By Don E. Ray, Portfolio
Let’s start with a few questions…What is loyalty? Are consumers loyal to a particular dealership? How do loyalty programs impact a buy/sell? Loyalty can be defined as faithfulness or being steady in allegiance. I think we can agree that many customers have no enduring allegiance to particular dealership or even a particular brand.
With the extremely high cost of customer acquisition, loyalty (a higher standard than simply retention) is very important to today’s auto dealers. Carl Sewell, an extremely thoughtful and successful Dallas dealer, in his must-read 1990 book “Customers for Life,” estimated that over a lifetime a loyal customer would spend $332,000 ($332,000 in 1990 had approximately the same buying power as $622,730 in 2016) at his dealership, thus validating the value of a loyal customer.
Dealers (and auto manufacturers) have long recognized the need for great customer satisfaction to facilitate customer loyalty. But with today’s fast-paced fickle consumer, great CSI is often not enough. Thus the birth of “loyalty programs.” While these programs can add value to a dealership, they can also make for a messy buy/sell. But there are ways to keep the messiness to a minimum and reap more benefits at the same time.
Loyalty programs are intended, as the name implies, to create loyalty between the consumer and the selling dealership. They can take several different forms including:
- Prepaid maintenance
- Tires for life
- Free oil changes
- Reward points
- Free car wash
- Lease pull ahead
The Good
A 2012 study by Performance Loyalty Group shows the effectiveness of these programs. Compared to customers not enrolled in these programs, the dealers in the study:
- See customers in service at least 1.6 times more frequently during the year
- Enjoy almost 2 times greater total service-spend per customer, per year
- See their customer-pay RO dollars go up nearly $44 per customer, per visit
- Thrive on retention of nearly 60% — nearly 3 times the NADA average and better than many non-captive service OEM-branded loyalty program goals
- Sell on average 15 additional units every month to customers redeeming rewards points toward those vehicle purchases
The Bad
While these programs have proven to be successful, they do have to be managed, but by whom? Will you use a third party administrator or will you attempt to manage these programs yourself? (Advice…sell and service cars and let a professional administer the program.) How do you calculate future claims/costs? Will your dealership be able to honor the claims when they occur? How will you set aside the funds for future claims? Will these set aside funds be wisely invested? If so, by whom?
The Ugly
If you decide to sell your dealership, how do these future liability/claims impact the value of your dealership? Will the acquiring dealer honor the claims? Will the new dealer be reimbursed by the selling dealer? Does selling dealer have the funds to honor the claims? Will funds to pay claims be held in escrow? How will any escrow amount be calculated?
But Wait…There’s More and It’s The Beautiful
It makes a lot of sense to segregate these future liabilities from the dealership itself. Many dealers are creating separate entities to receive premium income, reserve for claims, pay claims and earn money from investing the cash being held.
The claim losses are certainly manageable and the cash generated can be substantial. Under a properly structured and managed program a significant amount of both underwriting profit (premiums received minus operating costs and claims costs) and investment profit can be earned. And at the same time separation from the dealership can make for a cleaner buy/sell and at the same time take advantage of special United States tax rules to eliminate federal income tax on the underwriting profit…now that’s BEAUTIFUL.
Don E. Ray works at Portfolio…THE Reinsurance Company for Auto Dealers. He can be reached at 917-359-5128 or dray.portfolioco@gmail.com
