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Industry veteran says some franchised dealers are realizing 40 percent penetration on PPM plans, and that’s on leases. He explains why those dealers are also realizing great customer retention.

August 2013, F&I and Showroom - Feature

by Mike Gorun

If you caught last month’s issue of F&I and Showroom magazine, you know leasing accounted for a record 27.5 percent of all new-vehicle transactions in the first quarter. Until recently, that kind of surge spelled doom for the F&I office. One of the products driving the change is prepaid maintenance (PPM). 

These plans are not only keeping F&I managers in the game, they’re also serving as great sales generators in what has become an intensifying battle to retain customers.

Honda Cars of Boston is one such dealership. Currently, 40 percent of its lease customers choose to buy its prepaid maintenance plan, which it rebrands from a third party as Honda Guys Care. But even though the structure of leasing itself promotes repeat business, here is why “packaging” maintenance plans with leases makes sense:

  • It levels the competitive landscape: Many OEMs now package “free” scheduled maintenance services into their vehicle offerings. Dealerships representing brands that don’t offer these plans can now promote similar plans to negate this challenge.
  • It captures lease customers’ affinity: Dealership-sponsored plans build affinity with the dealership, not the OEM.
  • It enhances customer service: Rolling the cost of a PPM plan (usually under $1,000 to the lessee) into the lease provides no-hassle scheduled maintenance services for the term of the lease. Customers also drive away knowing basic and scheduled maintenance needs are prepaid.
  • It drives service profits: Plan use can improve service sales, even though most needs are covered by the warranty and the plan itself. That’s because vehicles covered by such PPM plans give advisors the opportunity to up-sell legitimate service needs, such as tire wear or body dings.

The plans designed by Honda Cars of Boston include routine maintenance services required by American Honda Motor Co., as well as filter and fluid changes, tire rotations and wiper blades.

Empowers Retention

Last year, Edmunds.com predicted that more than two million vehicle leases were set to expire in 2013. The majority of this additional off-lease inventory is projected to come from domestic models, reflecting their re-entrance into the lease pool in 2010.

In fact, Ricky Beggs, Black Book’s editor, noted in the National Vehicle Leasing Association’s Vehicle Leasing Today that 2013 “may also be the year that non-luxury cars take a significant bite into lease market share of the luxury brands.” And that’s despite what is expected to be a strong year of luxury import leasing, which Experian Automotive predicts will account for more than 62 percent of sales for BMW and Mercedes-Benz.

The reason is simple: leasing retention is profitable. For instance, manufacturers may sponsor lease pull-ahead offers to strengthen customer retention. These programs pay a customer’s last remaining lease payments if he or she agrees to a new lease or purchase.

In the first quarter of 2013, leasing accounted for 27.4 percent of all new vehicles financed. That translates into a large pool of customers whose retention can mean significant repeat revenue for dealers. And although per-transaction revenue is often less on lease deals than finance deals, leasing’s built-in retention factor can make lease customers some of the dealership’s most profitable customers. 

Builds Service Profits

But there are ways to offset the revenue gap between lease and finance deals. And as the Chicago Automobile Trade Association recently noted, “Another way to boost profitability [per vehicle leased] is to sell maintenance packages along with the lease.”

The great thing about some lease agreements is they stipulate that the leased vehicle be serviced by the brand’s certified technicians, or the men and women manning the service department. While such language is designed to ensure proper vehicle maintenance, it also works to feed the dealership’s service department. This makes PPM plans a natural fit for lease deals.

Not only do PPM plans offer customers real money-saving value, they also prime the pump for additional upsell opportunities in the service department, a fact backed by a recent study conducted by my firm. All 48 dealerships we studied offered a third-party maintenance plan, and they report enjoying an average of $102 in additional revenue per repair order for services not covered by their plan.

The study also found that 85 percent of plan holders purchase additional services beyond those included in the plan. They also visit their service department three times as often as customers who didn’t opt for PPM.
And unlike some affinity programs designed to drive retention, PPM plans don’t require that the dealer produce coupon books to hand to customers.

This can save dealerships thousands of dollars in marketing. And a dealership’s return on investment with such programs is measurable.

Hope is Not a Strategy

Many dealers hope their lease customers will lease or buy from them again. Considering the percentage of lessees who do, there’s hope. However, market dynamics are always in flux, so the battle for every consumer is intensifying.

Vehicle OEMs recognize this, as some are including free scheduled maintenance services in vehicle sales. Dealers are also taking note and are turning to PPM plans to maintain their connection with lease customers.

Some providers are even helping to shape and strengthen that connection through web-based technologies that offer a simple, yet sophisticated, means of managing, administering and communicating plan guidelines and benefits to customers. If anything, these software-driven offerings allow dealers to stay in constant contact with plan holders.

Selling PPM plans to lease customers helps position the dealership to retain their business for the long run. And with some dealers achieving penetration rates as high as 40 percent, it is clear lease customers value the benefits and peace of mind these plans provide. 

Michael Gorun is the managing partner and founder of Performance Loyalty Group Inc., a company he started in 2003 after nearly 25 years in operational management positions. He can be reached at michael.gorun@bobit.com

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