## Biweekly Payment Magic

A while back, I did some foundational work for a leading biweekly payment service.  That is, the math part, which I will reprise here.  Biweekly works best in a climate of high interest rates and, unfortunately, soon after this project, the Federal Reserve dropped their reference rate to zero.  The Fed has not been persistently above 2% until recently, and biweekly is once again looking good.

The featured chart shows a scenario first constructed by my erstwhile partner Phil Battista.  I call it the “magic trick” because the customer in this scenario has financed an extra \$3,250 with no change to the term, APR, or payment.  Before presenting the trick, here are some basics about biweekly.

## Biweekly Payment Plan Basics

In Canada, the banks offer loans with native biweekly payment schedules, and dealers feature them in their advertising.  Here in the States, you have to use a service.  The service collects payments biweekly via direct debit and manages the lender to accelerate the amortization.

Here is an example.  According to recent Cox data, the average price of a new car is now above \$49,500 with an APR of 7.0% and a 72-month term.  By the way, this survey does not include luxury brands, and some people are financing up to 84 months.

Below, I have modeled this “average” loan showing monthly versus biweekly payment schedules.  This is showing the amortization only, omitting whatever fees the biweekly service may charge.  You can see that the loan is paid off seven months early.

If you’re using longer terms to fit customers into payments, biweekly will shorten the trade cycle a bit.  Also, credit-challenged buyers may be better off with direct debit synched to their paychecks.

Nostalgia Alert: coding for the U.S. Equity project was originally done in C# by my son, Paul, who would have been around fourteen at the time.  We were making an OO model to include all loan and lease instruments as subclasses.  Coding for this article was done by me, in Python, which is 10X easier.

## The Magic Trick

If you compare the two charts above, you can see graphically how Phil’s trick works.  Instead of starting your biweekly loan at the same amount and having it end earlier, you start it higher and aim to end on the same date.

The trick works because half the monthly payment is higher than a native biweekly payment would be – by \$33 in this example.  The customer makes the equivalent of thirteen monthly payments per year, and the bank loses a little bit of interest income.  Here are the steps:

1. Increase the amount financed, which will increase the monthly payment.
2. Increase the term until the monthly payment comes back down to where it was.
3. Use the biweekly program to bring the term back down to where it was.

Congratulations, you can now finance more product with the same monthly payment.  I covered the concept for menu systems in Six Month Term Bump.  To do goal seeking, as I’ve shown here, you will need some Python (or a precocious teenager).

## Taxonomy of D2C Providers

PayLink was the finance source we chose for Safe-Guard’s D2C program, and now they have launched their own D2C program, Olive.  This looks like a strong program, and I’m flattered they’ve kept many features from my blueprint.  I especially like name, which is a play on “all of” coverage.

“We estimate the market size of the ‘sweet spot’ for post-OEM warranty VSC sales will continue to grow to 109 million vehicles by 2024”

This is a \$260 billion market.  Colonnade estimates that the “sweet spot” of vehicles less than 11 years old but past their OEM warranty is 87 million units, and growing.  That’s not to mention the 40 million sold each year without a service contract, at franchise and independent dealers.  I wrote about the different segments and how to value them in The Case for D2C.

Olive is positioned to address both segments, by partnering with automakers.  They claim two of the global top five.  I have reason to believe these are Volkswagen and Nissan, but I couldn’t find a source.  Like the original, Olive uses digital marketing and online origination through a consumer facing mobile-responsive (but not mobile-first) platform.

Not one to believe in coincidence, I reckoned that maybe there is only one winning formula, and this is it.  That would be bad news for APC, US Direct, Dialog Direct, Endurance, Infinite, Forever, Car Shield, Car Chex, Delta, Omega, and Concord.

If you are a data-science inclined tech strategy consultant, you might think of this as a seven-dimensional feature space

I taxonomized a bit in my first post on the topic, Direct to Consumer VSC Sales, and today we will work out a generalized framework.  This means mixing apples and oranges.  Many of the competitors I studied are “pure play” B2C.

Business to consumer (B2C) is everyday marketing, with branding, advertising, and SEO.  Direct to consumer (D2C) means that you were marketing through a channel, and now you’re going direct.  It also means that you have a channel conflict to manage.  Think of an auto finance company that does both direct and indirect lending.

My research found seven features that characterize a consumer-facing VSC vendor.  You can think of these as design choices for a new entrant:

2. Payment plan
3. Touch points
5. Marketing
6. Branding
7. Eligibility

Contract administrator – At Safe-Guard, obviously, we were the admin, although we branded the contract for various OEM clients.  Endurance administers their own contract, and Forever Car has an exclusive partner.  Most B2C vendors offer multiple contracts, with a variety of coverage choices.  Tec Assured works for the dealer, offering whichever contract is sold in the dealership.

Payment plan – No one pays cash for a service contract.  APC has its own finance arm, and Dialog Direct is part of Budco.  The challenge here is the credit-card security (PCI) standards.  See My Shift in the Call Center.  Admins recognize the need for a subscription-based VSC but none has yet cracked the code (maybe JM&A).  Bundling the contract with a payment plan achieves the same effect.

Touch points – In the earlier post, I described three points in the lifecycle which a vendor could target.  This dovetails with the lead source, below.  If the vendor is working with an OEM or a dealer, they can focus on new customers who didn’t buy in the dealership.  They also have access to service dates.  The pure B2C vendors generally aim for the warranty’s end, or they don’t choose a touchpoint at all.

Lead source – If the vendor is working with an OEM or a dealer (or any affinity group) then that’s a source of leads.  This may also qualify as a “relationship” for spam-law purposes.  Then, there are the usual sources, like vehicle registration lists.  This brings us to marketing.

Marketing – The pure B2C vendors use pure pull marketing, developing a brand through SEO, social, and advertising.  Who could forget the Car Shield ads featuring Ice-T?  Old-school telemarketing and direct mail are still in use – love those postcards!  As in the earlier post, my favorite approach is digital marketing, from a lead list, with call-center backup, driven by a CRM like Salesforce or Nutshell.

Branding – Branding is complicated in this space.  The pure B2C vendors must develop an online brand, even though they sell multiple admins’ contracts.  On the other hand, the affinity vendors may develop the client’s brand, or they may create a separate brand as a way of mitigating channel conflict.

Eligibility – Depending on the touch point, the easiest way to deal with pre-existing conditions is to sell while there’s still OEM warranty remaining, or enforce a thirty-day waiting period.  Servicecontract.com uses an inspection at Pep Boys, and there are also mobile inspection services.  Dealers using Tec Assured, obviously, have their own inspection capability.

Let’s demonstrate the framework with some worked examples:If you are a data-science inclined tech strategy consultant, you might think of this as a “feature space,” with each of the competitors staking out their territory on a seven-dimensional Go board.  You might also want to boil it down to three dimensions so your client can understand the diagram.

In the earlier post, I cited two broad categories: those that work with the dealer as a partner and lead source, and those that are pure B2C consumer-facing.  Here, I have shown a little more of the complexity.  Affinity marketing doesn’t stop with dealers, and some D2C vendors are hybrids.

If you’re a new entrant, this framework can help you structure your go-to market strategy.  If you’re an incumbent, you can play seven-D Go and outflank the competition.

## My Shift in the Call Centre

A User Story

I enter the PCI compliant cleanroom at eleven o’clock with only a quinoa bowl from Freshie’s, and log in to Salesforce on my locked down computer.  No cell phone, no scratch paper – and there are cameras.  I wave to Peter on Camera #1 and start to dial.  I do not have high hopes of reaching anyone in the middle of the workday.  Amid all the DNRs, I may catch an inbound call off of our direct mail campaign, or someone out on the floor may catch it while I am dialing.

I log in to the dialer and it presents my first call.  To save time, I hit “dial” and the phone rings while I paste the number into Salesforce and search for the Opportunity.  Our Cisco dialer has a predictive mode, but I am not using it.  For low volumes, preview dialing is supposed to be a better experience.  The Ministry of Commerce prefers it, too.  This number is guaranteed to be in Salesforce, with a prospect status, because the dialer file is generated nightly from the Opportunity table in Salesforce.

Bonjour et félicitations pour votre achat d’un véhicule Nissan

My first call goes to voicemail, which is par for the course.  I recite the voicemail script, which I know by heart, and log the status in Salesforce.  I really wish the dialer could leave that damned message on its own.  I must recite it a hundred times a day.  I will dial this number three times before dropping it from the file, spread over a two-week period, in case my prospect is away on vacation.  Salesforce applies this business logic when it generates the dialer file.

For the next few hours, I get voicemail, no answer, not interested, and never call me again, which I duly note in Salesforce.  This last category will be added to the phone number filtering logic, along with the Do Not Call list we purchased from the Ministry.  I recognize the next number.  Merde!  It’s Dave Duncan.  I try to cancel the call, but too late.

Dave proceeds to grill me about my affiliation with Nissan.  No, I do not work for your local dealer.  If I did, we would have an “existing business relationship” and we wouldn’t have to honor the DNC list.  No, I do not work for the factory, its captive, nor the captive’s department of protection products – but we are the one and only factory authorized direct marketer of said products.  That’s why it’s their number on your Caller ID.

By six o’clock, I have a live prospect.  I alt-tab to my SPP system, which allows me to quote rates as well as set up a payment plan.  I also have a custom Product object in Salesforce which connects to the rating API, but I find it easier to work in SPP because most customers will want a payment plan anyway.  SPP calls the same API.

Things are going well until my prospect insists upon seeing the contract.  I recite the talk track about cancellation and full refund within thirty days, but to no avail.  I can also email a specimen contract and we can review it right now while he’s on the line (better odds of closing).  I end up emailing a custom link, or PURL, from SPP that will open right to the rates and contract we discussed.

I flag this one for callback in a few days.  It’s possible he will self-close on the SPP site, and then Salesforce will close the Opportunity automatically when it receives the file from SPP.  In any case, I now have an email address we can use for the next digital marketing campaign.  Speaking of digital marketing, whenever a voicemail greeting begins, “the Rogers mobile customer you’ve dialed,” I flag those as numbers to which the digital team can send text.

My next prospect, I actually close on the call.  I am sitting in this fakakta cleanroom just in case I have to handle credit card information which, at last, I do.  My guy buys a 72-month plan, which I set up for 24 monthly payments on SPP.  Then, I download both contracts – the protection plan and the payment plan – and attach them to the Opportunity.

Salesforce won’t close the Opportunity, though, for another day until it receives confirmation from SPP that all is well with the credit card.  If not, it will indicate that status, send an email, and I will have to call him back.  Once the Opportunity does close, as a win, Salesforce Connector will pick it up and Marketing Cloud will include both contracts in a direct mail welcome package, ending the Customer Journey.

So, to summarize my workflow, I am manually pasting phone numbers into Salesforce and VINs into SPP.  Salesforce and SPP are each capable of rating and contracting via API, and the customer can check out with or without my assistance.  These tasks could be improved with some Computer Telephony Integration and an SPP interface.  Instead of sending data directly to SPP, all I really need is the logic to generate that PURL and then Salesforce could either launch it for me or send it to the customer as needed.

At eight o’clock, the end of my shift, I doff my headset and run the job to generate tomorrow’s dialer file.  This is basically a query against the Opportunity table, applying the “next date to call” rules.  Without CTI, the best time to call is not supported.  Jeanette will have to pick those out of the comments manually.  Tomorrow is my day off.

## The Case for D2C

A while back, I wrote a survey of Direct to Consumer VSC Sales.  This was a “how to,” and today I am writing about the “why.”  The short version is that D2C is a large and unserved market.  Franchised dealers sell service contracts with 47% of new vehicles, which is great, but that leaves the other half unprotected.

Add 6% to reported F&I gross, plus 4 to 5 times that amount for the backfile

Depending on which “touchpoint” you wish to pursue (see here) this market includes roughly 67 million vehicles.  That’s how many are on the road, less than six years old, with no coverage.  Dealers are the group best positioned to serve this market.  Of course, a dealer can only address his local share of the market, not the whole 67 million.  See Profit Opportunity, below.

To succeed with D2C, you must have an existing relationship with the customer.  That’s because success requires digital marketing, and anti-spam laws limit what you can do without a relationship.  For example, an OEM can email their customer a solicitation for their factory-label protection products, but a TPA cannot.

So, the dealer has the inside track.  He has the relationship, the contact info, and a service department to verify eligibility.  Plus, every additional VSC aids in service retention.  Depending on the dealer group, it may also have the other ingredients.  Here’s the parts list:

### Direct to Consumer (D2C) Operation

• An advanced CRM with the ability to run a scheduled, multichannel contact program.  Salesforce calls this a “customer journey.”
• A source of premium finance, like SPP, Budco, or PayLink.  Dealers will already have one of these, for their instore F&I operation.
• A call center, which could be the BDC, to participate in the selling journey and also to deal with issues around premium finance.
• A branded website capable of presenting and selling the service contract, including Visa checkout and premium finance.
• A service facility.  If you’re not a dealer (trying to cover all bases here) there are still things you can do with Pep Boys and mobile facilities like Pivet.

Depending on the dealer group.  Obviously, if you’re Lithia, you already have a finance arm which could (with training) handle bounced Visa charges.  They’ll need to comply with the PCI security standards.  Maybe that’s best left to PayLink.

There is a host of such decisions, for which you will need expert assistance – but let’s get back to the “why.”  We are going to make a gross profit calculation in three steps:

### Direct to Consumer (D2C) Profit Opportunity

1. Compute the potential product gross that didn’t close with the vehicle sale.
2. Estimate the likely D2C conversion rate.
3. Add the backfile of customers from prior years.

Let’s look at AutoNation.  Sorry, NADA Average Dealer doesn’t provide enough detail.  Even the AutoNation data doesn’t provide much detail on product sales.  Still, we can draw some inferences using the 2019 annual report, industry norms, and these remarks from then-CEO Cheryl Miller.

AutoNation reported sales of 283,000 (new) and 246,000 (used) with F&I PVR of \$1,904.  That’s the headline figure, including finance reserve.  Owing to adjustments, the figure in the annual report is a little higher, and the calculation based on Miller’s summary is a little lower.

The \$1,350 (new) and \$1,050 (used) are averages across all units.  We can infer that product gross was roughly \$2,580 (blended) on 47% of units.  That leaves the other 280,000 vehicles unprotected, with a potential gross of \$720 million, equal to 71% of AutoNation’s reported F&I gross.

You can use 75% of F&I gross as a rule of thumb.  In general, product gross is two-thirds of F&I gross, and this is derived from fewer than half of the vehicles sold (omitting ancillaries).  The ratio of D2C opportunity to instore penetration is 53/47 of the two-thirds, which makes 75%.

This \$720 million is the potential gross AutoNation left on the table in 2019.  Okay, that’s not fair.  It’s only on the table assuming every one of the D2C prospects will buy the product, which they won’t.  Most won’t, in fact.  The conversion rate is the product of three factors:

• The number of contacts per customer, based on your touchpoints and your programmed journey.
• The take rate, which is the percentage of people who take action by clicking the PURL link, scanning the QR code, or whatever.  The industry norm here is 2-5%
• The close rate, which is the percentage of takers who are closed by the call center or self-close on the web site.  Expert closers can do 20-30%.  Remember, this is within the self-selected “takers.”

The conversion rate is what counts, but we break out the components for management purposes.  For instance, maybe the take rate is high but your closers are weak.  Success requires a lot of contacts, with compelling CTAs and good closers.

Let’s say we utilize all of our advantages as a dealer – an aggressive journey on all touchpoints – bringing our contacts to 10.  Multiply this by a conservative 20% close rate and 4% take rate.  This gives us a conversion rate of 8%.

In our AutoNation example, this would mean roughly \$58 million of additional gross.  All of this arithmetic generalizes, too.  Simply take reported F&I gross and multiply by 6% (8% of the 75%, above, makes 6%).  So, now I can crack the Lithia annual report with F&I gross of \$580 million, and reckon that D2C could mean \$35 million to them.

This incremental income recurs annually, since it’s based on one year’s volume – but we start the game with a backfile of unserved customers from prior years.  We might reasonably want to go back five years for new vehicle buyers and three years for used.

AutoNation is a convenient example because they sell new and used in roughly equal parts, so this works out to (blended) four years’ worth of volume.  If your mix skews more toward new vehicles, then your backfile opportunity will be richer.

In short, you can use the 6% rule to compute the annual recurring, and then add a one-time opportunity of 4 or 5 times that amount for the backfile.  This more than pays for setting up the operation.  So, is it worth the hassle to earn an extra 6% of F&I gross?  Ponder that next time you see the Car Shield ad on television.