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How to avoid the penny wise and pound foolish trap

September 20, 2011
Filed under Service Providers

Scenario: A customer purchases a new ATV from his local dealer. The next year he goes back to purchase two additional units from the same dealer as both his wife and his son have enjoyed riding as well. In preparing for a family ATV vacation, he finds the battery for the original unit will no longer hold a charge.

Returning to the dealer for a replacement, he is told the price of the battery is $185. The customer is shocked at the high price for such a small battery and inquires about a discount stating that he has purchased three machines from the dealer in the last two years. The counter person apologizes, explains the battery is a specialized style and size and thus very expensive. No discount or alternative is offered. The frustrated customer leaves the dealership determined to find the battery cheaper elsewhere.

What Now: Blanket discounts can kill profitability, especially at the parts counter. In this case, however, providing a small percentage off the part, a reward in the form of points or even a credit (gift card) toward future purchases, could be the difference between a customer lost and a customer for life.

E-mailing customers regularly, especially recent major unit buyers, with incentives to return to the dealership (a parts discount coupon), has proven very effective in creating return customer visits. Having received a coupon prior to visiting the parts counter could have prevented this situation altogether. A coupon in his email box the next time he logs on is clearly not as effective but could be the trigger to easing his frustration and giving the dealership another chance.

What was learned? According to a recent report by Frederick Reichheld of Bain & Company, acquiring a new customer can cost six to seven times more than retaining an existing customer. Likewise, each new customer has a real financial value to the dealership. A recent industry study by ADP Lightspeed reported that value to be $14,000 lifetime or $5,000 per year on average.

Employees and managers in each department must clearly understand this concept.  A process should be established enabling employees to make the right call or at least alert/involve a manager to avoid similar issues down the road.

Decisions should be made with the long-term interest of that customer relationship in mind. In this case, the cost to retain $18.50 of one-time purchase margin could be $14,000 in lifetime revenue.

Comments

One Response to “How to avoid the penny wise and pound foolish trap”

  1. Jennifer Robison on September 22nd, 2011 10:04 am

    Great Tip!

    [Reply]

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