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PPM Driving Retention, Profits
March 2013, Auto Dealer Monthly - WebXclusive
By Daryl K. Tabor
The service department is the lifeblood of your dealership, driving receipts and carrying you through those dicey periods when car sales suffer under the weight of a weak economy. Even in good times, the profit margin from new-car sales is likely overshadowed by that of service and parts. Including staff behind the parts counter, the service department probably employs as many people as all other areas of the dealership combined. Without it, your store is simply a car lot where customer retention is based on little more than the price on the windshield and a friendly handshake.
Despite their importance to auto retailers' survival, it's only been in the past few years that service departments have been taken seriously as a way to not only drive retention but also capture the most coveted prize in any business: customer loyalty. While fidelity cannot be bought, many automakers and dealerships have found that retention, the unemotional cousin of loyalty, can be bargained for. Retention often begins with a simple invitation to visit your service drive every 5,000 miles or so. And who knows, it might even be the start of a long-lasting relationship.
Prepaid maintenance (PPM) plans and courtesy service packages have started to blossom as customer retention tools for automakers and individual dealerships, whether they be franchise or independent lots. Today, nearly one-quarter of Americans are driving with some type of service plan, which generally covers routine maintenance as prescribed in the owner's manual. "It's one of the most powerful loyalty tools at a dealer's disposal," said Mike Martinez, chief marketing officer at DMEautomotive (DMEa).
Dealers have been slow to embrace the retention and income possibilities of PPM, claims Mike Gorun, CEO at Performance Loyalty Group?a subsidiary of MediaTrac that provides myriad customer retention tools for numerous industries, including UltraCare for the automotive sector. However, the implementation rate of PPM plans has begun to improve in recent years, driven in part by the rise of technology that allows dealers to more efficiently administer, manage and customize programs. A quarter-century ago, maintenance programs were troublesome to implement, requiring the use of analog methods like books of coupons redeemable for specified services. The plans were virtually all run at a high cost to retailers by third-party administrators, Gorun said. "The way that it was packaged was very cumbersome for the dealer," he said. "In the last 10 years, everything has gone electronic and is integrated into the DMS (dealer management system)," he continued. "It's all automatic on the back-end side. It makes it very easy for the dealer."
Ash Bauer, vice president of Resource Automotive, a financial services, consulting and training unit of The Warranty Group, which offers its own PPM product, added he also thinks it is an increased focus on retention that is fueling the rise of maintenance plans. "The manufacturers are starting to see the benefits," he said. DMEa's Martinez also suspects dealers are waking up to the fact that keeping customers through retention tools is more important-and less expensive-than finding new ones.
The survey says
Last August, DMEa, a marketing analytics firm specializing in the automotive industry, released the findings of a nationwide consumer study focused on maintenance plans. The survey results illustrate the correlation of maintenance packages to customer retention and loyalty-the ultimate prize sought by auto retailers. According to DMEa's data, 22 percent of car owners in America have a maintenance plan for their vehicle that augments its warranty. Of these, 15 percent are covered under free original equipment manufacturer (OEM) plans like ToyotaCare, with the balance having purchased PPM at the dealership. The study, which polled 2,194 vehicle owners who had had their car serviced over the course of the previous 12 months, found that 56 percent of those holding such a plan are likely to return to the dealership for service after their package expires. That figure climbs to 62 percent for those who used their plans for all maintenance during the term of the contract.
"Our survey provides fresh evidence that both prepaid and OEM-provided maintenance plans have a powerful impact on dealer service retention," reported DMEa's vice president of strategy and analytics, Doug Van Sach, in a press release detailing the survey results. But there is still ground to be gained. After all, 25 percent of plan-holders only sometimes utilize their benefits-though they are free or are already paid for-using aftermarket service in the interim. An additional 10 percent never put the maintenance packages to use and rely completely on aftermarket upkeep.
While some dealers and service department managers may think such spoilage (unused maintenance service revenue) bolsters their bottom line, Gorun believes that PPM purchased but not put to full use is wasteful for both the car owner and dealership. "A dealer used to want a higher forfeiture rate," he said. "That's really the old-school mentality. Now you want your forfeiture rate as low as possible." Van Sach's statements announcing the results of DMEa's survey reiterate that belief. "We think it's (to) a dealer's benefit to encourage people to use PPM," he said. "With nearly 3 in 5 consumers reporting they are likely to continue servicing at the dealership after their plan expires-compared to average dealer post-warranty retention rates of 22 to 40 percent-these programs can more than double service business that typically bleeds to the aftermarket, while also having a profound impact on retaining the young, traditionally dealer-averse, service shoppers' business."
Retaining "dealer-averse" drivers aged 35 and under, or millennials as Martinez calls them, is key to the success of PPM, according to the DMEa marketing officer. Also known as Generation Y owners, these drivers are nearly twice as likely as those over 35 to have a maintenance plan-31 percent versus 18 percent, respectively. Almost three-quarters of those under 35 utilize their plans for all of their owner's manual-prescribed service during the term of the package. "This tool helps with the millennial customer," Martinez said, primarily by allowing dealers to maintain contact with this important demographic.
Traditional service department loyalists tend to be 45 or older. These customers develop a long-term relationship with a particular dealership. Ironically, this age group (driven by brand, expertise and trust) is least apt to purchase PPM, though they are most likely to use the same service lane for all regular maintenance work. Conversely, consumers less likely to operate based on loyalty are typically younger than 55-particularly millennials, according to previous DMEa findings. They are driven by tangible factors such as price and convenience, hallmark traits that fuel retention. By allowing both competitive pricing and convenience, PPM can allow dealerships to retain the elusive patronage of youth and sow the seeds of loyalty-building relationships with Generation Y consumers.
"It's not a huge money-maker for us, but it brings people back to the dealership," said Tim Nadvit, finance manager at Ganley Honda Superstore in North Olmstead, Ohio. "We are not just trying to sell to one person. We're trying to sell to the whole family." The Honda store is one of 25-plus franchises in the northern Ohio Ganley Auto Group that offer PPM through Fidelity Warranty Services. The program is offered for both new and used models as well as for customers who migrate to the store for service on vehicles purchased elsewhere. Nadvit said the Honda store is retaining about three-quarters of its new-car lease customers in its service lanes and about 65 percent overall, including buyers of pre-owned vehicles.
While prepaid and complimentary maintenance programs have proven effective at keeping customers coming back to the service lane, 86 percent of drivers who return for regular maintenance are also more likely to purchase their next vehicle from the same dealership. Martinez said the strongest correlation occurs when car owners fully utilize maintenance plans.
OEM maintenance plans
It is now somewhat common for automakers themselves to offer pre-pay or no-cost maintenance plans to customers as a supplement to the factory warranty. "The driving factor behind this is to build loyalty for sales and service," Kevin Reed, president of Momentum Automotive, said of offering such plans. Reed is both a distributor and user of UltraCare.
Looking at the 2012 model-year, 15 leading automakers offered complimentary maintenance plans for terms ranging from six months to seven years or 5,000 to 87,500 miles on the road, according to Edmunds.com research. Most often, the courtesy packages on specified new vehicles cover routine service spelled out in the owner's manual and can be cashed in at any of the OEM's dealerships. Some offer more coverage. In fact, upkeep covered under the packages offered by these OEMs can be as varied as the inventory on your lot.
According to the Edmunds.com report, savings for buyers or lessors of 2012 models range from more than $3,800 with BMW's rather extensive plan to as little as $75 with Lexus, which offers only the first scheduled maintenance visit free.
Automakers typically offer complimentary plans on new vehicles for the term of factory warranties-particularly on high-end models-as a form of insurance on the resale value of trade-ins and models returned at the end of a lease. The maintenance packages not only ensure service by certified technicians but also act as built-in service records made easily available when the person goes to sell their car or return the leased vehicle. For customers, too, such plans offer insurance, as certain aspects of warranties may be voided by automakers if prescribed maintenance is not performed and logged at a certified service bay.
Dealer-centric maintenance plans
OEM plans work fine for the automaker, but may do little to help the individual dealer. These plans are not captive service, explains Gorun. For instance, a Toyota owner who purchased a car from Dealer A can get his service through ToyotaCare completed at Dealer B, who may be a competing Toyota retailer just down the road. This works the same for PPM from virtually all automakers. "One thing critical to prepaid maintenance is captive service," he emphasizes. That is why many stores have chosen to push their own PPM administered and managed internally through Web-based products. Many of these dealer-centric PPM plans also allow for dealer branding. The best part for the dealer wanting to boost their bottom line, though, is the fact that whether the plan is complimentary or purchased by the customer, it can stipulate that service take place only at the point of purchase or at other stores within their auto group. Both independent and franchise dealers are starting to turn to this type of in-house PPM. "The third-party administrator is gone," said Gorun. "Now, the dealer is holding his own money, pricing it the way he wants it, setting his own reimbursement rates."
These new dealer-centric PPM products offered through numerous companies across the nation are making their mark in the auto retail industry. Resource Automotive's DriverPlus is seeing its own unprecedented expansion nationwide. "It's the largest growth product this year," said Bauer. "The numbers are getting larger by the week." Yet another coast-to-coast provider, Allstate Dealer Services, which covers virtually all bases for dealer F&I needs, began offering its own PPM a little more than a year ago.
Regardless of the name behind the PPM, tailor-made programs now allow the service manager to be a key player in dealer pricing. This was not common with the previous generation of maintenance plans, which often left the service department to absorb any losses incurred when customers cashed in underpriced PPM. "He's no longer taking a haircut on it, he's pricing it," Gorun said of the service manager. "He knows what his margins are."
In the past, the third-party administrators typically charged hefty set-up fees for PPM, offered a rigid structure in both price and scope and held the reserve on the plans. Penetration was low. Today, maintenance programs generally allow the dealer to retain the reserve and spoilage. But the key, Performance Loyalty Group's CEO said, is for the dealers to not price themselves out of selling the product. Customers, Gorun said, can easily add up the actual costs of the service covered in the plans and take a pass on purchasing ones priced too high. "Even a PPM (plan) given away for free would more than pay for itself by the end of its contracted term," he predicted, citing the likelihood of vehicle repurchase and continued service at the dealership. The actual cost of such courtesy PPM to the service department can be packed into the financing of the vehicle at purchase.
Other key factors that dealers may look for in PPM are full customization, potential for rebranding, automated claim forms, assorted marketing components and integration with the store's existing DMS for a seamless transaction for the service and accounting departments. "You must also have a good marketing component behind it no matter your vendor," Reed added. Such marketing allows the dealer to send thank-you notes to customers after utilization of the plan and reminders as to what remains on the package. "These types of communications are what drive that visit frequency up, which is what we want," he added.
Aside from pricing, customization of PPM allows dealers to set service intervals, establish time and mileage parameters and offer virtually any amenity as part of the package. "They can put anything in there they want," Gorun said. For example, dent-and-ding or detailing functions of a PPM plan may be perceived as high-value by the customer. "The customers just love it," he said of such extras. "We're a retention company, so trying to get that engagement with the customer, trying to get that fuzzy feeling with them ... those are the types of things that really, really do (retain customers)." Those amenities weren't typically found in the old-school programs. Common services that may be offered in PPM through a dealership today include:
* Lube, oil and filter changes, including synthetic oil
* Tire rotation and pressure check
* Alignment check
* Replacement of wiper blades
* Multi-point vehicle inspection
* Fluid top-off
* Nitrogen-filled tires
* Body repairs
* Cleaning and detailing
* Discounts on parts, service and accessories
* System flushes
* Air filter replacement
* Wiper blade replacement
Much has changed to let the dealers take full advantage of PPM. "The best part is, the customer comes back," said Monica Peck, co-owner of Hare Chevrolet, which utilizes UltraCare. She said in mid-November that the northern Indiana dealership had sold more than 750 PPM plans since inception of their program in October 2011. "It's had a huge impact on us," Peck said. "Retention is the key. You're keeping (customers) out of your competition's service lane." As proof, she said that in 2012, retention of new-car owners' service was up, as were repair order numbers at Hare Chevrolet.
"In order to survive, a dealership has to be able to service what they sell," Reed emphasized. That includes used cars. Reed is a big advocate of offering PPM on pre-owned vehicles, as those buyers are twice as likely to defect to another dealership for service or buying their next car. Joe Lescota, director of dealer development for NIADA, said more independent lots are gravitating toward offering service, and pre-owned dealers are just as likely to reap the same rewards from the service department as franchise dealers. Tony Troussov, director of training at Automotive Development Group in Minnesota's Twin Cities, said the PPM his company offers also has BHPH clients. "Customers don't pay very often when their car breaks down," said one of those customers, General Manager Andy Swanson of UsedCarXpress in St. Paul, Minn. Swanson said Easy Care, the free three-year maintenance plan attached to every sale from the large BHPH lot, helps keep cars on the road and customers happy and allows him avoid costly repossessions. "It works really great for us," Swanson added.
Besides the morphing of PPM from stiff and clunky programs to sleek and innovative packages, several ancillary factors also seem to be driving the uptick in their success at retention and profits. Service lanes, typically the bread and butter of dealerships, have felt the squeeze from a reduction in warranty and recall work as cars have become more reliable, particularly as new-car sales continue to rise since bottoming out at the height of the Great Recession in 2009. Competition from independent service providers such as quick-lube shops and tire outlets has also hurt. "They're getting into the pockets of dealers," Reed said of the aftermarket stores. This combination of factors is fueling the growth in dealership retention programs like PPM.
More than a retention tool
Depending on the structure of the PPM, spoilage may be retained by the dealership, adding additional revenue to the bottom line of the dealership.
Besides service retention and an increased likelihood of selling a new car to the PPM recipient, the packages offer more immediate benefits to retailers. In fact, PPM sold at Hare Chevrolet in the first 13 months of the program generated $144,000 in upsells, according to Peck. That's an extra $136 spent by customers outside of the PPM contract each time they visited the service lane.
That amount of upsell at Hare is not atypical, according to Gorun, who said his clients average about $127 in upsells per PPM visit. He referenced a San Antonio dealer who tallied $29,000 in upsells for October 2012 alone with 94 percent of customers on a PPM visit purchasing something at the store. Another store, which he would not name, amassed $505,000 in upsells off the 6,300 repair orders generated by its PPM. "It drives customer loyalty and retention, but it also generates revenue," he said.
The reserve money that dealers hold on to can also be impressive. In the first nine months of Hare's PPM program, more than $75,000 in reserve money was collected from the 466 plans sold. The same anonymous dealer Gorun referenced that generated a half-million in upsells also collected about $1 million in reserve and paid out only $226,000. "So he's setting on about 700 grand," he said of the dealer.
Service and sales growth is fueled by PPM, added Reed. Ideally, a dealership will sell about 40 percent or more of its PPM in the service lane with the balance sold by F&I. "That's what you'd like to see," Gorun said, "about half coming from each end." That's because so many more people are passing through the service department of a typical dealership as opposed to the sales department, he explained. People signed up for PPM in the service lane are usually there for a simple oil change, he said, but a good service advisor will sell them on the benefits of a long-term plan rather than pay-as-you-go.
Despite proven benefits to the customer, it's not always an easy sell. "Selling PPM is like selling prepaid dental care," said Bauer of Resource Automotive. "Customers don't get excited about it."
Automotive Development Group's Troussov said that is why dealers must make clear to prospective buyers the advantages of owning PPM plans, making the packages a powerful why-buy-here tool to close a sale, which, naturally, is the first step in the retention process.
By making PPM a why-buy-here carrot, dealers can dispel the notion held by cost-conscious customers that aftermarket service facilities are less expensive and provide faster service. Depending on the plan, some general selling points include:
* Drivers can pay for tomorrow's maintenance at today's prices.
* Since the work has already been paid for, service can be fast and convenient with no waiting in line to pay.
* The cost of the package is included in the monthly car payment, eliminating maintenance budgeting worries.
* The work is always performed by certified technicians.
* A vehicle's resale value is increased through digital records of upkeep.
* A plan may be transferable when the vehicle is sold.
* Timely service reminders can be sent via e-mail or text to handheld devices.
* Only factory-authorized parts and fluids are used.
Lescota said using PPM to drive regular income in the service center is a win-win for both dealers and customers. "Not only is it good as a profit center," he said, "but it's a great way to keep customers and avoid the high cost of gaining new customers."
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