With the major shift into leasing certified pre-owned vehicles by several OEMs and major financial institutions, many dealers have predicted a decline in service contract sales. However, according to an article in Automotive News, they would be wrong to do so.

Due to an influx of low-mileage pre-owned vehicles, captive finance companies and others have started to embrace certified pre-owned leasing programs. Lease customers haven’t always been the best candidates for service contracts – especially high line leases, as many of these vehicles come with free maintenance. However, the length of many leases and, more importantly, the length of loan terms have increased.

This is an indicator that many consumers who opt for extended term loans, or leases, would certainly benefit from service contracts as they will either 1) still be in their lease when the free maintenance expires; or 2) hold onto their vehicle for an extended period of time, far longer than in the past.

According to the article, while new vehicles will still outpace used vehicles in service contract penetration, there’s no need to worry about a decline in service contract sales. In fact, both new and used vehicle service contract penetration has increased among prime borrowers, with the gap between new and used vehicle service contract penetration decreasing from seven percent in 2007, to just 0.5 percent in the second half of 2016.

Many buyers – prime and sub-prime alike – increasingly see the value of a steady monthly vehicle expense without the worry of a hefty service bill. Yet there are many finance managers that don’t present service contracts as aggressively to prime borrowers for used vehicles as they do to sub-prime -- they assume the customer won’t be interested. While this may historically be accurate, the CPO leasing movement, along with extended loan terms, have substantially altered the rules of the game.

Consumers have warmed up to service contracts and have come to understand the benefits for convenience and financial stability. And, as new car margins continuously decrease due to manufacturer incentives, competition and increasing pricing transparency via third party sites, dealers increasingly rely on their F&I departments to increase profits through back-end product sales. Yet many F&I managers have been trained – via customer interactions and their common sense – that certain customers don’t need or want a service contract, but that is where the shift has occurred and there is opportunity aplenty!

Perhaps in the past service contracts didn’t make sense for certain buyers. However, these days, increasingly car buyers ARE investing in service contracts -- both for purchasing AND leasing.

The key to any successful selling process is consistency. Train your finance managers not to assume anything. Present, show the value of and sell service contracts to every customer, regardless of lease or purchase. According to the statistics, they will thank you for it, and it’s a win-win for the customer and your dealership.

A dealer in Washington state has taken a highly unusual - and unheard of - path to customer retention and loyalty. According to Automotive News, Denver Morford, dealer principal at Barry Chrysler-Dodge-Jeep-Ram in Ephrata, Wash., doesn’t believe in dealer reserve. Not only does he not believe in it but he also educates his customers during the buying process that he is legally allowed to mark up the buy-rate (the wholesale rate the bank has approved the customer for) by as much as 2 percent…and chooses not to. He allows each customer to view the responses from the banks and see the buy-rate that is offered. In his opinion, this transparency on the financing side of his business - and the loss of dealer reserve profit – contributes to his high level of customer retention and brings additional sales via word of mouth. He has no finance department, or used car managers, as he trains all of his sales staff to handle customer transactions from start to finish.

It’s certainly an interesting philosophy. The dealership’s combined sales in 2014 between the 3 stores were 160 new and 390 used vehicles, averaging roughly 46 units per store. Transparency in the buying process has been increasingly demanded by consumers, but I’m not aware of anyone else that has connected the dots between transparency and customer loyalty in this way until now. While we don’t have any numbers to compare (gross vs net profit per vehicle), one would have to assume that they are lower than average, as there’s little doubt that this dealership’s competitors are participating in dealer reserve, and offering other back-end products. Of course, the easy way to balance the loss of back-end profit is to increase front-end profit.  But, those same consumers seeking transparency, along with the many forms of information available on the internet, would probably dictate the vehicle prices.

Another theory to consider is that - just maybe - it’s his unusual sales process that’s helping him win customer loyalty and retention. Consumers traditionally don’t like the whole back-and-forth part of the sales process. Training all of his salespeople to assist a customer from the beginning of the transaction to the end may be the differentiator that is really bringing people back and leading to more referrals.

Whether the key to this dealership’s high customer loyalty and retention originates from the “no dealer reserve,” or from the entire customer experience itself is something that should be closely considered. It could be that empowering his employees to smooth out the sales transaction for his customers is all that was needed to raise customer retention, and it’s not just a matter of leaving money on the table.

A dealer in Washington state has taken a highly unusual - and unheard of - path to customer retention and loyalty. According to Automotive News, Denver Morford, dealer principal at Barry Chrysler-Dodge-Jeep-Ram in Ephrata, Wash., doesn’t believe in dealer reserve. Not only does he not believe in it but he also educates his customers during the buying process that he is legally allowed to mark up the buy-rate (the wholesale rate the bank has approved the customer for) by as much as 2 percent…and chooses not to. He allows each customer to view the responses from the banks and see the buy-rate that is offered. In his opinion, this transparency on the financing side of his business - and the loss of dealer reserve profit – contributes to his high level of customer retention and brings additional sales via word of mouth. He has no finance department, or used car managers, as he trains all of his sales staff to handle customer transactions from start to finish.

It’s certainly an interesting philosophy. The dealership’s combined sales in 2014 between the 3 stores were 160 new and 390 used vehicles, averaging roughly 46 units per store. Transparency in the buying process has been increasingly demanded by consumers, but I’m not aware of anyone else that has connected the dots between transparency and customer loyalty in this way until now. While we don’t have any numbers to compare (gross vs net profit per vehicle), one would have to assume that they are lower than average, as there’s little doubt that this dealership’s competitors are participating in dealer reserve, and offering other back-end products. Of course, the easy way to balance the loss of back-end profit is to increase front-end profit.  But, those same consumers seeking transparency, along with the many forms of information available on the internet, would probably dictate the vehicle prices.

Another theory to consider is that - just maybe - it’s his unusual sales process that’s helping him win customer loyalty and retention. Consumers traditionally don’t like the whole back-and-forth part of the sales process. Training all of his salespeople to assist a customer from the beginning of the transaction to the end may be the differentiator that is really bringing people back and leading to more referrals.

Whether the key to this dealership’s high customer loyalty and retention originates from the “no dealer reserve,” or from the entire customer experience itself is something that should be closely considered. It could be that empowering his employees to smooth out the sales transaction for his customers is all that was needed to raise customer retention, and it’s not just a matter of leaving money on the table.

Manufacturers are increasingly introducing programs designed to increase brand loyalty, and car buyers are staying more loyal than ever before. One of the most recent examples is GM’s decision to expand its free scheduled maintenance programs to more of its vehicles including most 2014 Chevrolet, Buick and GMC vehicles.

Many dealers have offered a few free scheduled services to their sales customers in an effort to not only introduce them to their service department, but to keep them coming back. With manufacturers focusing more on retention and shifting towards offering free scheduled maintenance for new car buyers, this offers dealerships greater opportunity than ever before to build a customer relationship with a car buyer (whether that car was bought from them or a competing dealer). This can not only increase up-sell opportunities, but also increase their chances at future vehicle sales.

Dealerships who have an OEM customer retention program need to recognize that this is a golden opportunity for them to really focus on “WOWing” the customer as, at this point, a customer has no concerns about price (the service is free to them). It’s all about the customer experience. Provide a great customer experience and they will continue to come back after their free maintenance benefit expires. Treat them poorly and they will take their vehicle to your competitor.

Cadillac has offered a 4-year, 50,000 mile free scheduled maintenance program for a while. Even with car buyers keeping their cars longer (58 month average in 2012), dealerships will still have the opportunity to impress and win the loyalty of the consumer for most of their time of ownership. If done properly in combination with the OEM’s brand retention strategies, a dealership can greatly increase their chances of converting that long-time service customer into a new car sale that then converts back into a service customer.

This “circle of life” could continue indefinitely as long as both the brand and your dealership focus on providing customers with programs that are designed to maintain the customer’s brand and dealership loyalty. As length of ownership continues to increase, fixed operations revenue becomes more important than it ever has been in the past. Leverage your OEMs brand initiatives to support your own dealership retention strategies and you can set yourself up to earn more lifetime customers.

The reason OEMs see the wisdom in using such maintenance programs is to sell more vehicles and importantly keep those buyers loyal to their GM dealer.  One might conclude then that this trend erases any market need for third-party prepaid maintenance (PPM) programs. After all, PPMs are substantially the same as those OEMs offer.

Given this, are factories’ free maintenance programs making third-party PPMs unnecessary?

On the contrary, they are now more vital than ever. The first automotive loyalty programs were utilized by dealers in 2002. Now, more than half of all the US dealerships employ some type of loyalty initiative (many through OEM sponsored programs).  But what about the dealerships with multiple brands where the OEM programs could do more harm to the remaining dealer brand than the good they provide to the other?  Multi-brand dealership groups need a solution that will allow cross-selling and plan redemption between all of their brands. OEMs simply can’t provide this type of solution, nor are they expected to.  Think of the brand Starwood Hotels and Resorts. We all know them as The Westin, Sheraton, The W, Le Meridian and others. Starwood wants to encourage their loyalty members to utilize all of their different brands but under one common moniker. Dealership groups that have multiple brands can benefit from this practice, and they will start realizing the benefits it provides to them in cross-brand marketing, (not to mention the vast amount of customer purchase data and analytics it provides).

With a third-party PPM program, a dealer extends maintenance services at a discount price (some dealers choose to give them complimentary to purchasers). Consider that for GM, late-year buyers of its 2013 models won’t receive free factory maintenance. A dealer offering a PPM program can bridge that gap.

Furthermore, only PPM programs enable dealers to:

• Offer similar maintenance incentives to customers who purchase or lease a model year not covered by the factory program.
• Offer these conveniences – and gain their retention value – to purchasers of other makes it sells from its used vehicle inventory.
• Capture bought-elsewhere and other-make customers who visit the dealership service department.
• Offer these advantages to customers of other franchises in its group whose OEMs do not offer free maintenance.
• Offer customers prepaid maintenance after the duration of the OEM program to further retain them. 

Manufacturers are increasingly introducing programs designed to increase brand loyalty, and car buyers are staying more loyal than ever before. One of the most recent examples is GM’s decision to expand its free scheduled maintenance programs to more of its vehicles including most 2014 Chevrolet, Buick and GMC vehicles.

Many dealers have offered a few free scheduled services to their sales customers in an effort to not only introduce them to their service department, but to keep them coming back. With manufacturers focusing more on retention and shifting towards offering free scheduled maintenance for new car buyers, this offers dealerships greater opportunity than ever before to build a customer relationship with a car buyer (whether that car was bought from them or a competing dealer). This can not only increase up-sell opportunities, but also increase their chances at future vehicle sales.

Dealerships who have an OEM customer retention program need to recognize that this is a golden opportunity for them to really focus on “WOWing” the customer as, at this point, a customer has no concerns about price (the service is free to them). It’s all about the customer experience. Provide a great customer experience and they will continue to come back after their free maintenance benefit expires. Treat them poorly and they will take their vehicle to your competitor.

Cadillac has offered a 4-year, 50,000 mile free scheduled maintenance program for a while. Even with car buyers keeping their cars longer (58 month average in 2012), dealerships will still have the opportunity to impress and win the loyalty of the consumer for most of their time of ownership. If done properly in combination with the OEM’s brand retention strategies, a dealership can greatly increase their chances of converting that long-time service customer into a new car sale that then converts back into a service customer.

This “circle of life” could continue indefinitely as long as both the brand and your dealership focus on providing customers with programs that are designed to maintain the customer’s brand and dealership loyalty. As length of ownership continues to increase, fixed operations revenue becomes more important than it ever has been in the past. Leverage your OEMs brand initiatives to support your own dealership retention strategies and you can set yourself up to earn more lifetime customers.

The reason OEMs see the wisdom in using such maintenance programs is to sell more vehicles and importantly keep those buyers loyal to their GM dealer.  One might conclude then that this trend erases any market need for third-party prepaid maintenance (PPM) programs. After all, PPMs are substantially the same as those OEMs offer.

Given this, are factories’ free maintenance programs making third-party PPMs unnecessary?

On the contrary, they are now more vital than ever. The first automotive loyalty programs were utilized by dealers in 2002. Now, more than half of all the US dealerships employ some type of loyalty initiative (many through OEM sponsored programs).  But what about the dealerships with multiple brands where the OEM programs could do more harm to the remaining dealer brand than the good they provide to the other?  Multi-brand dealership groups need a solution that will allow cross-selling and plan redemption between all of their brands. OEMs simply can’t provide this type of solution, nor are they expected to.  Think of the brand Starwood Hotels and Resorts. We all know them as The Westin, Sheraton, The W, Le Meridian and others. Starwood wants to encourage their loyalty members to utilize all of their different brands but under one common moniker. Dealership groups that have multiple brands can benefit from this practice, and they will start realizing the benefits it provides to them in cross-brand marketing, (not to mention the vast amount of customer purchase data and analytics it provides).

With a third-party PPM program, a dealer extends maintenance services at a discount price (some dealers choose to give them complimentary to purchasers). Consider that for GM, late-year buyers of its 2013 models won’t receive free factory maintenance. A dealer offering a PPM program can bridge that gap.

Furthermore, only PPM programs enable dealers to:

• Offer similar maintenance incentives to customers who purchase or lease a model year not covered by the factory program.
• Offer these conveniences – and gain their retention value – to purchasers of other makes it sells from its used vehicle inventory.
• Capture bought-elsewhere and other-make customers who visit the dealership service department.
• Offer these advantages to customers of other franchises in its group whose OEMs do not offer free maintenance.
• Offer customers prepaid maintenance after the duration of the OEM program to further retain them.