AutoNation recently reported that, in one quarter, the dealer group sold more than 30,000 prepaid maintenance (PPM) plans, with a large percentage of them sold in the service lane. Products that link vehicle sales to future service department work have always been important, but in today’s margin-compressed retail environment, they’re critical.

In response, product providers are widening their focus and offering a slew of next-generation prepaid maintenance programs designed to make it easier for dealers to customize plans that appeal to their market.

At most dealerships, 18 to 20 percent of customers will return to the dealership for service work. Depending on the plan and the store, a prepaid maintenance plan can triple that number. Given that most brands will experience a 20 percent decrease in units in operation and service volume as a result of the market’s recent upheaval, prepaid maintenance plans represent an opportunity to gain back some ground.

Richer Content, More Value

All the advantages of selling a prepaid maintenance plan are rendered moot if customers don’t see the value in the plans. Fortunately, value is exactly what today’s next-generation plans address. While a traditional plan may only offer discounted prices on lube, oil and filter, tire rotation and wiper-blade replacement, today’s plans are designed to offer state-mandated inspections, loaner vehicles and flushes — all of which carry higher perceived customer value. This makes the plans easier to sell, whether they are presented in F&I or in the service drive.

While the first goal of a prepaid maintenance plan is to gain the customer’s affinity for your shop, the real value lies in upselling additional retail parts and services. I recommend that you give every vehicle that rolls into your shop a free, multipoint safety inspection. Doing so will allow your advisors to present legitimate upsell recommendations for repairs and services beyond those covered by the customer’s plan. This practice is especially effective for high-mileage vehicles that are three years or older. One common misconception is that holders of prepaid maintenance plans do not make good candidates for additional service presentations. This is far from accurate. In fact, they have demonstrated a predisposition to purchasing your service and are as agreeable to upsell efforts as any customer. The deciding factor is in the service advisor’s ability to present and sell additional services.

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The ability to leverage this upside potential from every plan sold is paramount in today’s market, as capturing downstream retail service business can help your dealership offset sales volume decreases. For instance, when a plan is offered as a complimentary offering on a pre-owned vehicle sale, a dealer can bump after-sale service utilization of his or her dealership from about 5 and 8 percent, all the way up to 60 percent.

I know of a dealer who places a complimentary three-product plan on the hoods of every one of the 720 pre-owned units he sells annually. The reason for that is this dealer expects to generate more than $400,000 in total incremental service revenue, based on a $160 average repair order and a 55 percent plan redemption rate over the plan’s two-year term. Plans of this nature can cost less then $70 per unit sold and will generate more than $1,000 per unit in service revenue.

The Dealer-Centric PPM

Not all PPM plans are alike, but today’s next-generation plans offer several administrative and management advantages that make them worth a second look. For instance, many of them are dealer-centric and do not rely on third-party administration. Additionally, many allow dealers to offer their plans under a private, dealership-branded label through an extension of their own brand marketing and promotional efforts.

With these new plans, key functions and processes can be carried out in-house through the dealership management system (DMS) and Web-based software, including plan redemption management, registration and service claim submission. This gives dealers more control over how money is reported, tracked and used, which means there’s no waiting for service claim payments, earned reserve and plan forfeiture amounts. The dealer simply processes it through his or her normal accounting process and the funds are transferred through the general accounting ledger in his or her DMS.

Every plan will experience forfeiture (i.e., money that remains in the dealer-funded reserve), which occurs when a customer terminates the plan before it expires or does not use the plan. For most traditional PPM plans, the third-party administrator holds the dealer-funded reserve and can take from it up to 60 percent of the value of the cancelled services as part of its fee structure. That’s not the case with a dealer-run program.

There are little to no barriers for dealers who want to use this new generation of self-administered, self-managed PPM plans. The plans are customizable, easy to administer, available for pre-owned units, generate higher grosses, provide a competitive sales advantage and, ultimately, help dealers build longer, more secure customer relationships.

Michael Gorun is managing partner of MediaTrac, a technology-based owner retention and loyalty company. He has more than 25 years in operational service management positions for Ford, Nissan and General Motors. He can be reached at michael.gorun@bobit.com.