If you want to increase your vehicle service contract penetration while simultaneously reducing reinsured VSC loss ratios, package the deal with a dealer-branded prepaid maintenance plan or sell (or gift) it separately to VSC buyers.
Selling or gifting a PPM to a customer is the best complement to any VSC. PPM incentivizes motorists to have their vehicles serviced at the dealership, which establishes a pattern and makes those customers more likely to return to the dealership for needed repairs covered by the VSC.
Vehicles receiving routine maintenance more frequently under PPM use should suffer fewer mechanical issues. By helping reduce claims against reinsured or direct business VSCs, PPM use contributes to a lower loss ratio.
The Winning Combination
Our data shows that dealers using this strategy increase VSC sales by 10% and enjoy an 8% reduction in VSC loss ratio, on average.
The value of vehicle service contracts and their mechanisms are well understood. However, PPMs work in different ways to drive service volume and retention. PPMs are prepackaged and often include discount-priced bundles of various routine maintenance services. Most dealers build their plans around an oil change, a tire rotation, an alignment or other wear-and-tear items.
Here’s how this combination helps create these results:
- Every VSC provider requires the policyholder fulfill the vehicle’s proper maintenance to ensure the VSC still covers necessary repairs during mechanical failure. In other words, failure is not due to neglect by the motorist.
- Dealer-branded PPMs keep customers returning to their dealership for routine services covered by the plan. Benefits encourage plan holders to visit the dealership more often than they would otherwise. This habit extends to the motorist using the VSC at the dealership, solidifying a stronger retention relationship.
The average price of a VSC is widely varied, based on named peril or exclusionary coverage, and range between $1,000 and $3,000. Add a PPM plan that raises the total price by $150 or more, but helps ensure cover-ability at the time of loss. With the right PPM, the customer also has a digital record of the maintenance services performed, to help validate their value if their VSC claim is denied due to a rejection on based on lack of routine maintenance.
Data shows that dealerships using a retention plan specifically designed and managed to retain customers enjoy an 85% first-year retention rate and a 65% rate in the second and third years. Also, these dealers report PPM use contributes to a $70 increase per repair order in customer-pay. On average, users use plan benefits at least four times a year.
Not Created Equal
Not every maintenance plan delivers these benefits, notes Scott Smith, dealer principal for Automotive Associates of Atlanta, a premier, privately owned, six-store automotive group. He dropped OEM and other third-party providers’ maintenance programs because those plans did not lock the consumer into using the issuing dealership for service.
“Those other plans give consumers too much flexibility in where those plans can be employed — we wanted a program that makes sure those customers service back here,” he told me.
A PricewaterhouseCoopers report notes that dealers have some or all control of their insurance products claim processing — especially for VSC and maintenance plans — and can leverage that accessibility to drive customer loyalty.
“Efficient claims processing, coupled with an effective fraud control, can contain costs, increase loyalty, and cement long-term partnerships with the dealer,” the report noted, in part. “This is especially important for products where dealers own the risk, such as in reinsurance programs.”
Given how PPMs sold in F&I (or in service) benefit the dealership, the PPM has replaced GAP and other ancillary products as the second-most purchased product behind service contracts. PPM use offers the customer and the dealership a mutual benefit and does not rely on a loss to trigger the coverage. It is proactive coverage that helps both.
The data show that customer use of a dealer-branded PPM when packaged with the sales of a VSC promotes a 10% increase in VSC sales. Because the customers possessing both products maintain their vehicles better, their service contract claims are less, which is great news for VSC loss ratios. Preventive maintenance helps in any insurance environment!
Ryan Williams is president of Fidelis PPM and a 20-year veteran of the auto retail and service industry. Email him at [email protected].