2 features of service contracts are especially likely to retain customers

Selling extended service contracts can help a dealership bring vehicle buyers back to its service department, building customer loyalty and boosting fixed ops income. Two common features of these contracts — a tieback clause and a disappearing deductible — are especially helpful to achieving these goals, dealers and industry analysts say.

A tieback clause requires a vehicle owner to return for service to the dealership that sold the contract if the car or truck breaks down within a specified distance from the store, usually 40 miles. A disappearing deductible is a threshold out-of-pocket expense that is waived if a customer comes back to the selling dealership for service.

With these two features, "not only is the dealer making money selling the service contract, he is also going to guarantee his service department will be loaded with work," says Max Zanan, president of Total Dealer Compliance, a consulting firm in New York.

Tom Bell Chevrolet in Redlands, Calif., is launching a dealership-branded prepaid maintenance package for new and used vehicles through the service contract provider Portfolio. The contract requires maintenance work to be done at the dealership.

To make the tieback attractive to customers, the dealership will price the maintenance package "aggressively," but not to the extent the service department won't make money, General Manager Derek Hanson told Fixed Ops Journal. Tom Bell Chevrolet charges $1,480 for the five-year plan, which includes eight oil changes and all other factory-recommended service. The retail value of the package is $2,422, Hanson adds.

"We see the importance of getting people back into our service department," Hanson says. "If you sell a maintenance package with a tieback, we're married."

The dealership is targeting a 10 to 20 percent take rate for the new package among vehicle buyers and service customers, Hanson says, compared with the rate of 3 to 4 percent for its current maintenance package, which allows work to be done at other General Motors dealerships.
Anchor Auto Group in North Smithfield, R.I., includes a 40-mile tieback clause in the service contracts it sells at its two dealerships. The contracts, issued by Portfolio, include a disappearing deductible, generally $100. They also cover towing and rental fees, says Chris Benoit, the group's parts and service director.

"Tieback is huge," Benoit says. "It helps you retain all the service business so you can best take care of the customer." He declined to estimate how much business the contracts generate.

Tom Bell Chevrolet's service advisers, including those in the express lane, get $100 for every service contract they sell to their customers, Hanson says. Otherwise, he says, advisers might be reluctant to offer prepaid maintenance plans and to explain the benefits of the tieback to customers.

He says the service department sells about 10 service contracts with a disappearing deductible each month, compared with as many as 70 in the dealership's finance and insurance department.

"There is a real opportunity to get service advisers in the quick lane" to pitch the product, Hanson says.

In addition to its branded maintenance package, the dealership offers other service contracts that have disappearing deductibles. "The disappearing deductible is really good because it brings [customers] back to us," says Josh Petty, the dealership's service manager.

Portfolio works with about 16,000 dealerships to sell service contracts, says Greg Hoffman, the company's managing director. All of the contracts have tiebacks, Hoffman says, and about one-fourth include disappearing deductibles. Both features enhance service customer retention, he says.

"The more [a customer] is in the dealership, the more you can impact the experience," Hoffman says. "That results in future sales."

Many service contracts allow service departments to release work covered by a tieback to another dealership or independent repair shop if it would be too inconvenient for a customer to return to the selling dealership, Hoffman says.

Some dealerships offer a loyalty program to buyers of service contracts with tiebacks that earns them a free oil change after a certain number of visits, Hoffman says. Others give tieback customers "priority" status, which entitles them to such benefits as delivery of a loaner vehicle and discounts on some maintenance items, he says.

Cascade Auto Group in Cuyahoga Falls, Ohio, offers a disappearing deductible, but not a tieback, as an option in the service contracts its sells, says Michelle Primm, the group's co-owner and general manager. The group sells Subaru, Mazda and Audi vehicles on one campus.

"We can pull a loyalty report at any time to see what percentage of our customers are returning to us for their claims, so that we can adjust our policy in the future if business demands it," Primm says.

Cascade's contract provider is Resource Automotive Inc., a division of Assurant Inc. Matt Mahar, Resource Automotive's regional general manager for Ohio and Indiana, says Cascade customers whose contracts include disappearing deductibles are significantly more likely to return to the dealership for service than those whose plans don't include the feature.

Mahar says, "Our pitch to dealers is that you would be surprised how many people will drive 100 miles to save $40 or $50."