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.
Subhanallah…!!! Janganlah Kamu Malu atau Segan Untuk Menagih Hutang….
Startups Must Choose Financing Models Wisely: Bootstrapping versus Angels versus VCs
When a Startup decides to expand using Bootstrapping, Angels, or VCs, it is incorrectly assumed that this choice has to do solely with money. Many advise founders to take the best deal and get the process over with as soon as possible.
However, it must be noted that the type of financing Startups receive determines the company's strategic direction and probability of success.
Finance Models have numerous tangible strategic implications. When early stage Startups choose a Finance Model, they are confining themselves to a limited range of strategic options. When choosing a Finance Model, I think it is best to momentarily forget about money and focus sensibly on strategy.
To make the best possible decisions regarding your financing and de facto strategic direction, Startups have to place themselves in the best possible situation from day one.
Every Startup should end a series of successful prototyping with an analysis of which low-cost, high-impact business models, revenue models, pricing models, and sales strategies are suitable for their solution [problem-solving product or service] and its Users.
The next step is for Startups to assess the cost of implementing and executing particular business models. Startups may choose to self-finance these costs, receive funds from Angels, or use a pay-as-you-go strategy where you use a small base of sales to generate free cash flow which in turn funds additional sales efforts.
Finally, when moving into Alpha and Beta testing, it its critical to simultaneously test well-thought out business models, revenue models, pricing models, and sales strategies alongside your solution. If you decide to chase market share, forget about business models, and give your product away for the interim, then it is still a good idea to enable Users to purchase upgrades, subscriptions, or ancillaries. Otherwise, you may never know how many Users are committed or passive.
The Bootstrap Finance Model necessitates laser beam focus on product development, cost control, sales, and profits. Bootstrapping is akin to the concept of intelligent design. You are building a company from the bottom-up and are willing to allow a naturalistic growth cycle to occur. You're interested in keeping your company very malleable, ready to shift directions in accord with market demands. You are opportunistic. Bootstrapping has lower initial risks, but higher long term risks since you may lose significant market share while other companies choose to Go Big. Bootstrappers risk being relegated to a sub par market position even though you probably have hip solutions, the coolest brands, and a cult-like User base.
The Angel Finance Model requires smooth investor relations, a high User growth rate, and a strategic direction that leads towards a highly probable merger or acquisition. Angel financing is similar to evolutionary theory. The Angel's funds act as a propulsive agent to thrust a Startup upon an evolutionary cycle towards a probable Series A round or additional infusions of capital by Angels.
Despite opinions to the contrary, Angel investors are not charities, repositories of free money, or blind speculators panning for gold in quicksand. Angels need to make successful investments to sustain their investment activity. Angel financing has medium short term and medium long term risk.
The biggest dilemma in the Startup/Angel relationship is a misunderstanding of roles and responsibilities. Angels essentially invest in early stage conceptual renderings of solutions. Angels have to avoid getting involved in day to day management. Their only concern should be the completion of a workable solution [problem-solving product or service] that is ready to grow from prototype to Alpha tests/Beta tests. With Angels the clock is ticking slowly, but it is ticking. There is an expectation of multiple rounds of financing and merger or acquisition within 3-5 years. An Angel usually expects to earn a post-dilution return on investment of at least 200%.
The VC Finance Model can be simplified and best understood as a troika comprised of Seed Stage VC Funding, Early Stage VC Funding, and Late Stage VC Funding. Seed Stage VCs invest after evaluating an early prototype or hearing a particularly interesting pitch. Early Stage VCs invest with the sole intent of maximizing the value and market position of a Startup in anticipation of future rounds of financing. Late Stage VCs invest in Startups seeking additional funding while preparing for an eventual IPO or M&A. At each stage of a Startups' evolution, VCs invest with the expectation that exponential growth and a successful M&A or IPO will substantiate the risks incurred.
The VC Financing Model compels a startup to grow at an ever accelerating pace. Such growth comes at considerable risk and entails the development of a costly labor, advertising, and technology infrastructure. Over the short term the risks involve technology and labor. The Startup must scale quickly to ensure quality user interactions, while priming their web sites and customer service systems to handle an exponential increase in Users. The Startup has to also deal with potential shortages in highly skilled programmers and project managers. Long term risks are market based. While managing such a fast pace of expansion, the Startup must stay grounded in the marketplace and respond proactively to shifts in the tastes and need of their Users.
Under this scenario, the focus is placed on expanding market share and brand identity. Typically, VCs expect to net a return on investment of at least 600%-1000%. Startups funded by VCs are always expected to become market leaders. A VC funded software company surviving multiple rounds of financing and heading towards a M&A or IPO can easily spend $50,000,000 or more over a two year period.
It is important to note that while there are innumerable examples of surviving and thriving Bootstrapped and Angel financed companies, successful Large-Scale VC investments are short in number in the Web 2.0 Era. Startups don't require that much money to fund operations. And there is a more patient attitude on the part of Startup Founders who appear to be committed to running their companies for long periods of time before seeking VC funding.
Many Startups will become sustainable using all three Financing Models in the near future. A number of Startup Founders will decide early on to exclusively rely on one Financing Model throughout the embryonic period of their company. For example, it is possible that a Startup could reach a successful M&A or IPO exit by the sole means of Bootstrapping. To the contrary, numerous Startups will solely utilize several Angel investments or multiple rounds of VC funding to reach success.
Furthermore, others will undoubtedly find success by mixing and matching Financing Models. For example, a Startup may initially secure Angel investments then choose to Bootstrap or accept VC funding to facilitate further expansion and progress towards exit.
It is best to remain free of any preconceived notions or biases. When the time comes to make a Financing Model decision, just remember you're making a compulsory strategic decision. Just make the best decision possible relative to the market conditions and fiscal circumstances that face your company at that time.
