7 ways car dealerships can solve affordability problems in 2024

Retail automotive loves our buzzwords, and for 2024, one of those buzzwords is #affordability. What can car dealers do to address the affordability problem facing the majority of consumers today?

Step 1, focus on what you can control.

There are plenty of news headlines about things that are outside of a dealership's control. Things like interest rate fluctuations, stock market volatility, declining vehicle book values, increasing consumer credit card utilization, rising debts, and increasing costs of consumer goods are a few examples of things beyond our control. These headwinds certainly don't make it easier to sell a vehicle, but they do present us with a unique opportunity.

What can we control?

We can start by seeing the 'problem' of affordability as more common than people realize. We can educate our teams that the majority of consumers have affordability issues. Things like:

• 40% of consumers have a credit score of 680 or less. But it goes beyond just a simple credit score measurement.
• Income disruptions, or even income stagnation, becomes a material problem when the cost of everything around you is going up. Inflation is a sneaky thief.
• Negative equity on trade-in's coming back to the dealership with a vengeance from all the inflated book values and 'free' money from the past few years.
• Households with children going off to college have plenty of things squeezing their budgets, but adding a third car to the driveway for their college bound kid while still managing tuition/books/etc is certainly a real constraint.

As you can see, it's not just about credit scores or even a particular type of customer, it's just a part of life. Outside of the most fortunate 1%, just about everyone lives within a budget of some sort. Understanding where your customer is in their financial journey, allows you to provide the most appropriate guidance you can for their next vehicle.

As a saleperson myself over a decade ago, I found this to be a very easy topic to avoid. "I'm not a financial advisor" was often a philosophy I incorrectly embraced.

I was not being as helpful as I could have been, and rather, was just looking to get a YES and sell a car, by any means necessary. We can no longer afford to take this approach as it creates many downstream issues in the sales process. Read up on the great trainwreck, a phrase coined by Greg Goebel around 2006 to learn more about this.

The more we can understand and empathize with this affordability reality the more confidence we can have in guiding the vehicle selection process.

So, what are some practical, in-store, operational things dealers can do?

7 ways a dealership can tackle affordability:

1. Understand affordability

The word affordability can meet a lot of different things to people depending on their point of view and personal financial situation. But it's important to think of this in two parts: Short-Term and Long-Term.

Short-Term is how a purchase decision impacts their finances today.

Long-Term is how a purchase decision will impact their overall finances in the future.

Most people think about affordability in automotive simply as the monthly payment. Lower payment = More affordable.

While this is somewhat true, it can miss the long term implication, and also assumes customers understand their current financial picture. Many consumers need guidance on how much they can afford, and conversations around what their true discretionary income is.

Often, as consumers without a clear budget focus, we overestimate how much discretionary income we have available each month, forgetting about all of our reoccuring expenses or little things that can pop up here or there.

Lenders try to take a deeper look at a consumers financial picture, analyzing payment to income (PTI), and debt to income (DTI), and general payment trend history.

Long term thinking will try and objectively look at loan term, interest rate, personal driving habits, vehicle reliability, resale values, and total cost of ownership including insurance and gas. Most consumers cannot do this calculus.

Good news, you can be their go-to automotive person they trust!

Many consumers, especially non-prime and subprime borrowers, have significant variances in finance terms available to them that can be very dependent on actual vehicle selection and proposed loan structure.

This variance of potential finance charges makes long-term thinking hard to manage during the initial vehicle selection process. For example, a consumer can choose a 2020 Ford Edge with 25,000 miles with an interest rate of 12.5% but could have purchased something else, say a 2020 GMC Terrain, with similar miles, at a similar price but a lower 9.5% interest rate because of a lenders assessment of overall loan/collateral risk. If a consumer had that information upfront, or at least some idea of that variance, would that change their initial selection?

2. Get organized.

Have some way, any way, of looking at your inventory, especially used vehicle inventory, that considers retail price, cost, and book values. Depending on the size of your inventory it can be a simple spreadsheet, a white board list in the sales office, or possibly leverage an existing tool you already have like Vauto (or VINCUE or ACV MAX ).

After you understand what you have in stock, you can proactively promote 'affordable' cars to your staff, via weekly huddles or lot walks - which will meet most lender guidelines, and will be suitable for people with lower incomes or credit scores. Some 'old school' teams like to physically organize their inventory by affordability as well (colored balloons or different colored prices, etc).

3. Examine your tools.

Even with your current technology, you may feel you'd like to go further. The next level up would be to use a light weight tool like streamline.auto ?? ?? ?? to enhance your current sales and vehicle selection process. Having a quick and transparent way to show customers which cars they can afford, and more importantly, get approved on, will be a confidence builder for your entire sales and f&i team.

From there, if you'd like to take a more complex approach, you could examine your current crm and desking tools to see if something like NCC | ProMax or AutoFi would be a better fit for your sales team and f&I process.

Regardless of your tool selection, just having a proactive mindset to your inventory and f&I process will help your store tackle affordability.

4. Used Car Sourcing Strategy

Having affordability in your mind when you approach your dealerships acquisition strategy will guide you in some interesting ways. Prioritize appraising vehicles in your service lane, customer trades, and previous customer database via lifecycle management efforts are all excellent ways to find affordable vehicles.

Beyond those approaches, wholesale auctions, when examined through a lens of book values, can also be a place where you can find value. To succeed here, you will need a more acute understanding of your current lender programs, like age/mileage limitations, and specific book value vs market pricing differences.

Often, our wholesale buyers will use their personal biases and opinions on which vehicles are most suitable to bid on, and they can be somewhat disconnected from the retail transactional side of things. But sometimes, that 'tan impala' or whatever less appealing vehicle, has a unique price arbitrage by having a strong book value and ability to get even the most challenged customers approved. You want (need) some of these vehicles in your inventory.

Involving the finance teams, in the sourcing wish list process, could be a great way to enhance your thinking. They can bring in some data like average customer incomes by credit band you are currently seeing, to guide sourcing needs by different price points.

5. Early F&I involvement

This common best practice has some very useful benefits.

First, by engaging your highest paid (usually most talented) employees early in the process, the customer will be able to lower their guard more and embrace the overall experience.

Second, by involving F&I early in sales process we should be able to run credit earlier in the process, to prevent quoting unrealistic terms, or wasting time landing on vehicles that are too expensive or have no chance of being approved.

This early involvment practice also has some other benefits like improving your compliance standards and processes for regulation like the FTC CARS rule coming into effect this summer.

6. Normalize the problem

Positioning your dealership as a place that can help anyone regardless of credit situation is a way to differentiate yourself in the market. But to truly accomplish this your teams will need to understand it's not just 'credit criminals' who have finance issues. (And probably eliminate any references to criminals all together...)

Many people have had unfortunate situations come up in their lives like divorces, health issues for themselves or loved ones, addictions, layoffs, and many other very common scenarios. We should strive to see a more accurate representation of the human stories behind these vehicle purchases.

7. Training

We can all benefit from a constant improvement mindset, and training our f&I and sales managers is no exception.

We should remain open minded to meeting with our current lenders, learning about their programs strengths and weaknesses, and perhaps most importantly, building strong relationships with your lender partners.

We are in a people business after all, and relationships on all sides matter. Having some key lender partners that you work with consistently over time will allow you to get even the most difficult situations funded.

If you aren't confident in your own ability to train your teams, then consider bringing in some outside help as there are many great trainers and resources out there to explore and invest in.

Thank you for the opportunity to share my thoughts on the industry and this common buzzword for 2024. I hope you found it helpful, and look forward to hearing what you think! I wish all dealers another successful year in 2024 and continuing to embrace challenges as opportunities.

Your turn! What are your thoughts? I'd love to hear what you'd add to this list.

Cheers,

Matt Lasher

President, streamline.auto ?? ?? ??