Sweetening the Deal
December 2009, Auto Dealer Today - WebXclusive
Using Warranties to Market Your Inventory
It’s a question dealers ponder daily: How do I make my store stand out in the crowd? Everyone wants to convince customers to buy from their store instead of the guy down the road; that’s certainly nothing new. However, common incentives like complimentary vehicle history reports or free car washes aren’t quite enough anymore to grab the attention of today’s car buyer. Cash-strapped consumers want more value from their hard-earned dollars, and dealers are finding they must up the ante.
“People are looking for the best value for their money,” said John Marazzi, a partner of John Marazzi Nissan in Naples, Fla., “especially in this economic environment we’re in now.” New cars already have a manufacturer’s warranty, and even some used cars are still covered under their original warranty. However, the mindset of today’s buyer is one that is focused on the long-term view. According to Marazzi, these customers might be willing to spend the money to buy a vehicle today, but are planning to keep it for a long time, so a warranty included in the purchase is just the thing to persuade them to buy.
When he and a business partner acquired the store in September of 2008, instituting a lifetime warranty program was one of his first priorities. He chose a program he was already familiar with from his days as a general manager at another dealership, the Lifetime Warranty offered by Warranty Automotive Service Corporation (WASCOR), which provides powertrain coverage for unlimited miles as long for as the customer owns the vehicle.
Marazzi is able to provide his customers with the Lifetime Warranty on new vehicles and select pre-owned vehicles (most Asian makes and highline vehicles five years old or newer under 50,000 miles). The company offers market exclusivity to its dealers and Marazzi said that as a franchise dealer, it gives him a distinct marketing advantage over his local competition.
People may say Marazzi’s competitors’ have a better price, service and/or selection, but what his store has that the others don’t is a lifetime warranty with unlimited time and miles that is good anywhere in the country. He added, “That’s the unique selling proposition that we hammer in all of our marketing.” The warranty gives customers a “definitive reason” to do business at his store.
Marazzi stated that the warranty program has been cost-effective for him on both new and used vehicles and has helped to more than double the total sales since he took over the store in 2008. For a relatively small cost, he can offer new-car customers the selling point of a powertrain warranty that will still be good after the manufacturer’s warranty has expired, for as long as they own the vehicle.
“On the used car side,” he added, “it’s fantastic because it ensures people that are buying a pre-owned that you’re eliminating the risk of the purchase.” While his cost to provide the warranty on used vehicles is slightly higher than on new, it has been well worth it for the increase he has seen in used vehicle sales. “In one year, we’ve now become the second-biggest volume used car dealer in southwest Florida,” he stated. “We took a store that used to sell 30 used cars a month, and now we’re doing 120 to 130.”
Adam Arens, owner of Patriot Subaru in Saco, Maine, is also utilizing WASCOR’s Lifetime Warranty, although he initially started out with something slightly different. When he opened the dealership almost six years ago, he started his own tires for life program, which he offered for about four years.
“I did tires for life originally because I certainly wanted to segregate our dealership in the culture and its offerings from all of the other competitors, and when you start a brand-new dealership from scratch, retaining your customers is very important … that program was to retain customers for the service department,” Arens stated. “We had tremendous success with it.”
Despite that success, in March 2008 he decided to discontinue his program and instead began offering WASCOR’s Lifetime Warranty. The reason for the switch? He wanted something that would truly be a marketing program for his sales department, rather than a service retention program. “With tires for life, you have to service your car at the dealership,” he explained, so the program had little to offer a potential customer from outside the immediate area who did not intend to regularly service their vehicle at Patriot.
Being able to offer a warranty customers can use at any licensed repair facility in the country allowed Arens to extend his sales reach and successfully market to customers outside his geographic area.
“Whatever we do here, we do it culturally,” said Arens. “We didn’t just do it as a marketing program. We attached it to everything that we do. It’s on the showroom, it’s in the service lane, it’s on every advertisement that we make, it’s on our Web site … we took it on as a culture.” So much so, in fact, that for his pre-owned Subaru inventory, he does not use the manufacturer’s certified program; he only uses the WASCOR Lifetime Warranty. “We find it a key differentiator,” he stated. “I want my offerings to be better and different than what you can get down the street. It allows me to compete against a new Toyota or against a new Honda by having a lifetime program.”
Arens stated, “Our business is up 25 percent.” While he acknowledged that solid processes and retaining good people are responsible for part of that increase, he attributed quite a bit of it to the warranty program. “We have seen major increases in our volume,” he said. “People don’t care if they can buy a car for $300 or $400 less someplace else … because they understand they’re getting a lifetime warranty.”
Undoubtedly, customers see significant value when a dealer offers a lifetime warranty and will pass up other dealerships to buy from someone offering them that extra value, especially on used cars, a purchase where they want extra peace of mind. “Ask a customer who’s bought cars before, ‘If you had to buy a drivetrain warranty on another used car elsewhere, what would you pay for it?’” said Jerry Van Devere, finance manager at Van Devere, Inc., a Chevrolet, Buick, Pontiac and Kia dealer in Akron, Ohio. “Generally warranties are over $1,000, and here, it’s a benefit of doing business with Van Devere.”
Van Devere has been using the Warranty Forever program from National Automotive Experts for almost three years, after hearing about it from a member of their 20 group. The warranty is included on new vehicles and on used vehicles under 100,000 miles. A vehicle is covered for as long as the customer owns it, provided they bring it into the dealership to keep up on factory-recommended maintenance.
“The program was very motivational for me for many reasons,” said Van Devere. “Probably the biggest one is customer retention.” Retaining more service business from a sold customer increases the chances that they’ll sell another vehicle to that person in the future. “When a customer brings their car back to us for service … you’ve usually got about a 70 percent chance of retaining them and selling them [another] car.”
Although Van Devere’s primary motivation for using the program was retention, it has also been great for marketing. “From a sales standpoint, it really gives us a good marketing tool,” he said. “It’s something that’s an edge up on our competition.” The Warranty Forever program is promoted in all of their advertising—TV, radio, newspaper and direct mail. “Customers tell us that it was something that got their attention … It was definitely a tool that helped us get that [sales] opportunity.”
Chris Kahrs, general sales manager for Amato Automotive in Milwaukee, Wis., said Amato has been using the Warranty Forever program for their pre-owned vehicles since January of 2008. Like Van Devere, Owner John Amato learned of the program through his 20 group and saw value in it as a powerful marketing tactic and a service retention tool.
“Everything we do as far as used cars is surrounded by the Warranty Forever,” said Kahrs. The warranty is promoted in all their radio, television and print ads, as well as on their Web sites. According to Kahrs, the warranty has been a deciding factor in many of their customers’ purchase decisions. “I’ve got quite a few people that have bought only from us because we have the Warranty Forever,” he stated.
Bob Hobbs, vice president of Kim’s Toyota in Laurel, Mississippi, has been marketing his inventory with Auto4Life’s Lifetime Powertrain Coverage. He began using the program in December of 2005 after he discovered through research that it had increased another dealership’s sales by 26 percent. “It was night and day,” he observed. Customers must have all factory-recommended service performed at the dealership, and the program provides powertrain coverage for as long as the customer owns the vehicle.
Hobbs explained his reasoning for including the Lifetime Powertrain Coverage on new vehicles. “I already sold the best product in the world, Toyota. Well, let’s have the best warranty on it. [Toyota’s] certified warranty is good but it’s only 100,000 [miles],” he pointed out. “I wanted to differentiate myself.”
He also offers the coverage on used vehicles under 90,000 miles. “That is the no-brainer of the deal,” he said. “There are not too many dealers in the country that put a lifetime warranty, free of cost to the customer, on a used car.” If the customer is looking at two dealerships that are competitively priced on used cars, he said, “you have to buy it from the guy who’s going to give you a lifetime warranty.”
He said Auto4Life is reasonably priced and is a very cost-efficient way to add marketing appeal to his inventory. According to Hobbs, offering the warranty spiked sales about 25 percent practically overnight. “I’ll never forget that. We made 10 sales just from that warranty the next day,” he said.
So Hobbs now promotes the program as many places as possible. “It’s splattered everywhere at the dealership,” which includes banners all over the store and window clings on the cars. “It’s in every ad—print media, TV, Internet … I’d highly recommend it for any dealer. Long term, it’s fantastic.”
Nate Derring, owner of Nate and Andy’s Quality Auto Sales, an independent store in Logan, Utah, opted for a slightly different route for his warranty program. He began offering his own lifetime powertrain warranty program, rather than purchasing plans from a warranty company. The primary goal was to have something unique to market his vehicles, but he was also looking ahead to long-term customer retention and generating business for the new service department that was added when he built a larger facility in the early summer of 2008.
At one time, he considered signing up with a warranty company, but its program was not a good fit. Instead, he continues to offer his program, but now has a third party administering it for him. It is still a dealer-obligor program, meaning Quality Auto Sales pays all warranted claims, but having a third-party administrator takes some of the pressure off Derring. The administrator closely monitors the contracts for him and Derring does not have to be in a position to play the bad guy if a customer presents an unwarranted claim.
While a dealer-obligor program means Derring is assuming more risk than he would with another company’s program, it also allows him to offer exactly the kind of coverage he wants and still yields many of the same benefits. “We’ve had quite a few customers that have come in and said, ‘The reason that I’m purchasing from you is because you guys offer this and someone else doesn’t,’” said Derring. The only requirements of the program are that customers must have their oil changed at the dealership in accordance with the manufacturer’s suggested schedule, and they must bring the vehicle in for a transmission service once every three-and-a-half years or 40,000 miles.
“We definitely spend a little bit more time and have a longer certification process to go through,” he stated, “but our ultimate goal here is not about making the extra money and service entirely. It’s about retaining the customer’s business for life, so if we do warranty for life, then we should be able to get their business for life and their family’s business for life.”
He’s had this system in place for about 15 months and has replaced a few transmissions. On the surface it sounds expensive, but the increased vehicle sales volume and the profit generated in the service department from maintenance work offsets the costs. Derring pointed out another benefit of the warranty program—referrals.
Warranties can be great marketing tools even after the customer has purchased the vehicle. No customer is happy when they have a problem with their car, but if that warranty comes through for them when it’s needed, that creates a positive experience for the customer, who will often tell someone else. In Derring’s case, spending the money to replace those transmissions paid off in word of mouth. “We’ve sold others off of that from referrals,” he said.
Other dealers have reported similar experiences. “The warranty has helped a lot of customers,” said Van Devere. “I think when a customer has a problem, if it gets taken care of with that warranty, it says something about Van Devere. It’s a positive for the customer.”
Another great side effect of including warranties is the profit boost in fixed ops. In most cases, customers must keep up on their factory-recommended service. While not all programs require the customer to return to the dealership where they purchased the vehicle to have service performed, many customers are inclined to do so.
Marazzi stated that his first-year defection rate in the service department is down roughly five percent. While the customers understand that they’re not required to have the recommended maintenance and service performed by the dealership, he said, “we do explain to them that we keep everything on computer record, it’s all documented,” so the dealership is better prepared to help them handle whatever issues come along.
Kahrs said Amato has taken a similar approach, telling customers that while they can have service performed elsewhere, it is more beneficial to have the work performed at the dealership so they are able to make sure the customer is following all the requirements to keep their warranty in good standing. He said there are a number of people who might not otherwise have had their maintenance performed by the dealership.
He also said the warranty company does everything it can to help the dealership retain that service business. Customers who have work done elsewhere are required to get pre-authorization from the warranty company, which will notify the dealership via e-mail to let them know that the customer called, what their concern was and how it was addressed. This allows the dealership to stay informed and follow up with the customer. Kahrs said there have been a number of instances when they’ve been able to bring the customer’s business back to their service department.
Some dealers may be hesitant to use warranties as a means to market their inventory because they are afraid it will cost them F&I profits. However, that seems to be a misconception. “When the product was first created … the average manager felt that your extended service contract sales would suffer because of Lifetime Warranty,” said Marazzi. “We didn’t see a drop in vehicle service contracts at all, which was really surprising to me…we’re still running 40 percent on vehicle service contracts, even with Lifetime Warranty on new cars.”
Hobbs said, “That was my first question—is it going to hurt my service contract penetration? And it hasn’t. Ours actually went up.” He said they used to be under 50 percent on F&I penetration and are now at about 60 percent. Derring reported that he had seen about a 25 percent increase in his service contract penetration
“I don’t know that we’re selling any more of anything [in F&I] because of it,” said Arens, “but I will tell you this: remove the fear. You’re not going to sell less of anything because of it either.”
Vol. 6, Issue 11