A Closer Look at Combo Products

As an industry, the trend is currently moving toward providers offering more pre-packaged combo products, where a mixture of several products that were traditionally sold individually are offered as a single product. Sales of combo products have doubled year-over-year for the last two years. However, they are still only about 1% of the overall volume of contracts sold.

It is an attractive idea that seems primarily driven by market (i.e. dealer) demand. Among the two million-plus annual volume of contracts processed by SCS Auto (F&I Admin’s F&I administration platform) there are at least 15 different kinds of F&I products represented. Large dealerships with strong F&I offices struggle to find space to present even half of these on a given menu. Combining some of them into packaged offerings enables dealerships to offer more benefits to customers as a single product with a relatively simpler sales pitch. Having to sell only a single contract in the 15-20 minutes available to the F&I manager with a given customer also raises the likelihood of making a sale.

The consumers benefit since they only have to buy one product to get multiple benefits, and usually at a discounted price relative to buying each of these coverages individually. They also only have to deal with a single administrator to get any of the myriad, but related, benefits they may have purchased when it comes to making claims. And they only have to keep track of a single contract.

Providers can also benefit, as innovative packages are not only an appropriate response to market demand, but also help differentiate their products from other providers’ products, since individual products have largely become commoditized. Combo products are much harder to comparison shop – either by agents, dealers or the end customer. And when individual coverages are combined into a truly single contract, there is the possibility of saving on certain kinds of administration expenses while taking advantage of the increased likelihood of sales on what could be a higher-margin product than multiple contracts with smaller individual margins.

However, successfully packaging products requires careful planning and a good understanding of what your dealership and agent channels are truly asking for. Firstly, not all products can or should be packaged. Good combo products offer synergistic benefits such as an appearance protection package that offers paint, rust, dent and rip/tear/burn coverage. Trade-in protection/GAP coverage could be offered in combination with lease excess wear and tear coverage for a leasing customer’s complete peace of mind. Another good example is a vehicle service contract (VSC), tire and wheel and roadside assistance combination.

But determining an attractive combo to offer dealers and customers is only the start of the complex analysis required to determine what products to offer, through which channels and at what prices. It also requires a good understanding of all the regulatory complexities, as well as your own organization’s systems and operational capabilities in ensuring a smooth customer relationship through the life of the combo contract.

The first challenge is regulatory; there are several states with laws that prevent the packaging of certain kinds of products. Ironically, some states seem to mandate packaging (e.g. windshield coverage must be provided with a VSC in some states). It is also important to ensure that the base product is clearly defined in some instances to ensure lenders will finance the resulting contract – you may want to offer roadside assistance and key protection with a VSC base product, but not want to offer mechanical breakdown benefits as an add-on to maintenance contracts.

Once you have come to grips with the marketing, sales and regulatory factors, the next important decision to make is whether the resulting combo is truly a single presented product that results in a single contract, or if it results in multiple contracts. A good example where multiple contracts are necessary is a VSC upgrade to a limited warranty – since the upgrade usually sells for a discount because of the presence of a limited warranty, and the benefits are in perfect synergy (mechanical breakdown protection), one might think that this combo results in a single contract. However, since a limited warranty is usually free to the customer with the car, it is a separate contract from the VSC upgrade, even if they are both printed on a single contract form.

There are other reasons to keep the contracts separate, even if the products are packaged into a single one from a product presentation perspective. For example, if you bundle prepaid maintenance with a VSC, you may not want to have the ‘loss experience’ of prepaid maintenance (generally closer to 100% as nearly all benefits are, by design, paid out as claims) drag down the loss ratio for the VSC side of the coverage. And do agents/dealers have the right incentives in their commission structures to ensure they do not think of the combo package as a lower margin product (because it is discounted)?

Other administration concerns along the same lines include planning for how cancellations, transfers and claims can be handled. For example, if an appearance protection product that relies on the application of a chemical is bundled with a dent protection package, it is necessary to think of how a cancellation is treated/calculated, as the chemical has already been applied but the dent protection could be more easily cancelled. Claims may look relatively straightforward to handle; however, predicting losses on a combined product may be more challenging, as the experience is not necessarily as predictable when it is a combination of the experiences of two or more products that comprise it.

Making the combined product a single contract does have its benefits. Accounting for the costs, and rating, is a bit simpler when there is a single contract. When you have multiple products that are packaged such that they result in multiple contracts, apportioning the rates and costs among them to reflect the discount adds to the administration effort. Assuming there is a discount for purchasing the combo instead of three individual coverages, where does that discount get applied? Does it come off of each product equally? Or does the entire discount go to one product, with the other two still being listed as full price? Do you have the analysis and administration tools to ensure such discounts are properly accounted for without manual ‘workarounds’?

Finally, but perhaps most importantly, do you have a good measure of whether offering a combo product has increased your top line and bottom line? Is there truly a savings in the administration costs, given the additional effort required to properly design a combo product? Have you truly increased sales by bundling multiple coverages into one?

The trend is to offer more of these combo products, and as an industry, I think this is a good thing. It does allow for an easier selling process and increased customer satisfaction. It also provides for greater product differentiation - and when admin costs are truly saved, a more profitable product. These are compelling arguments for offering them. But of course, treating combo products like any new product offering, and ensuring that the entire product management processes (sales, marketing, pricing, accounting, administration, service and systems capabilities) are properly planned for is essential to ensuring a successful and enduring combo product.