Mar
25

Why Prepaid Maintenance Should Produce More than Customer Retention

By Mike Gorun at Performance Loyalty Group  //  March  //  No Comments // Tags: , , , , , ,

Service Group Advisor | Volume VIII, Issue 1 – When a dealership offers a prepaid maintenance program (PPM) to customers, what is the dealership hoping to get in return? Certainly one answer is to gain customer affinity for the dealership.
Why Prepaid Maintenance Should Produce More than Customer Retention
That affinity is profitable too. Experience shows that customers who use a dealer’s repair facilities are 17 times more likely to purchase their subsequent vehicles from that dealer. As fortunate as that is, the true long-term benefit is that PPM plan customers frequently purchase additional customer-pay retail parts and labor services that boost repair order profitability.

Necessary for the dealership to capitalize on this opportunity is the dealership’s commitment to deliver a safety and reliability inspection to every vehicle owner. This inspection helps verify the needs that brought the vehicle into the shop in the first place and for technicians to identify other legitimate maintenance and repair needs beyond those covered by the customer’s PPM plan.

Boosting a PPM repair order with another $150 to $350 of additional up-sold retail customer-pay business will add serious money to the bottom line. When a PPM plan is built into used vehicle prices, a dealer can bump after-sale service use of his or her dealership from about 15% to upwards of 50%.

One dealer who plugs a basic three-product PPM plan into every one of the 600 used units it sells yearly expects to generate more than $1.3 million in total incremental service revenue. This return is based on a $682 retail upsell per customer per service visit over the two-year plan term, even after factoring in a 55% utilization rate and plan costs.

Studies of current customers purchasing one company’s PPM program reveal a remarkable statistic: while current industry statistics indicate that roughly one in five customers return to the dealership for service, this company’s plan holders are visiting their servicing dealers at a rate of 72%.

Further, plan holders that return to the dealership to redeem their plan elements also purchase incremental retail service about 90% of the time. In addition to the increased visit frequency, those plan holders are spending an average of $128 per visit for incremental retail service upsell products and services.

A dealer that writes 1,500 repair orders per month can easily sell 150 to 200 maintenance policies just by asking the customer. In F&I, it takes a 500- to 600-unit store to generate the same 200 maintenance policies.

So, given these upsell profit opportunities, why are some dealers’ prior experiences with PPM disappointing? Many have said that customers simply won’t buy these plans. However, this may not tell the entire story. When those programs are examined, it is clear why customers wouldn’t be interested – they were loaded with services of low value to the customer yet priced quite profitably for the dealership. This is unfortunate, as the nature of these plans and dealers’ inability to sell the plans cost dealers much lost service business.

Newer, redesigned PPM programs help to eliminate this downside. Today’s programs offer a wider range of products and services. These programs, usually administered and managed to offer what is considered valuable to the dealership’s customers and market, seem to really work – for consumer and dealer.

Finally, today’s PPM plans are software-driven, handling once time-consuming chores like plan registration, service claim and premium submission. Because dealers control these programs, any reserve or forfeiture is immediate. Forfeiture is money remaining in the reserve for plan services not redeemed by purchasers.

Every plan will experience forfeiture. It results when a customer terminates the plan early or for whatever reason does not use the plan. For most traditional PPM plans, the third-party administrator holds this dealer-funded reserve. It is from this reserve that the administrator would often take up to 60% of the value of the cancelled services as part of its fee structure.

The new generation of self-administered, self-manager PPM plans offers attractive advantages to today’s market and value-conscious buyer. Custom plan content really appeals to them. That richer content makes these plans more attractive. These plans also enhance the owner’s investment in having the vehicle maintained by the dealership where they bought the PPM plan. This, in turn, enhances opportunity for alert advisors to upsell additional services for healthier repair orders.

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