Should you charge Doc Fees?
Many pundits, both professional and casual, have recently proclaimed the end of the car industry as we know it due to autonomous vehicles and Tesla’s direct-to-consumer model, among other evolving social and economic factors. This is not the first time dealers’ demise has been predicted and it probably won’t be the last. But it is interesting to see similar topics arise in microcosms of the industry. The internet will make salespeople obsolete, tablets will replace service advisors, and Carmax will take all the used vehicle business from franchised dealers. Just wait, it’ll happen!
While we have not seen any indication that the previously mentioned events will take place, there is one area with which many stores and dealer groups have experimented that could have a massive effect on the bottom line: getting rid of Doc/Admin Fees. While this is certainly not a new phenomenon, it seems that more and more stores have questioned and ultimately changed their fee strategy. There are three main options:
1) Keep the Doc Fee to protect Dealer profits as gross margins continued to decrease;
2) Repackage the Doc Fee with stuff (tire and rim warranty, key fob replacement, etc.) to build value;
3) Eliminate the Doc Fee and watch as your leads, floor traffic, and volume skyrocket.
We do not claim to know which of these works better but we have plenty of experience listening to stores that employ all three methods.
1) Keep the Fee – This is the most common path chosen. Dealers fear change and a quick summation of the profits generated from doc fees gives good reason to fear what would happen if they were eliminated. If a competitor heavily advertises “No Doc Fees”, your store will have to continually work deals in which you sacrifice margin to include the doc fee in the deal. Not a big issue since you always have to tailor your approach to beat the competition but it will undoubtedly be a primary complaint among salespeople and desking managers.
2) Repackage the Fee – This method can be very successful if done properly, but adds a level of complexity that needs to be managed. If a customer has a legitimate reason they don’t want the added product/service (maybe their credit card or travel association covers the same thing), can you still charge them? If Service or Parts is part of the program, how does the money flow between departments and who, if anyone, is compensated? Does your newly branded package actually add value to a majority of your customers or would you be better off just having a fee? And depending on your answers above, how much more likely are you to sacrifice the package than you would have done with the fee?
3) Get rid of the fee – In this situation, your hope is that eliminating the fee will increase your competitiveness in the market and drive more interest to your store. And it may do that! But how many more units do you have to sell to overcome the potential loss of revenue when you stop charging fees? It’s a tough question to answer. Another tough question: How do you replace that lost revenue in every deal, in case your volume doesn’t increase as expected? Here are two points purely based on observations and unmeasurable data in a non-statistically relevant data set (in other words, we can’t back this up so don’t ask for proof): First, you are just as likely to see no volume increase as you are to see an acceptable increase. And second, it is far more difficult to make up for that lost revenue on a per-deal basis than you think. While you may feel that you are better servicing your customer base and are happy to have one less excuse on your sales floor, we have few examples of stores that are unequivocally more profitable due to their elimination of fees. This doesn’t mean we advise against doing it, we just recommend a thorough understanding of the potential threats to profitability and strong plan of attack should you decide to change strategy.
There is one caveat to this discussion that is worth noting. If you truly “market price” your inventory, how do you incorporate fees into your pricing strategy? This is probably more relevant in today’s Used Vehicle market (and many stores have eliminated UV fees but not NV fees), but the question remains. Does the fee affect your ability to price competitively or do you just include it in your market price, similar to a pack? And do you have enough control over the desking process to guarantee that the fee (or an equivalent discount to the vehicle) isn’t given away unnecessarily? There is no reason to think that fees are going out of fashion but there is plenty of reason to consider the effects, both positive and negative, on how fees are incorporated into your pricing strategy.