Tag Archive | "pre-paid maintenance"

Combining VSCs and Pre-Paid Maintenance

One of the most profitable, and highest penetration products sold in the F&I office is the vehicle service contract (VSC). Dealers and providers alike are constantly looking for new ways to add value to F&I products, and the VSC is no exception. AE Magazine spoke to Larry Dorfman, Tim Brugh and Mark Cohen to get their take on the latest trends in the VSC arena, and where they see the most opportunity for adding value.

One of the current trends in the F&I market is to bundle or combine several products into one package. While this works with ancillary products very successfully, it turns out that, for many reasons, it is very challenging to combine a VSC with another product on a single contract.

“It’s more clear-cut to break it out,” said Larry Dorfman, chairman and CEO, EasyCare. “The more stuff you add together, the more the CFPB will give us a hard time.” He went on to note that the VSC is probably one of the most important tools in the F&I office – not only is it profitable, but it is extremely valuable to the consumer. He believes that keeping it clean is critical, to ensure customers always have the option to protect themselves from the largest potential financial drain – vehicle repairs – even if they don’t take any other F&I products.

One product that is a strong fit to offer alongside the VSC is a prepaid maintenance plan. While, many believe the prepaid maintenance is better off remaining as a separate contract, prepaid maintenance and service contracts do go hand-in-hand. “[Prepaid maintenance] is a logical progression,” said Tim Brugh, president, American Auto Guardian Inc. (AAGI). “If a customer wants to have maintenance taken care of, it is a 1-2 conversation – they are already trying to protect the car, and the prepaid maintenance protects the car even further.”

Dorfman noted that some of his dealers have started offering maintenance plans free for the first year along with their service contracts, as it acts as a great retention tool, and gets the consumer used to coming in to the dealership for maintenance. He noted that the dealers he has seen use this method generally include several oil changes and a safety inspection, at minimum, and have seen a great deal of success, with up to 70% penetration rates.

Agreeing, Brugh noted that offering prepaid maintenance alongside the VSC helps to ensure the car remains within the contract parameters. “The odds are we can’t cover the contract if they didn’t maintain the car,” he noted. But if a dealership ensures the customer is coming in for regular oil changes, inspections, etc., they can ensure that if the customer does need to make a claim on their service contract, they don’t have to worry about being disqualified.

Another reason the maintenance-VSC combination works so well, Dorfman noted, is that, by law, VSCs cannot require that a customer comes into a specific service department to maintain their vehicle. The contract can require them to maintain it to a set standard, but it cannot specify where they go to have that maintenance performed. He believes the pre-paid maintenance plan is the best way for dealers to ensure that the customer does not think about taking the vehicle elsewhere for maintenance or service.

Brugh went on to note, however, that one of the big reasons he still believes it is better to keep the two separate is lender approval. “I think it would be very valuable to bundle them together if you could get the lenders to approve it,” he said. “One of the problems is getting them to approve the additional variations. Because your VSC is always approved if you have the right type of carrier, there usually aren’t any problems – but you start to have problems when other products are added on. Lenders are as important to the process as compliance is today. You can build it, and you can make it compliant, but getting lenders to approve it can often be the biggest challenge..”

The Compliance Puzzle
Speaking of compliance, there is a complex process going on behind the scenes to ensure the contracts offered to the dealers – and in turn sold to the consumers – are not just profitable, but are compliant with a large, complicated web of regulations dedicated just to service contracts.

Mark Cohen, senior vice president and general counsel, AAGI, noted that, today, about half of the states have regulations or statutes that govern service contracts. But the problem gets more complex – every state’s regulations are a bit different, with all of them requiring slightly different wording or clauses, as well as either allowing or disallowing specific types of provisions. Further, some of those states simply have statutes that providers and administrators – and dealers and agents – are required to be aware of and follow, but they don’t actually look at the contract unless a complaint is filed. Other states require providers or administrators to submit and gain approval for every version of every contract sold.

“There are 50 kingdoms and each one is a little different,” said Cohen. “Some don’t have any regulations on VSCs at all. Other kingdoms say ‘you have to be licensed to be a VSC provider, and here’s what you have to have, but we don’t need to approve them. Just make sure they comply.’ And then there are some where you have to be licensed and submit the contracts for approval.”

And as if that weren’t complicated enough, providers and administrators have to constantly update their products to comply with new regulations, or new interpretations of old regulations, and go through the entire approval process all over again, every time. “Every state is so different, and constantly changing,” said Brugh. “You used to be able to file a product, and until you renewed it, you were okay. Now if they change the law, you have to keep changing the contract to meet their standards; we are constantly redoing contracts in the VSC industry.”

So what does that approval process actually entail? Cohen, like Brugh, noted that it often starts with the lenders – providers and administrators make sure, before they go any further, that a contract is something a lender would be willing to finance. Once that approval is obtained, depending on the state and what is required, the contract is submitted to the Department of Insurance, or a similar government body, who will review it and send it back with notes. Typically, Cohen noted, the provisions on cancellations are the sections that are the most scrutinized.

“And that’s just in the states where you have to file before you can use it,” said Cohen. “But you had better be on your game in states where you are licensed but contracts do not need to be approved; you have to make sure it complies. You have to have a compliance department, which reviews the contracts to make sure they’re in compliance with each statute. This is a highly regulated industry, and if you don’t want to be regulated, this is not the business for you.”

At the end of the day, Dorfman noted, the key is to make the entire process as easy and painless for consumers as possible. If they are relaxed and confident in the products, they will walk away happy with their purchase, and will be more likely to not only return to that dealership, but to purchase additional products in the future. And regulators will have less reason to create new regulations or add additional stipulations to current laws if consumers are getting contracts they feel are fair and valuable. “Treat customers well, and they will buy anything. But don’t treat them well, and they will scorch you,” he said.

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Pre-Paid Maintenance – The Time is Now

The question is; to offer a pre-paid maintenance plan or not? It is a good question and one that every agent should be asking their dealers. When you look at the statistics it is pretty easy to determine that every dealer needs to find ways to get their customers back in the service department.

Every time I see the stats they are the same: 76% of customers that service with a dealer outside of the manufacturer’s warranty period will return to give that dealer a shot at selling them another vehicle. There was a time that people wouldn’t think about going anywhere but the dealership to have their routine maintenance performed, but that was a long time ago and since then a multi-billion dollar industry emerged in the quick lube business.

The thing about the quick lube business is they are also getting the service work that the dealers used to get. That means those customers are up for grabs when they are in the market for their next vehicle, so using a customer retention tool such as a pre-paid maintenance plan will help your dealers take better care of the customers they have worked so hard to get – and keep them from shopping with the competition before their next purchase.

Pre-paid maintenance plans are becoming so popular that the manufacturers are now pushing them because they know that if they can keep the customer servicing at their branded dealerships those manufacturers will retain that customer. They are even starting to, or have already moved, to customer retention as their indicator on how a dealer is performing – even more so than CSI.

So, now that you know you should be looking at adding a pre-paid maintenance plan to your product mix, if you don’t have one already, what works? Ideally, dealers should build their own plans with the help of their agent. That will drive customers back to their facilities, and highlight the specific areas each dealership wants to focus on. Also, the manufacturer programs will allow your dealer’s customers to use the plans they bought in competitor’s service department, so the little extra cost to have a dealer-branded plan will pay off many times over versus simply using the manufacturer’s one size fits all program.

Once your dealer chooses to have a pre-paid maintenance plan, they need to decide whether a pre-load program that can be upgraded is the right option, or should they offer a stand-alone program? Either option is good, it really depends on what the dealership is trying to accomplish, and this is where you, as an agent can help them identify the path that best suits their needs. The pre-load programs help dealers differentiate themselves in the market place, while a combo approach helps a dealer build value, offering the customer a significant savings for prepaying for their basic maintenance at time of sale.

The key to any pre-paid maintenance plan being offered at the time of sale is to keep it simple; the object is to get the customer into your dealer’s service drive, and let the professional service writers take it from there.

What we are trying to accomplish with any pre-paid maintenance plan is to introduce the customer to the service department, and to show them that our dealers can be quick and are price competitive. We are trying to educate that customer that the dealership really is the best place to service the vehicle, and not just during the warranty period. Dealers need to retain that customer in their service department once that warranty period has expired, and the use of a pre-paid maintenance program that extends past the manufacturer’s warranty is a pretty good way to help your dealer’s customers form a habit of returning to the dealership.

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Maintenance Plans Keep Consumers Servicing at Dealership After Expiration

DAYTONA BEACH – DMEautomotive (DMEa) released findings from its new national consumer survey that provides insight into the state of prepaid (PPM) and complimentary dealer and OEM maintenance plans, from current penetration rates and customer satisfaction levels, to the precise role these plans play in dealership service retention.

“Our survey provides fresh evidence that both prepaid and OEM-provided maintenance plans have a powerful impact on dealer service retention,” said Doug Van Sach, vice president of strategy & analytics at DMEa. “With nearly three in five 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% (depending on vehicle make and age) – 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 shopper’s business.”

While the majority (65%) report using their plan for “all” scheduled maintenance, a surprising 25% have only used it for “some” of their covered services. So, even though a free or paid-for plan is in place, plan holders are still choosing to spend service dollars outside the dealership – a possible reflection of the lack of convenience traditionally associated with dealership service centers. Also, a significant percentage of plan-holders either are not being consistently engaged by their dealership, or are not finding value in their plans, with 9% reporting they have not used it at all.

Overall, 56% of those with a maintenance plan report they’re likely to keep servicing at the dealership when the plan expires (with only one in five claiming they’re unlikely to). Dealerships clearly need to work hard to keep those in-plan loyalist intenders, and move the 25% that report they’re on the fence about sticking with the dealership to the loyalty column.

How much consumers use their plans, and whether they exclusively service with that dealer, correlates with a significantly higher likelihood to continue service with that dealership post-plan. For instance, 62% of those that use plans for “all” service are likely to stick with the dealer. And nearly two times more consumers in that group report they’re “very likely” (30%) to return to the dealership, compared with those that only have “some” maintenance performed under the plan (17%).

Capturing the Younger Market
While young, under-35 servicers present the most profound loyalty challenges for dealerships (data confirmed by previous DMEa white papers), this survey reveals that maintenance plans represent a major opportunity to connect with – and retain – them. Not only were those under 35 more likely to have a maintenance plan (31%) than those 35+ (18%), they were significantly more likely to use their plans for “all” maintenance (72%) than older customers (61%).

Notably, those aged 25-34 (who used plan for “all” maintenance) reported the very highest plan satisfaction (84%) compared with any age group – and 62% of that segment reported they’re likely to service at the dealership post-plan. With prior DMEa data revealing that the largest group of dealer-disloyalists are aged 25-34 (representing over one-third of total disloyalists), it’s clear that maintenance plans are a uniquely powerful way to drive more loyalty among that critical ‘next wave’ of traditionally dealer-resistant servicers.

“It’s imperative that dealers and OEMs offer free and prepaid programs, because more than half of all consumers currently under one indicate they will stay with the dealership post-plan,” noted Van Sach. “Our data did contain some surprises: one in four customers still stray from the dealership while under a plan; and consumers who do not have “all” service performed under the plan are significantly less likely to continue servicing at that dealership. So, if dealers or OEMs imagine that under-plan service taken elsewhere just means more profits – or that they don’t need to worry about keeping these customers very ‘close’ and satisfied until plan expiration – this data clearly shows that those beliefs need some revising.”

This maintenance plan “market snapshot” represents first findings from DMEa’s newest survey on current service consumer behavior and trends. Reports on diverse topics, from QR Code, mobile app and social media usage, to how servicers research specific service purchases, will be released over the next three months.

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