : 15 Years,
Area : Finance and ERP Consulting,
Current Designation : AGM - Business Application ,
Organization : JSoft Solutions - JSW Group Company.
can be contacted at rainapur24@gmail.com