New vehicle sales are slowing and increase pricing transparency is eroding front-end sales margins. I predict that increased F&I pricing transparency due to online retailing solutions will soon put the same downward pressure on F&I margins.
To stay profitable in this environment, dealers must transition to a razor and razor blade business model, where almost no profit is made on the front end and all the profit is made on the back end. With this business model, profits are made by creating an enduring relationship with customers over the lifetime of vehicle ownership.
How will this affect dealership pay plans?
The traditional dealership business model was designed to optimize profits from every transaction: the sale, F&I, service. We’re one of the few industries left that have 100% variable pay plans, and most dealers still pay salespeople and service advisors based on transactions, instead of on relationships.
The problem with variable pay plans is that they’re out of alignment with the experience that you want to provide customers. Think about it: If I make a killing off you on the first sale, how can I move forward to create a relationship with you that’s built on trust?
Variable pay plans are not good for the consumer, nor are they good for the long-term profitability of a dealership. Besides, it’s becoming increasingly difficult to find young people who are willing to work for this type of compensation.
Changing Pay Plans in Sales
In the old days, the view was that gross margin on a vehicle was determined by the ability of the salesperson and sales manager to negotiate. If you think about the number of deals that are coming through TrueCar, Costco or credit unions, your salespeople don’t have much opportunity to influence gross margins. Why pay them on that basis?
With traditional pay plans, even the sale of the vehicle is split up into two different transactions, with compensation structures pitting sales against F&I. But the customer has only one bucket of money, not two buckets of money. Is it any wonder that forcing a customer to sit through two separate sales processes leaves a bad taste in their mouth?
If the future of dealership profitability relies on nurturing customer relationships, the compensation structure should reward salespeople for efforts that promote relationship-building. There are plenty of things you can bonus on that aren’t related to number of units sold of gross generated.
My brother-in-law who has a dealership now bonuses on positive reviews. You could bonus on CRM KPIs, such as number of conversations. Definitely bonus on service introductions, as well as when customers bring their vehicle in for service the first time. This would encourage salespeople to follow up with customers after the sale, which rarely happens now.
Changing Pay Plans in Service
The same transactional mindset exists in service. When a service advisor presents a list of $1,000 in recommended repairs, the customer’s initial reaction is one of resistance.
However, if the service advisor breaks down recommended repairs into urgent items, safety items and nice-to-haves, then the customer is better prepared to address the items over time.
With traditional pay plans, service advisors fear that the customer either won’t get the service done, or they’ll go somewhere else, or even if they do come back in they’ll go to a different service advisor, who would then make the bonus on the sale. This mindset encourages an all or nothing attitude.
What if, instead of transactions or longevity bonuses, you paid service advisors on how many of their customers return for service? It doesn’t matter which service advisor the customer comes back to. The primary relationship the customer should have is with your brand and store. The relationship they have with their service advisor should be secondary to that.
Making the Transition
Variable pay plans aren’t good for the customer or for the long-term profitability of dealerships. Changing pay plans doesn’t have to be a huge, sudden transformation. Start by tweaking bonuses and incentives. Think about how to create a less mercenary pay plan that allows someone to put food on the table without having to gouge customers every chance they get.
Eventually, your compensation plans should have a higher base pay and award bonuses based on metrics that reward relationships, rather than transactions.