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Service contracts trending up with pre-owned buyers

Karin Gelschus, Contributing Writer
December 26, 2011
Filed under Features

Adding protection on pre-owned gives consumers confidence

Although pre-owned service contract sales are on the rise by most accounts, many dealers are still leaving money on the table.

When dealers see the value of service contracts and they’re being properly sold, F&I profits can increase significantly. Service contracts sales increases reflect the latest pre-owned vehicle sales trends.

“With the sales increase of used vehicles, we have experienced solid growth in our sales of service contracts, insurance and our other ancillary products,” said Troy Billen, assistant vice president of sales, powersports division of The McGraw Group. “Customers truly want peace of mind of mechanical breakdown coverage when purchasing a used vehicle.”

By offering service contracts, dealers can overcome customers’ No. 1 objection when buying pre-owned — there’s no protection.

“Be it new or used, customers want warranty coverage when purchasing a vehicle,” said Brian Weaver, vice president of The McGraw Group. “It’s one of the most common questions asked during the sale of a used vehicle. Hang a sign on the vehicle [that coverage is available], and it overcomes that objection before the customer even brings it up.”

Maximizing revenue
Service contracts generate more revenue by helping vehicles sales and boosting F&I revenue.

“Most dealers don’t offer any in-house warranty on their used vehicles, which can be a concern to a customer,” he said. “It may even sway him away from the purchase.”

By having that value added in, however, customers are willing to pay more and/or negotiate less when the vehicle has mechanical breakdown protection, Billen said.

“If the vehicle doesn’t break and the customer decides to sell the bike a year or two later, his three-year contract transfers over to the next purchaser,” Billen added, “so it builds value in the bike again.”

There are a variety of products available to ensure dealers have plenty of sales options for their customers’ needs. Among them offered by McGraw are a 90-day certified used bike warranty, with dealers having the option to up-sell to 12, 24 or 36 months.

“With customers being more careful with their money, we created no-interest payment plans of three, five and 10 monthly payments to make the purchase of the longer-term coverage easier,” Billen added.

The longer the service contract, the better it protects the dealer-customer relationship in case a vehicle fails. For example, if a dealer sells a bike and the transmission fails 60 days after the sale, a service contract could benefit both.

“If there’s no service contract sold, no protection, no coverage, then the relationship can be affected because the customer thought they were buying a good unit from the dealer,” Billen said. “Of course, the dealer didn’t know this was going to happen, but if there’s coverage, the relationship is maintained and probably enhanced because the dealer will take care of it with the contract.”

Both the dealer and the consumer have to see the value in service contracts for them to boost F&I sales. With consumers being more cautious with their discretionary income, they generally take their time to make purchase decisions.

“In the mind of the customer, the investment he’s making with the used vehicle is just important as if they were buying a new unit, maybe more so,” Billen said.

The service contract not only increases the value of the vehicle, but it allows the dealer to stand behind the product, and it helps build and maintain the relationship between the dealer and customer.

“If there’s a mishap, the customer can say, ‘This dealer sold me a bike that wasn’t properly maintained, or it was a bad bike,’” Billen said. “By having the contract, it eliminates those issues.”

Those types of negative comments can arise if the vehicle isn’t covered, especially if the consumer is financing.

“The reason the customer is financing is because he doesn’t have expendable dollars in his pocket to buy the product, which means at the time of a claim or a failure, he wouldn’t have the money to repair the vehicle as well,” Weaver said.
A typical repair bill can be hundreds of dollars and sometimes thousands depending on the vehicle. Compound parts and labor costs, and a service bill could be three to 10 times the cost of a service contract.

“I know a guy in a situation right now where it’s costing him $5,500 to fix a crank bearing,” Weaver said. “Not everyone is going to have a failure, but you’re buying the unknown for new or used. When a customer buys a unit, there’s no guarantee when the guy gets on his unit and drives away that he’ll need some sort of protection. You’re protecting future exposures that bike might go through because no one knows the future. When it comes to a consumer purchasing a vehicle of this caliber, he has to make sure that down the road if there are any mishaps, he’s not paying out of pocket.”

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