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**

- Compute the potential product gross that didn’t close with the vehicle sale.
- Estimate the likely D2C conversion rate.
- 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.