After 20 years of implementing profitability models and helping lenders optimize their auto portfolios, we've observed a consistent pattern: Two lenders with identical 8.5% portfolio yields often see vastly different bottom-line results six months later. The difference? How comprehensively they measure true profitability.
Currently, most auto lenders track the following essential metrics:
These metrics provide valuable insights, but they often exist in isolation, missing critical connections that determine actual profitability.
We've seen multiple examples of organizations handling dealer incentives well versus poorly, highlighting why this component is fundamental to get right. In today's market, higher average vehicle prices have made flat payments more enticing for dealers because they can secure larger payments without relying on rate markups that might deter buyers. A $500-750 flat on today's higher-priced vehicles is less noticeable to customers than achieving the same dealer compensation through rate markup
The problem for lenders: These flats devastate profitability on your best credit tiers and today's higher loan sizes amplify the damage. A 1.5% flat on a $40,000 loan equals $600, making your largest, theoretically most profitable loans precisely where flats hurt most.
Real-world example: A regional lender discovered their A-tier customers (750+ FICO) receiving 4.99% rates plus $625 dealer flats were actually generating -0.3% returns after full cost allocation. Meanwhile, their B-tier segment at 7.99% with $250 flats yielded 2.1% margins.
Based on our experience across implementations, successful profitability measurement requires:
The key insight: It's more important to capture all components reasonably well than to perfect any single calculation while missing others.
We often see organizations where the following is true:
This disconnect occurs when teams optimize their metrics in isolation without understanding the full profitability equation. Nobody connected dealer flat payments + operational costs + segment-specific loss rates.
Through our implementations, we've learned that profitability models fail at both extremes:
Too Simple: A lender using spreadsheet averages across all segments. Example: An outlier lender offering 4% rates when market sits at 6%. After 2% cost of funds + 1.5% operational costs + $375 dealer flats = negative 1.2% actual return.
Too Complex: A regional bank's 47-variable model requiring daily updates from six departments, pricing on RAROC (Risk-Adjusted Return on Capital). Result: Operational nightmare that becomes unmaintainable.
Just Right: Models sophisticated enough to capture key relationships while remaining operationally sustainable. This is where Nomis's 20 plus years of experience becomes invaluable. We've seen firsthand what works and what doesn't across diverse organizations.
A critical principle we've developed: Your profitability measurement for pricing shouldn't be incongruent with how your organization already thinks about profitability. Creating a unique framework for optimization often fails because it doesn't integrate with existing decision-making processes.
Instead, we help organizations evolve their current profitability thinking, identifying which components are solid and which need enhancement. This approach ensures buy-in and sustainability.
Surface-level analysis might suggest 84-month loans outperform shorter terms due to higher interest collected over time. But without lifecycle modeling, you could be missing critical factors:
This is where misunderstanding the full breadth of portfolio performance becomes dangerous. By the time these losses materialize, you've already written thousands of similar loans.
For example, a $30,000 loan at 4.5% looks profitable until you factor in the $500 dealer flat. Without connected intelligence, lenders don't realize these flats are eating into their spread. The challenge has intensified: higher vehicle prices mean dealers can secure larger flat payments without impacting buyers through rate markups, making flats increasingly attractive versus rate participation.
When unsophisticated competitors underprice, the market follows. You match their 5% rate to stay competitive, not knowing they're losing money. Price sensitivity analysis would show: only 15% of customers in that segment would not have converted. The other 85% would have accepted 6.2%.
Profitability measurement becomes truly powerful when connected to price sensitivity analysis, like so:
Our implementation process often reveals profitability insights organizations didn't know they were missing. This isn't about criticizing current practices, because the majority of lenders are thinking seriously about profitability. It's about enhancing and connecting existing intelligence.
We guide organizations to their optimal complexity sweet spot, where analytical value exceeds operational burden. This might mean starting simpler than expected or adding specific components that dramatically improve accuracy.
Common examples from our clients:
Through our software solutions, Nomis helps our clients transform profitability from guesswork to science.
Understanding true profitability is essential, but the real value comes from acting on these insights. Nomis Price Optimizer (NPO) takes your comprehensive profitability framework and transforms it into optimal pricing decisions.
NPO enables lenders to:
The platform integrates all the profitability components we've discussed (FTP, risk costs, dealer incentives and operational expenses) into a unified optimization engine that suggests pricing aligned with your strategic objectives.
In today's market, sophisticated profitability analysis isn't just an advantage. It's just as much a defense against market distortions created by incomplete measurement. When dealer flats silently erode margins and extended terms hide future losses, comprehensive profitability intelligence becomes your early warning system.
In a market where less sophisticated lenders can unknowingly destroy pricing discipline, sophisticated profitability analysis is your defense. Price sensitivity analysis ensures you're not leaving money on the table OR pricing yourself out of winnable segments.
And remember: Sometimes the most profitable decision is walking away from a deal that doesn't meet your profitability thresholds. Disciplined lending beats volume-at-any-cost strategies over the long term.
Success doesn't require infinite complexity or abandoning your current framework. It requires:
With over 20 years of experience implementing models and optimizing auto portfolios globally, we don't just build models, we:
Ready to evolve your profitability measurement? Contact us at sales@nomissolutions.com to discuss how your organization can see the complete picture.
Written by: Jamie Cervetto, Director of Professional Services at Nomis Solutions