The solution to capturing more customer-pay service starts by simply giving the customer a no-brainer reason to visit the dealership’s service department at least once before going anyplace else and proving to them that they will have a good experience at a fair value.
Profitability is the ultimate goal of any business, and dealerships are no different. The challenges can come in many forms. This year is a perfect example.
Fueled by pent-up demand following COVID-19, the auto industry is coming off a record-breaking spring that saw its strongest May ever for new and used car sales and June sales soaring 15% over the same pre-pandemic period in 2019. However, the industry is also experiencing historically low inventory due to the strong sales and disrupted production from the global computer chip shortage, with May inventory running 43% behind the same time last year and 54% below 2019.
The combination of strong sales and tight inventory is driving up record prices. The average new car price in May came in 12% higher than a year ago, at more than $38,000. In turn, the higher prices are pressuring car buyers to continue extending their auto loan terms. Since February, loans with a term greater than 72 months have made up 30% of all loans. These are customers who won’t be returning to the dealership any time soon for another vehicle and when they do, they’ll be carrying a ton of negative equity with them. So, the question becomes how does a dealer maximize revenue with limited inventory and without sacrificing profitability in the future?
The answer is to capitalize on the profit centers they already have, because initiating anything new right now is going to be next to impossible. Don’t let employees become complacent because their bonuses are on the rise. Their short-term gain in the current environment cannot become the dealership’s long-term problem.
Consider these statistics:
- The new-vehicle department accounts for about 58% of a dealership’s total sales, but it contributes less than 26% of the dealer’s gross profit and, of that, 83% comes from the F&I department.
- Approximately half of a dealer’s gross profit (49.6%) comes from the service and parts department, and yet, only 13% of customers routinely get their vehicle serviced at the selling dealership.
- Of those 13% who do have regular maintenance performed at the selling dealership, 76% will purchase another vehicle from that store. That’s 35-40% higher than for customers who get their vehicle serviced someplace else.
The obvious question then is why? Why won’t a customer choose to get their vehicle serviced by the selling dealership in a routine manner? There can only be a few reasons: 1) They had a bad experience with the dealership during their purchase, 2) They think the dealership service department will be more expensive than the oil-change franchise down the street, or 3) They worry about getting overcharged for service at the dealership as opposed to a third-party repair shop or service center. Except for #1, which needs to be dealt with regardless, the simple answer is fear and perception.
The solution to capturing more customer-pay service starts by simply giving the customer a no-brainer reason to visit the dealership’s service department at least once before going anyplace else and proving to them that they will have a good experience at a fair value. Remove the ability of third-party shops to sell the idea that franchised dealers rip off everyday consumers. One positive visit can create a relationship that returns a customer to the dealership for service on a regular basis, and brings them back again when it’s time to trade for a new vehicle. All it takes is just one visit.
AutoPayPlus recently unveiled a new, industry-first fintech dealership program that directly addresses the two issues dealers face today – longer term loans with greater negative equity and the failure to drive service retention. AutoPay+PERKS combines a proven biweekly loan payment service with a dealership cash loyalty program. It begins at the point of sale by enrolling customers in an F&I service that uses automated biweekly payments to help car buyers better afford their loan payment, purchase additional products, shorten their trade cycle and reduce negative equity.
Once the customer’s account has been active for six months (and it’s time for their first service), they will receive a dealer-branded debit Mastercard preloaded with $100 that can only be used exclusively at the selling dealership’s service department and nowhere else. Dealers have the option to load additional funds to the card whenever the customer uses it for service, thus further incentivizing them to return. In effect, they are getting a better deal every time they use their dealer-branded Mastercard at the dealership as opposed to using another card at a third party service center.
The program is supported by a mobile app that lets customers access their benefits from a dealer-branded service page; add funds to their card; receive factory recommended, regularly scheduled service reminders and recall alerts; and book their service appointment using the dealer’s online scheduling portal.
The current retail automotive environment is unparalleled, producing both once-in-a-lifetime opportunity and peril. While dealers have experienced record net profits during this past 18 months along with their commissioned employees, customers aren’t in the same boat. They are facing all-time high car prices which are leading to historic loan terms that will only lead to longer trade cycles and negative equity. That’s a real problem for dealers down the road.
Those gaudy F&I numbers won’t be coming back in 36-48 months because the customers won’t be, and the only way to compensate is to make sure dealerships prioritize and maximize their service retention and service department income. What they are going to lose in the front, they need to be prepared to make up for in the back.
Robert M. Steenbergh is the founder and CEO of AutoPayPlus, an industry leader in providing non-bank financial services to consumers via an automotive channel.