The most critical defection point for a dealership’s customers is during the transition from warranty to post-warranty. As the cost of vehicle ownership inherently increases, owners begin to price shop—or even worse, just assume the dealership is more expensive than independents, and look for alternatives.
Although this period presents a concern for dealers, it also represents an extremely large opportunity. However, to retain customers requires a shift in mindset.
Rather than viewing each service appointment as a transaction with the goal of making as much money as possible, you need to play a volume game. The more vehicles you service, the more profits you will make. But how do you retain more customers?
Here are several strategies to try.
Many dealers don’t put a lot of thought into their service pricing strategy. While the vehicle is under warranty, the price is determined by the OEM. After warranty, dealers tend to charge the same labor rate whether they’re doing an oil change or a transmission job. The labor rate might be $100/hour, regardless of whether the tech is getting paid $30/hour or $50/hour. If an oil filter costs $4, they charge $8. If another part costs $35 they charge $70.
Unfortunately, this cost-plus strategy doesn’t win the customer retention game. Pricing needs to reflect relative competitiveness.
If a customer has a BMW, there are a dozen places he can go to for an oil change. Same if he needs tires. But if he needs transmission work, there are few options. How can you make sure he comes to your dealership?
Win his trust with an intelligent pricing strategy. On vehicles transitioning out of warranty, it’s OK to make no margin on those oil changes, or to have a price-match guarantee. Your profit on that oil change is not going to make or break you, but increasing your retention of 4- to 6- year old vehicles will determine your long-term profitability. Think of the discount as an investment in the on-going relationship.
When you have a relationship with a customer, your dealership will be the only place they think of when it’s time for a brake job or transmission work. They won’t even think of shopping around. What is that worth to you?
It may sound counter-intuitive, but your pricing strategy needs to accept lower margins on “commodity” type work such as oil changes and new tires, in order to get more of the high-margin work. Commodity jobs should be discounted more than complex transmission or electrical work, for which dealers are better equipped and perceived as more capable. Not only your price, but your messaging should also reflect this strategy.
Add Value to PPMs and Extended Warranties
Selling pre-paid maintenance plans and extended warranties can be challenging. The customer only has so much money, and when they buy a car they’re usually more focused on keeping their monthly payments to a pre-determined limit.
You have another chance to sell them as they approach end of warranty, but you’ll only be successful if you add value. Make a list of all the services in a pre-paid maintenance package or warranty, along with their rack rates. Let’s say the total cost is $5,000. But because the customer is buying the services in a bundle, they’ll save 10% or 20%, so you charge $4,500 or $4,000.
Another best practice I’ve seen is to offer packages with a progressive discount. For your next service, 5% off. For the service after that, 10% off, 15% for the next, and so on. Perhaps set a limit at 20% off. Recognize that if you can retain this customer for seven years or even three years at a 20% discount, that’s a lot better than losing them shortly after warranty. You make less margin off each customer, but you’re retaining more customers, so the profit should be the same (if not higher).
Create Service Plans
Many dealers fail to notify their customers before their vehicle goes out of warranty. During this critical period, host a consultation with every customer prior to the end of their warranty period. Ideally this consult will occur when the customer comes in for their last service prior to end of warranty. Discuss ownership intent and likely service requirements over the next 3-5 years.
The purpose of this meeting is to create a service plan that reflects each customer’s needs and preferences. Most customers don’t have any idea what the cost of ownership for their vehicle will be when the warranty runs out, so show them. Create a customized plan and create three alternative approaches for the customer to meet those requirements, while demonstrating the value associated with each plan.
You may have to concede some commodity-type work to secure more critical work. For example, if the customer insists they want to get their oil changes done at Jiffy Lube because it’s closer to their home, or they like buying tires at Discount Tire, you don’t have to include those items in the plan.
These three strategies will help you retain more customers after the warranty period ends, which also gives you a shot at retaining them throughout the entire ownership lifecycle. As you retain more customers and as their service requirements increase, you’ll still be able to grow service margin dollars, albeit at slightly lower margins.
Blog | DATE 05, 2020