Dealers for years have been reinsuring their service contracts to help increase F&I income and store profitability. I do not think we need to get into the benefits of this profit center for every dealer in the United States and how important it is. A trend we have noticed lately though is that many dealers are taking advantage of reinsuring their retention programs.
When we bring this up in presentations, we always get the sideways glance and the wrinkled nose. We usually start explaining how, if designed properly, it can be just as profitable as your service contract business with half the lost ratio.
Here is what a lot of dealers are doing to create this new profit center. You start by adding a lifetime program to every car. Lifetime powertrain or engine works the best. You then set up a reinsurance program to cover the cost of claims. Here is were it starts to get interesting. Unlike a service contract where you are getting a forty or fifty percent penetration this goes on every vehicle sold. You now have 100% of your customers contributing to your reinsurance program. Let us look at the loss ratios. On a lifetime engine program, the loss ratio on new cars is 6% and on used cars it is 13%. These percentages come from us tracking claims for over fifteen years while we have been administering this program. Now compare that to the loss ratio for your service contract in most cases it is four or five times higher. On top of this, a lifetime program can help you in so many ways to create new business that a service contract can not.. On the sales side it puts another tool in the toolbox of your sales team. You will not be losing sales to the guy down the street who is already doing a lifetime program. It gives the sales team a feature, benefit conversation rather then only being able to talk about price. In service, you now have a chance to give every customer both new and used a good reason to use the service department rather then taking their business elsewhere.
If you really want to turbo charge your retention reinsurance program, add your prepaid maintenance program into it. The number one retention tool for service is oil changes. Set up a three- or five-year PPM program and seed the money into your reinsurance account. Why give the breakage to the factory or a third party when you can keep in in house? And you do not have to stop there. If you offer a rewards program to your customers, not the factory run types that do not seem to work anyway. Why not put a dollar value on the points and put that money in the reinsurance account? Pay for the points as the customers redeem them and keep the breakage for this as well.
This new profit center has many advantages. Unlike service contracts, it goes on every car. The breakage profits between a service contract and a lifetime program can be 80% better. Add an oil change program and even the rewards card into your retention reinsurance program and you can see why so many dealers are taking advantage of designing their own retention tools. Lifetime programs are not just to sell cars any more they are becoming the window to a whole new business.