The Role of the Service Department in the Buy-Here Pay-Here Business
By Steele Gudal
Most Buy-Here Pay-Here lots do not have service capabilities, so you might ask why I chose service as my topic. The answer is simple: the Buy-Here Pay-Here business is evolving and providing service to customers in one of these evolutions. Today, there is no growth in the old-school approach to Buy-Here Pay-Here. By this I mean selling a $1,500 car for $1,000 down and not standing behind the car after the sale. This point is emphasized by the fact that, as the third-party sub-prime lenders have retreated further up market, they have left behind customers who were obtaining financing at new car dealerships but no longer can. This customer expects a better experience and it is hard to provide that without a service department.
Without a service department, the Buy-Here Pay-Here dealer has limited control over the quality of reconditioning and after-sale service work. This is directly tied to the customer's satisfaction level and, therefore, to the performance of the loan portfolio. In addition, having a service operation enables the dealer to stand behind the vehicles by offering a warranty or extended service contract. This provides a distinct advantage on the sales lot, helping to attract more and higher quality customers. Again, this has an impact on the performance of the loan portfolio. Of course, everything in this business comes back to the loan portfolio. I have tried to emphasize in these columns the interrelated nature of each functional area of the business. In this case, a well-run service department can improve both loan performance and sales volume.
Notice that I have not mentioned any additional profit that can be generated by adding a service department. That is because it is difficult to operate as a typical service department in a sub-prime market. We are dealing with customers with very tight household budgets. A dealer is fooling himself if he thinks he can gross up the service work and be paid. Depending on the cost of the repair and the customer's financial health, this can have the opposite effect and would likely reduce the probability of a customer paying on the vehicle loan. This is not to say that the dealer is doing charity work, but it does mean that the dealer needs to think of a service department as more of a profit retention center than a stand-alone profit center. Its role is to put quality cars on the sales lot and then to keep those cars on the road. This is all designed to keep the customers happy and the underlying loan performing. In reality, you just want to make sure that you are covering all of your costs.
Running a service department in this way means the dealer will need to motivate and compensate its employees in a very different way. In a typical new-car store, the service department is compensated based on their volume of work, and they are therefore incentivized to generate additional repair orders. In a Buy-Here Pay-Here, a dealer needs to make sure that compensation is based on the quality of the work and on how cost effectively it was performed.
I am often asked my opinion of taking in outside service work. It would seem to make sense. You already have the facility and you might be able truly to make it operate as a profit center. My reply is always that it is not worth it. Remember that you are selling and maintaining five- to ten-year-old automobiles. They will break down, and the service department needs to be focused on your customers if you want to keep them satisfied. You also would need to operate with two separate pay plans, one for the outside work and one for your customers. Another way to look at it is to compare your return on investment in the Buy-Here Pay-Here business against a typical return in the automotive repair business. My guess is that you will quickly realize where your time and energy is better spent.
It was not that long ago that many of our facilities did not have a service department. It has been only through our evolution that we have realized how important this function is to truly meeting the needs of this segment of the market. It is clear that the bar has been raised in regard to customer service in this industry as well as in others. Nobody would attempt to operate a new-car store without a service department. Should your BHPH store be any different?
Steele Gudal is the President and COO of J.D. Byrider Franchising, a chain of 95 Buy-Here Pay-Here dealerships operating in 32 states and Canada. Byrider and its franchises own and service approximately $400 million in BHPH receivables. Gudal personally owns three locations in the upper Midwest with $20 million in receivables. sgudal@dealeronline.com
