Extended vehicle ownership keeps customers out of the market longer. But achieving positive equity in their vehicles as their loan balance falls gives customers more money to put toward another vehicle, including buying F&I products, AutoAlert and IHS Automotive say.
Vehicle ownership periods are lengthening overall. During the first quarter this year, the average length of ownership for a new vehicle was 77.8 months. That’s about four months longer than in the year-earlier period and more than two years longer than the 52.1-month period in the first quarter of 2006.
For used vehicles, average ownership was 63 months in the first quarter this year, about five months longer than the year-earlier period and also more than two years longer than the 37.7-month period in the first quarter of 2006, according to data from global research firm IHS.
Despite long-term ownership, more than two-thirds of consumers surveyed by AutoAlert, a data mining and trade-cycle management platform, said that they want dealers to notify them when they are in a position to upgrade their vehicle if it won’t change their monthly payment. And more than half said they want to be notified about key points in their ownership, such as warranty expiration.
Consumers, dealers benefit
Long-term vehicle ownership benefits both consumers and dealers in the long run, said Tom Libby, manager of loyalty solutions and industry analysis at IHS Automotive.
Once the ownership period reaches a certain point, the customer leaves a negative-equity position, and, as a result, has more positive equity on the vehicle, he said.
“Usually, the value of the vehicle goes down on day one of ownership,” Libby said. “The customer owes more than the vehicle is worth immediately.”
If customers trade in that vehicle too quickly, they have to pay to get out of the loan. “As the customer keeps the vehicle longer, that loan goes down in value, and at some point the vehicle is worth more than the loan. Then the customer actually has some equity on the vehicle and can use that against the new vehicle.”
That’s also beneficial for the dealer, Libby said. “It’s going to be easier to make the deal since customer has money they can actually contribute to the next deal. It helps the retail process overall.”
Dealerships can also sell more service contracts with extended ownership, Brian Skutta, CEO of AutoAlert, told Automotive News. Consumers who like to hold on to their vehicles are more likely to purchase an F&I product, such as an extended service contract, than consumers who trade in their vehicles every two to three years, he said. Consumers who are in it for the long haul understand “what the total cost of ownership looks like,” he said.
Customers want updates
AutoAlert conducted a study in September aimed in part at evaluating customer awareness and motivation to trade-in their vehicles and at learning how they want to be notified about vehicle upgrade eligibility. The study was based on IHS’ ownership data and a survey of more than 400 vehicle owners.
The survey found that 69 percent of respondents felt that it was “very important or somewhat important” for their dealership to contact them when they can upgrade their vehicle if it doesn’t impact their monthly payment, AutoAlert said.
Dealers should keep tabs on customer data so they are prepared to offer them updates that could lead to another deal and increase loyalty.
“This type of data-driven engagement with consumers is where dealerships are finding a great return on investment,” Skutta said in the statement.
The survey also found:
• Fifty-seven percent of consumers want to be notified about key points in their ownership, such as when the warranty is near expiration or when the trade-in value declines or is at a premium level.
• Forty-nine percent of respondents said that they were unaware that they could upgrade their vehicle before the lease or loan term is up.
• Seventy-five percent of those surveyed said they would be very likely or somewhat likely to trade in their vehicle today if their monthly payment would remain about the same.
‘Very smart business’
Contacting the customers before they’re ready to buy another car and monitoring their trade-in time is a “very smart business,” Libby said.
In the last several years, the F&I product menu has grown, Skutta said, so when long-term vehicle owners come back to the market, the dealer is likely able to show them more products than they had seen before.
“With pricing pressure on the front end, dealers have focused on the back-end” operations to make a profit, Skutta said.
If dealers pull customers in earlier, with updates on warranty expiration or trade-in value, for example, they could earn a bigger profit, he said.
“Pulling [customers] forward helps the dealer” and consumers, Skutta said.