In recent years the gold standard for a dealership’s used-to-new sales ratio has been 1:1, with the average dealer achieving a .75:1 ratio, according to NADA data. We don’t have official figures for what the sales ratio was in 2021, or will be in 2022, but I wouldn’t be surprised to see it jump as high as 2:1.
This shift in sales ratio will have consequences. In 2021, front-end profit margins skyrocketed while service revenue remained stable. Looking forward, however, dealers should prepare for service retention rates to drop significantly, negatively impacting service revenue. This will happen for two reasons:
- Seventy-five percent of new-car buyers return to the dealership where they purchased the vehicle for service, according to a DealerRater survey of 16,000 vehicle owners whose vehicles were still covered by a manufacturer’s warranty. If your dealership sold half the volume of new cars in 2021 as it did in 2020, expect the volume of service visits to drop proportionately over the next couple of years.
- Due to inventory shortages, dealers are selling more off-brand used vehicles than ever before; for example, Jeep dealers are selling Mercedes and Dodge dealers are selling Toyotas. These buyers are not likely to return to the selling dealership for service. Even owners of same-brand used vehicles are more likely to go to independent repair shops for service.
These trends set up a perfect storm of factors that will contribute to a nosedive in service retention rates and corresponding service revenue, quite possibly at a time when inventory levels are normalizing and front-end margins are dropping back to normal.
How can dealers best prepare? Prioritize service retention, starting in the sales and F&I office. Here are a few strategies to consider.
Give Away Prepaid Maintenance (PPM) Policies
PPM policies on pre-owned vehicles are a tough sell since most owners prefer taking their vehicles to independent repair shops. Considering how much profit dealers are making on preowned vehicles right now, the expense of giving away a PPM with every pre-owned vehicle is nominal compared to the potential return on investment when oil changes lead to additional repairs.
Your PPMs do not have to be long-term; perhaps a one-year policy that covers a couple of oil changes. This also gives F&I managers a chance to explain what comes with the free PPM and to offer additional options to enhance the package.
If you are a large dealer group with a variety of brands, give away PPMs that can be used at any of your stores. That way, when a Jeep dealership sells a Mercedes, the buyer can use the PPM for oil changes at your Mercedes store, or vice versa.
Vehicle Service Contracts (VSCs)
Service contracts are a great retention tool, resulting in 70% service retention rates throughout the ownership lifecycle, according to APCO data. F&I departments already have done a fantastic job of increasing VSC penetration rates and growing per-vehicle revenue (PVR).
One area of potential growth is to contact new-car customers who purchased three to four years ago and are out of factory warranty.
Promote Your Certified, Pre-Owned (CPO) Program
CPO vehicles come with a limited warranty, increasing the likelihood that customers will return for service. Plus, buyers of CPO vehicles are three times more likely to purchase a VSC than buyers of non-CPO vehicles, according to APCO data. The more you can promote your CPO program and its advantages, the better.
Bundle F&I Products
As a dealer, your goal is to get customers to visit your dealership for all of their car-related needs. Products like GAP can tie customers to your collision center if you have one. Appearance protection products can also bring customers in to fix dents, scratches and faded interiors. The more touchpoints you have with a customer, the more long-term relationships you will build.
The past two years have shown us that dealers are an incredibly dynamic, resilient group of business owners. Whatever challenges the future brings, I have no doubt that dealers will adapt and figure out how to be profitable while taking great care of their customers.
Rob Volatile (pictured, above left) is senior executive vice president of APCO Holdings and has worked with hundreds of dealers to optimize profits.
