Another Possible Option for Pre-paid Scheduled Maintenance

A candid discussion of pre-paid scheduled maintenance: should the product maintain the status quo for most dealers as an also-ran offering, or should it morph into a core product? What would a core product pre-paid maintenance program look like, and who would be the winners and the losers?

The statistical improbability of many F&I products paying a claim, it could be argued, is directly proportional to how difficult they are to sell and why penetrations are not higher (Let's call these products Low Statistical Probability products or LSP's). An example would be a theft product, where the consumer is buying insurance, just in case the unlikely event occurs and his vehicle is stolen. We're betting on that statistical improbability as well, hoping that we get to earn the premium without ever paying a claim.

If one accepts the argument above, the premise of a product that has an almost certain probability of paying a claim should have a correspondingly higher sell rate and penetration rate (Let's call these products High Statistical Probability products or HSP's). Of course, there are huge amounts of variables to consider in this unfair comparison, like premium pricing versus risk. All things considered, however, should we not take a very close look at product(s) that the consumer is very likely to use in order to drive revenues and profit? Further, can we make the equation profitable enough for the parties (provider, agent, dealer, and consumer) to where the adoption rate exceeds the historically low penetration rates of LSP's?

Pre-paid scheduled maintenance (PSM) certainly fits the definition of an HSP. The consumer will ostensibly redeem their "coupons" at specific intervals. I use "ostensibly" here because there are few dealers that realize the potential for earned premium that exists with PSM from customers that do not redeem their coupons. Rumors persist that the non-redemption of coupons could be as high as 60%. Those dealers that are enlightened will demand to participate as the product earns out. Allowing the dealer to participate, or even to completely own the participation component, may be the key to reinvigorating this product.

There are independent PSM providers administering dealer owned PSM programs right now that are gaining traction. If the independent administrators can make a profitable business model with a dealer owned PSM program, perhaps it is time for us to consider this model or risk losing hard-earned market share to them.

It appears that we are at a crossroads and have two choices. One would be to stay on track and accept mediocre PSM penetration rates as they are. The second and more progressive option would be to capitalize on the new PSM approach and design a program that makes a dealer even more loyal to us.

Perhaps it is time to take another look at the essential elements of a successful PSM program, one that performs at extraordinary levels and leaves all of the parties content with their roles.

Let's start where the rubber meets the road, with the consumer in the finance office completing the purchase of a vehicle. Why aren't more consumers buying PSM? The answer is simple: most dealers allow the finance managers to price themselves right out of the market. The typical consumer, when asked to pay $895 for three years of scheduled maintenance, simply adds up the cost of nine or ten oil changes and a half dozen tire rotations and says, "No thanks!"

However, if the goal of offering PSM from a dealer's perspective is to, 1) make a small profit in F&I to keep penetrations high because, 2) the real reason the dealer wants all or most of his customers to buy PSM is for retention in fixed operations first, then to turn those customers into repeat buyers later, then the dealer is on the right track.

Statistics tell us that up to 83% of customers will repurchase if the dealer can keep them returning to the service department for regularly scheduled maintenance.

PSM should be priced in such a way that even if a customer breaks out a calculator and walks back into service and gets the dealer's pricing for oil changes and tire rotations, the total represents at least an equal, if not less amount than we're charging them for the PSM in the first place.

Some dealers successfully turn a one year PSM giveaway into an up-sell opportunity in finance. The savvy consumer decides to lock in non-inflationary pricing today, and finance it, to save money overall on something he knows he will have to purchase tomorrow. PSM penetrations well over 50% are possible with this type of program, executed properly.

Assuming the dealer participates in most, if not all, of the earned premium, the administrator essentially becomes the marketing arm for the dealer's PSM owners. This can be done entirely by polling the dealer's DMS and marketing through automated email software programs, similar to what is used today by fixed operations retention software providers.

For providers of vehicle service contracts, promoting the bundling of a PSM with a VSC should be a natural evolution. Bundling will increase penetrations of both products if the producers are properly trained and the bundled pricing makes sense to the consumer. Priced separately, the best results are achieved when the dealer limits the markup of PSM to around $100 and realizes the big gains by up-selling in the service drive and taking a loyal customer and selling them another vehicle.

Selling PSM should not be limited to the F&I office. Why not market the program in the service drive while the customer is reaching into their pocket to pay for maintenance anyway? Again, training the service advisors to sell the program, plus consistently offering it to every customer and pricing the PSM competitively will drive adoption rates.

Since profit margins of HSP's are inversely proportional to the margins of LSP's, there must be serious volume production for the program to make sense for the provider. High volume PSM production is reasonable to expect from a properly designed, executed, and priced program with a committed dealer. A bigger footprint in the dealership, greater control of the dealer's portfolio of F&I products, and providing another product to the dealer with an inherently more holistic approach to income development (increasing revenue for both fixed ops and variable ops), could be a win-win for the entire supply chain. I invite your comments.