Dealerships ramp up sales of prepaid plans
Published in Automotive News
As automakers reduce or even eliminate free maintenance for new vehicles, dealerships are stepping up their promotions of prepaid plans for routine services such as oil changes.
The plans offer basic services at a discount to encourage customers to keep up with scheduled maintenance, making major repairs less likely. Dealers say such plans help retain customers, boost fixed operations profits and stimulate repeat service sales.
As of last year, 1 out of 9 new-vehicle buyers, or 11 percent, purchased a prepaid maintenance plan, the National Automobile Dealers Association reports. That take rate rose steadily from 3.3 percent in 2009.
Prepaid plans, which often are available to used-vehicle owners as well, typically include oil changes, tire rotations and multipoint inspections. They take vehicle age and odometer miles into account.
As a rule, the more extensive the plan, the higher the price. Automakers, independent vendors and individual dealerships all market prepaid plans.
Kelley O'Reilly, a marketing professor at Western Michigan University, says owners "are not proactively scheduling their vehicle's maintenance."
"Most consumers will not be open to prepaid maintenance programs unless it is something that they don't have to see," such as a plan whose costs are included in vehicle loan payments, O'Reilly told Fixed Ops Journal.
Automaker cutbacks
Some automakers and brands, such as Ford, Nissan and Volkswagen, no longer include free scheduled maintenance with the purchase of a new vehicle. Others, such as Toyota, Chevrolet, Volvo and BMW, still do.
Pay up front
VW of America dropped its included maintenance plan several years ago, says spokeswoman Jessica Anderson. "We looked at our volume competitors and, for the most part, they weren't offering it," she says.
BMW of North America has trimmed its Ultimate Care program of free maintenance to the first three years or 36,000 miles of ownership from four years or 50,000 miles. Owners of new and certified used vehicles can buy as many as four additional years of Ultimate Care Plus coverage, starting at $600 a year.
In October, Wallace Imports of Bristol, a Subaru-Kia-VW dealership in Tennessee, began selling prepaid maintenance plans bearing the dealership's name.
Before that, says TCBaker, the dealership's general sales manager, customers who bought prepaid plans offered by the automakers did not use them fully. The providers of those plans pocketed the "spoilage," Baker says.
The dealership developed its own prepaid program, Wallace Advantage, with the help of Fidelis PPM, a plan provider in Scottsdale, Ariz.
The Wallace plan enables customers to pay in advance for maintenance outlined in their owner's manuals for vehicles with 36,000 to 60,000 miles on the odometer.
Advantage plans cost $400 to $995. Baker says the dealership's plans "sell at three times the rate of the OEM plans" but did not provide specific figures. The dealership is developing a separate prepaid maintenance plan for used vehicles, he adds.
Return on investment
Even modest sales of prepaid plans add to the profitability of a dealership's fixed operations, says Fidelis President Ryan Williams. A $19.95 oil change typically produces an average repair order of $86, Williams estimates.
Fidelis provides prepaid plans to about 800 U.S. dealerships and dealership groups. The company charges its dealership customers a one-time setup fee of $499 for prepaid plans, plus $199 for each additional store.
Fidelis also collects a fee for each plan a dealer sells. That amount varies, Williams says, although another Fidelis official estimates it averages $30 per consumer.
Sixty percent of new- and used-vehicle owners buy a Fidelis plan, its dealers report. And about 70 percent of those buyers return to the dealership for service after the plan expires, Williams says.
"Forty percent of all our dealers do a complimentary giveaway of a one- or two-year plan," Williams adds.
Paradise Chevrolet-Cadillac in Temecula, Calif., includes a lifetime oil-change plan with each new and used General Motors brand vehicle it sells. The plan is good for as long as the buyer owns the vehicle but cannot be transferred to a new owner.
Service Manager Doug Ritchey says the dealership typically charges $80 for an oil change using synthetic oil and for related services, making the plan valuable.
Mike Armstrong, the dealership's service director, adds: "We sold 800 vehicles with lifetime oil-change plans in December. It has been a huge retention tool for us."
Keffer Chrysler-Jeep-Dodge-Ram in Charlotte, N.C., gives new- and used-vehicle buyers coupons for two free oil changes at the dealership to encourage them to buy prepaid maintenance plans offered by Mopar, the service organization of Fiat Chrysler Automobiles.
One popular plan charges $129 for four oil changes over two years, with semisynthetic oil and filter, says A.J. Bitterman, the dealership's fixed operations director. The dealership generally charges $55 for a single oil change, he says.
Bitterman notes that the dealership pays FCA $120 for the two-year plan. "We don't mark the [prepaid plans] up much," he says. "For us, they are more important as retention tools."
Nearly 40 percent of customers buy the two-year prepaid oil change plan from the dealership, Bitterman says.
A good experience with a dealership's service department can build trust and result in repeat visits, O'Reilly of Western Michigan University says. But that may not encourage vehicle owners to pay upfront for services down the line, she adds.
And the potential exists for a customer service headache, she warns, if buyers of prepaid maintenance plans want their money back after a poor service experience.
Williams of Fidelis says prepaid maintenance makes such complaints less likely, "as customers come in much more frequently and real relationships are forged."
"With our millions of claims and services performed," he says, "I am not aware of [a refund demand] ever happening."