Prepaid maintenance pays off for dealerships

Scott Smith couldn’t be happier about the assist his dealerships get from credit union network CU Direct’s Fidelis prepaid maintenance program.

“I’ve had huge gains,” says the owner of Automotive Associates of Atlanta. Smith says 65 to 75 percent of buyers at his six dealerships buy prepaid maintenance compared with an average of about 8 percent for all dealerships in the region. His dealership group has been using the prepaid maintenance program for more than five years.

That’s a different song than dealers were singing a few years ago. Back then, they were leery of prepaid maintenance products offered by credit unions and other outside lenders. Dealers feared that such third-party maintenance deals might cut into their own finance and insurance profits.

Their other main option, prepaid maintenance programs sponsored by the automaker, had a big catch, though. Most covered maintenance at any of the brand’s dealerships.

That defeated key advantages for dealers: the opportunity for their store to snag a bit more of the estimated $215 billion per year U.S. consumers spend on auto service and the chance to build loyalty that might lead to the customer’s next vehicle purchase.

Store-branded

The Fidelis system avoids those concerns, dealers say. It’s a software platform that allows dealers to create and run their own, self-branded prepaid maintenance programs. They decide what services are included and how much to charge for them. Fidelis gets a commission -- usually less than $50 -- for each prepaid maintenance contract sold, but it remains invisible to the car buyer.

The company sends dealer-branded email and direct-mail reminders to customers when it’s time for maintenance, says Ryan Williams, CEO of DRIV Technologies, the CU Direct division that operates the program.

Fidelis can be integrated in a store’s dealership management system to record the number of times prepaid maintenance customers come in for service, thus allowing the dealer to monitor the location’s service retention rate.

Higher retention

Nationwide, stores that use Fidelis prepaid maintenance programs average a 68 percent retention rate, defined as at least two service visits to the dealership by a customer annually, says Williams. The average U.S. service retention rate is 18 percent, according to the National Automobile Dealers Association.

Fidelis also tracks how much upselling the service department generates in parts and labor beyond the scheduled maintenance work -- down to the amount sold by each service staffer. The company says a dealership averages an additional $70 in revenue from visits by prepaid maintenance customers.

“Your service retention goes up immediately,” says Smith. “What follows is sales retention.” By ensuring new buyers will return to them for maintenance, dealers get new opportunities to foster customer loyalty by offering little extras such as a car wash and tire check. “You kill ’em with kindness,” says Smith.

As time goes on, the dealer can use a service visit as a chance to dangle an offer to trade up to a new vehicle, he notes.

Automotive Associates of Atlanta holds Kia, Nissan, Toyota and Scion franchises.

Bundling

Dealers hold their own reserves against the maintenance program, but Fidelis keeps track of the amounts as well as the store’s return on investment from prepaid maintenances.

This constellation of services has made Fidelis -- which also packages private-label versions of its product for other finance companies -- the dominant player in the prepaid maintenance market, according to Williams.

He says Fidelis also can bundle its prepaid maintenances with products offered by other companies, including roadside assistance and insurance for key replacement, identity theft and “dents and dings.” That packaging allows a dealership’s F&I and service departments to offer customers a single product.

Fidelis prepaid maintenance was acquired in July by CU Direct, of Ontario, Calif., which serves nearly 12,000 new- and used-vehicle dealerships in the U.S. The parent company’s main business is linking 1,100 member credit unions with dealership F&I departments to originate auto loans.

CU Direct merged Fidelis into its Vero Products division, which offers a variety of F&I products.

‘At what cost?’

Lester Glenn Auto Group, of Toms River, N.J., ran its own version of a prepaid maintenance plan, offering free lifetime oil changes, for about five years. “There was no doubt it helped our service maintenance, but at what cost?” says John Perillo Jr., the group’s director of variable operations.

The dealerships included the oil-change package at no extra charge on every vehicle sold as part of its Lester Glenn Experience program. But the group had no way of keeping track of its outstanding service liabilities. “It kind of slipped away from us,” Perillo says.

The eight Lester Glenn stores sell about 15,000 vehicles annually, Perillo says. “It was kind of scary knowing that there were 15,000 more people each year driving around with free lifetime oil changes,” he says, when the company didn’t know what that was going to cost.

In January, the group adopted the Fidelis plan and trimmed the free oil-change promise to two years. “We got it under control far faster than we expected,” Perillo says. “Now, we’re ready to take it to the next level” by adding tire and key replacement services.

He calls the Fidelis commission “minimal” and says it has paid for itself just in ensuring that customers get oil changes at specified mileage levels only, not just whenever their car is in for other service.