The quality of vehicles today is vastly superior to those of yesteryear. And over the past decade, the F&I industry has introduced numerous new products targeting new needs, such as key replacement.
But through it all, one evergreen product continues to rack up solid sales: the extended service contract.
The appeal, though, has changed. Today’s consumers buy service contracts for a new reason. They want protection against vehicle technology issues, said Vince Santivasi, vice president of business development at Zurich.
In addition to covering vehicles’ mechanical parts, such as the engine and transmission, some service contracts cover electronics, such as Bluetooth phone connectivity and radio and navigation systems controlled by the touch screen and voice command.
Consumers’ “biggest concern is the electronic piece,” Santivasi said. “Our penetrations continue to go up in service contracts because customers are concerned about in-vehicle technology failure.”
‘Bread and butter’
Service contract sales are dealerships’ “bread and butter,” said Arzu Algan, dean of education at Automotive Dealership Institute in Scottsdale, Ariz.
Data backs up that assertion.
In a DealerRater survey question supplied by Automotive News last month, 30 percent of consumers said they bought a service contract on their most recent vehicle purchase. Service contracts were purchased by 26 percent of new-vehicle buyers, compared with 40 percent of used-vehicle buyers.
And it’s not just vehicle buyers. Of consumers who visited the dealership for service, 33 percent bought a service contract.
The next best-selling F&I product was GAP, with 21 percent all respondents purchasing it. The percentage of respondents who purchased tire-and-wheel, prepaid maintenance, paint protection and alarm systems was 12 percent or less for each.
The definition of the service contract has expanded as consumers’ needs have changed and in-vehicle technology has advanced. If consumers are less worried about their mechanics failing and more worried about their Bluetooth connections, the service contract is still an applicable product.
Coverage on factory-installed electronics helps consumers “manage their costs over the ownership cycle of the vehicle. Once they get [those electronics], they don’t want to do without them,” Forrest Heathcott, president of JM&A Group, told Automotive News.
As dealerships’ focus shifts to products from dealer reserve as a source of F&I profits, the consistent contributor to those profits is service contract sales. “They are still the driving force of F&I income and the added value is that it’s bringing people back to the service department,” said Mike Casey, group vice president of sales for JM&A Group.
“The biggest risk a consumer has is if there is some kind of breakdown or heavy-ticket item. [The service contract] gives the consumer the most peace of mind.”