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.
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How to Finance Your Network Marketing Business
As Robert Kiyosaki says in his brilliant new book, THE BUSINESS OF THE 21st CENTURY, "If you want a solid future, you need to create it. You can take charge of your future ONLY when you take control of your income source. You need to own your own business".
The first step in becoming a business owner is to start to THINK like a business owner. Business owners understand the difference between "price" and "cost".
When you start a business, the price you pay for the things you need in order to get started is NOT the "cost" of starting that business. The "cost" is what you pay for the money you use to get started until you pay the money back.
For example, when a partner and I started a mortgage company here in Orange County California in 1988 we did a very careful analysis of how much capital we would need in order to make it through the first year. We looked at how much we would need to spend to get started properly, and how much we would need for the ongoing expenses like rent, payroll, phones, marketing expenses, utilities, supplies, and so on; and then subtracted a conservative estimate for how much revenue we would bring in that first year. The result of that analysis showed that we would need $250,000 to get started. In other words, the PRICE we would have to pay to get started and operate our business for a year exceeded our expected revenues by $250,000. That's not unusual for a traditional business.
We had $50,000 between us when we started and we got a bank credit line for the difference. So how much do you think we had to borrow against our bank credit line by the end of the first year?
Well, our analysis was exactly correct, so if you did the math in your head you know that we owed the bank $200,000 at the end of that first year. The $250,000 shortfall for the first year minus the original $50,000 we had put in.
Were we worried that we were $200,000 in debt after 12 months? Not at all. We were right on track.
Most new business take at least a year to become "cash flow positive"... where your gross profits exceed your expenses... and another 2-5 years just to pay back the initial investment. We went on to payoff that debt, and pay ourselves back, and build what became at one time the 3rd largest mortgage brokerage in the county at that time.
Here's my point. It did not "COST" us $250,000 to start that business. That was the PRICE we paid for the things we needed over and above what we could cover from the income from our business. The COST for our start up was the price we paid for the MONEY until we paid the money back. So our cost to start that mortgage company was about $24,000 which is the total of the interest we paid on the credit line until we had paid it off from profits in the 2nd year.
Robert Kiyasaki's new book, "THE BUSINESS OF THE 21ST CENTURY" is the latest in his RICH DAD / POOR DAD series. If you read just ONE book this year, I highly suggest that you make this the one. It can set you free because it can help you stop thinking like an employee and start thinking like an entrepreneur. He also has some great free audios and videos on his website. Check them out at TheBusinessOfThe21stCentury.com
In that book he points out that one of the many advantages of Network Marketing is that the start up cost is so low that you don't need a bank line of credit to get started.
If you plan to make money, you DO need to treat your new business like a business and start it correctly in order to make the most amount of money in the least amount of time, but unlike a franchise that might require $50,000 to many HUNDREDS of thousands to get started, you can fully capitalized your start up in network marketing for so little money that it would be considered a rounding error in a traditional business analysis.
The "seed capital" you need to start your network marketing business correctly and cover your start up expenses is so small that you don't need to go to a bank to get a business line of credit.
If you don't have the money you need in a savings or investment account, you can just use OPM... Other Peoples Money... and you can cover the interest on that money and be "Cash Flow Positive" in your very first month!
What that means is that you can literally get your business started for with NO cash out of your pocket. You can even start your business for FREE if you earn back the initial start up cost and pay off your start up loan before the interest is due.
Here's how that can work...
Remember, there are two things that you will need to cover each month: Your monthly business expenses, and the interest you pay on the money you used to get started until you pay that money back.
To make the most amount of money in the least amount of time you want to start at level where you can maximize as many aspects of your company's compensation plan as possible. In most legitimate network marketing companies, you can do that for less than $5000 and the monthly business costs are less than $300 a month.
In the company I'm with, for example, you can position yourself to maximize the compensation plan for less than $2000, and your monthly business expenses are only about $150 a month, so let's work the numbers....
Cost of $2000 (worst case - 24% credit card) $40/month
Monthly Business Expenses $160/month
Total Monthly Break Even $200/month
This is my "Break Even" point. As long as I earn at least enough to cover my monthly Break Even Point, everything above that amount is profit.
Most companies have a Fast Start Bonus of some kind that pays at least $50 to $200, so it's easy to cover the monthly Break Even Point just with personal production as long as you are working your business. That means that you can literally use a credit card to start your business and earn the money to cover your Break Even Point BEFORE the credit card bill even arrives.
If you earn enough in that first month to cover your Monthly Break Even Point AND to payback your start up loan in your first month, you will have started your business for FREE because you won't even owe the interest on the money if you pay it back within 30 days of receiving your credit card statement. A weekly pay plan with a good Fast Start Bonus and a simple effective system for building your business makes that very feasible.
In addition, if you don't already have a business that is based exclusively out of your home, the TAX BENEFITS are often more than enough to offset your monthly expenses. Be sure to check with a tax advisor who is familiar with home based business tax law.
To quote Kiyosaki again, "In network marketing, instead of earning income directly, you are building an ASSET - your business - and it is the asset that generates the income... Network marketing creates passive income but requires very little cash investment to start up. It has very low overhead, and can be operated on a flexible part- time basis until it generates enough cash flow for the entrepreneur to transition out of his current full-time job."
To Summarize...
1) The COST to start up a business is not the PRICE you pay to get your business started, it is the price of the MONEY you use to get started until you pay that money back.
2) If you use your own money, the "opportunity cost" to get started is the interest you could have earned on that money which is very small these days. If you use other people's money (OPM) your cost is the interest you pay on that money until you pay it back. On a 24% credit card that is only 2% per month.
3) Most legitimate network marketing businesses can be fully capitalized for less than $5000 and have monthly business expenses of less than $300. That means that your monthly break even point is VERY low and can be achieved in your very first month if your company has Fast Start Bonuses that pays weekly, and a proven system for building your business.
4) The tax benefits of owning a business that is based solely out of your home can allow you to legitimately reduce your tax liability by converting some of your after tax expenses to pre-tax business expenses. If you are paid on a W-2, you may be able to immediately reduce the amount that is withheld from your paycheck, thus effectively giving yourself a "raise" in takehome pay. Be sure to consult with a competent tax advisor.
5) The start up cost is so low in network marketing that it's possible to earn enough money in your first month to completely repay your start up loan before your credit card bill is due. In that case you won't owe an interest at all and you will have started your business for free.
6) Once you have found a network marketing business that makes sense for you, start at a level that will maximize the compensation plan so that you can make the most amount of money in the least amount of time, then follow their proven system for building your business.
DOUG JONES is a 24 year veteran of the network marketing industry. He has and MBA in entrepreneurship and finance, he has owned two traditional businesses and served as a corporate controller early in his career.