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Driving Retention
Prepaid Maintenance Plans Boost Customer Retention for Lease Customers
Plan penetration 40% for some franchises, driving service profits too
By Mike Gorun

Dealers focused on customer retention are selling prepaid maintenance services to their lease customers in an intensifying battle to retain them lease after lease.

Honda Cars of Boston reports that 40% percent of its lease customers choose to buy its prepaid maintenance plan, which it rebrands from a third party as Honda Guys Care, when presented with the option in the F&I office.

Even though the structure of leasing itself promotes repeat business, here is why “packaging” maintenance plans with leasing makes sense:

  • It levels the competitive landscape. Many OEMs now package “free” scheduled maintenance services into their vehicle offerings. Dealerships representing brands not offering these plans now can promote similar plans that can negate this challenge.
  • It captures lease customers’ affinity. Dealership-sponsored plans build affinity with the dealership, not the OEM as OEM plans do. Most dealers would prefer to retain the lease customer to the dealership and not the same-make competitor across town.
  • It enhances customer service. Rolling the cost of a prepaid maintenance plan (usually under $1,000 cost to the lessee) into the lease provides no-hassle scheduled maintenance services for the term of the lease. Customers 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. Vehicles brought into service to use plan benefits give advisors opportunities to up-sell legitimate service needs, such as tire wear, body dings, malfunctioning lights and other items.

The plans designed by Honda Cars of Boston include routine maintenance services required by American Honda Motor Company, Inc., as well as filter and fluid changes, tire rotations and wiper blades. By providing these plans, the dealership can deliver a better ownership experience for its customers to help solidify their long-term retention.

Empowers retention
According to Bloomberg News and Edmunds.com, two million vehicle leases will expire this year. 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.

Ricky Beggs, Black Book’s editor, notes in 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.” Experian Automotive says that luxury import leasing will continue to be strong, greater than 62% of deals for BMW and Mercedes-Benz.

OEMs and dealers alike agree that lease retention is profitable. For instance, manufacturers may sponsor lease pull-ahead offers to strengthen customer retention. These programs pay customers’ remaining few lease payments if they will re-lease or purchase the brand again.

According to fourth quarter 2012 figures from Experian Automotive, new lease share of new finance was 24.79%. This is a large pool of customers whose retention can mean significant repeat revenue for dealers. While per-transaction revenue is often less on lease deals than sale deals, leasing’s built-in retention factor can make lease customers some of the dealership’s most profitable customers.

Builds service profits
The Chicago Automobile Trade Association, citing NADA, notes that selling prepaid maintenance services to lease customers can help offset the revenue gap between lease and sale vehicles. “Another way to boost profitability [per vehicle leased] is to sell maintenance packages along with the lease,” CATA noted.

In some cases, lease agreements may stipulate that the leased vehicle be serviced by the brand’s certified technicians working in the brand’s dealerships. While such language is designed to ensure proper vehicle maintenance on these vehicles, it also keeps that service work within the brand’s franchises and not the aftermarket.

The right prepaid maintenance services for lease customers simplify retention:

Their potency is the money-saving value they provide customers while creating additional up-sell opportunities for the dealership.
There are no coupons books to produce and no coupons needed for customers to use plan services which saves the dealership thousands of dollars in marketing costs.
ROI is measurable.
According to a study by MediaTrac of 48 dealerships using a third-party maintenance plan, these dealers enjoyed an average of $102 in additional revenue per repair order for services not covered by the plan. In other words, this is the customer-pay business derived from legitimate upsell flowing from plan-provided services, such tire, chassis, fluids and related needs.

Some other notable study findings:

  • Almost 95% of all plan holders purchase additional services beyond those included in the plan
  • Plan holders visit their service department three times as much as do customers not owning such a plan (approximately 68% vs. 22%)

Lease-bundled plans should include the basic required scheduled maintenance services specified by the vehicle’s OEM plus other services the dealer might choose to include, such as tire rotations, alignments, fluids changes and wiper blades.

Hope is not a strategy
Many dealers hope that their lease customers will lease or buy from them again. Considering the percentage of lessees who do, these dealers’ hope might seem warranted. However, market dynamics are always in flux, so the battle for every consumer, lease or otherwise is intensifying.

OEMs recognize this, as some are including “free” scheduled maintenance services in vehicle sales to strengthen the bond between OEM and customer. Dealers as well are beginning to sell third-party plans that brand the dealership over the OEM to lease customers in F&I and are rolling the plan cost into their lease payment. In either case, the objective is to enhance the customers’ vehicle ownership experience so they’ll remain customers long-term.

To simplify plan mechanics, many dealers use prepaid maintenance plans driven by web-based technologies. For dealers, this approach offers a simple yet sophisticated means for managing, administering and communicating plan guidelines and values to customers. Furthermore, such software-driven plans help the dealer communicate more easily and consistently with plan holders, additionally helping to shape and strengthen the relationship.

Selling prepaid maintenance plans to lease customers helps position the dealership to retain their lease and vehicle service business long-term. Penetration rates as high as 40% indicate lease customers value the benefits these plans provide them, giving them greater peace of mind and a more exceptional ownership experience.

About the author

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 for Ford, Nissan and General Motors. You can reach Michael at mgorun@performanceloyalty.com.

About Performance Loyalty Group

Headquartered in San Ramon, California, Performance Loyalty Group is a leading marketing technology company providing customized loyalty rewards, customer retention, prepaid maintenance and media tracking programs for the automotive industry.

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