I’ve worked in and around the global automotive business for nearly 20 years, which often makes me the new kid on the block when compared to most original equipment manufacturer (OEM), automotive finance, and dealer executives who’ve seen it all, done it all, and know it all. These industry veterans have drilled into my head the importance of the dealer Finance & Insurance (F&I) office’s role as a catalyst for generating service loyalty, brand loyalty, and dealer profitability – especially around growing sales for extended warranties or vehicle service contracts.
And for very good reason.
With margins on new vehicle sales in single digits and vastly improved vehicle quality making it more difficult than ever to retain service customers, vehicle protection products like extended warranties provide an economic lifeline and another way to delight the hyper-demanding, connected consumers that are critical for every dealer, OEM, and automotive lender.
Service contracts and extended warranties – the lost opportunity
According to a Pega-commissioned survey of the aftermarket buying habits and satisfaction/warranty perceptions of more than 1,000 U.S.-based consumers, we found that consumers actually appreciate extended warranties and vehicle service contracts. Sixty percent agree warranties provide value, and 62% of consumers with active warranties report benefitting from them within the past year. But a vast majority of respondents are driving vehicles without one. Specifically, a majority of drivers (63%) do not have active extended warranties, despite seeing their value. If we extrapolate this statistic and apply it to the 17.6 million cars and light trucks sold last year in the U.S., that totals approximately 11 million missed opportunities on vehicle extended warranties.
While industry veterans likely aren’t surprised by this data, a back-of-the-napkin look at the economics of this survey is nonetheless stunning. At an average price of $1,500 per service contract or extended warranty, this is a lost opportunity for the industry worth over $16B in service contract revenue alone. And that’s not even considering the “halo effect” such plans have, including:
- Service contract purchasers have a “stronger emotional attachment” to the products they buy (2015 survey conducted by Ipsos for The Warranty Group).
- Consumers that purchase extended warranties and service contracts are twice as likely to recommend the dealer (research by Assurant Solutions).
- Service contract income as a percent of new- and used-vehicle department gross profit reached nearly 28% in 2018 (NADA 2018 data.)
Making these figures all the more urgent, younger consumers, on which the industry is hyper-focused, are twice as likely as those 55 and older to opt in for service contract and extended warranty products. We might expect these buyers to continue to buy service contracts as they age, representing an even greater share of revenue and profit in the years to come.
Why are so many consumers driving without extended warranties?
Survey results reveal a clear disconnect between appreciating the importance of an extended warranty and actually purchasing one. The biggest barriers to consumers purchasing a warranty are: cost (35%), not thinking they need one (32%), and lack of availability at the time of purchase (29%). Furthermore, nearly half of those surveyed (48%) only somewhat understand their existing manufacturer’s warranty, and 7% say they don’t understand it at all.
These are surprising statistics for 2018. Every week, automotive trade publications feature articles, best practice profiles, and the latest news about how dealers, OEMs, and lenders can collaborate to grow penetration rates of extended warranty offerings. As one prominent and recent example, General Motors just announced it is giving new-vehicle buyers the option to add two years to their factory warranty in addition to the vehicle service contracts GM dealers already sell.
According to Automotive News, “Several dealers have mixed feelings about the program. They cited the risk of the factory offer impinging on their own warranty and service contract offerings, and suggested it would help the manufacturer more than their stores.” But other dealers applauded the program, saying it's getting more difficult to retain service customers as competition with independent shops intensifies.
A one-size-fits all approach to pushing aftermarket products and services hasn’t worked
The extended warranty or service contract program du jour that OEMs and lenders roll out to dealers hasn’t worked. Nor have traditional “push” based marketing tactics (circa 1990-something), menu-selling applications, or even noble efforts to pull F&I selling into the digital retailing journey before consumers arrive at the dealership. (And disagreements between dealers and OEM partners don’t help.)
All of these tactics represent more of the same in the search for new aftermarket revenue opportunities and ways to delight customers. What they also have in common is a one-size-fits all, channel-specific approach to pushing extended warranty adoption among other aftermarket products and services.
What does the automotive industry need to do to crack the code?
Enhanced marketing and decisioning capabilities are producing better results
What’s been missing isn’t more tactics, applications, or programs to sell extended warranties and service contracts. It’s the capability to know, target, and engage auto buyers with extraordinary intelligence and insight into the context around their purchasing decisions. For example, OEMs and their captive lenders should team up to use journey-based customer data and intelligent decisioning capabilities to deliver the next best offer, message, or action for the right extended warranty, protection product, or F&I offering “as a service” to their dealers, no matter the program. Making the right offer to the right consumer at the right time – based on insights relevant to each customer’s needs and lifestyle – is what players in communications, banking, insurance, and airlines have been perfecting for years.
Leading OEMs are already starting to execute just this kind of enhanced marketing and decisioning science in their vehicle marketing programs. The most successful OEMs understand that not all dealers, prospects, customers and vehicle purchase/ownership journeys are the same. Whether it’s shopping for and buying a car, or considering and buying an extended warranty, contextual data and intelligence can be used to trigger “just in time” engagement with vehicle owners at critical moments, like when the consumer comes to the dealership for critical service – arguably the most important part of the owner loyalty journey given the criticality of safety, dependability, quality, and reliability.
The bottom line: understand your buyer’s unique needs and circumstances to personalize their experience
When it comes to aftermarket owner and user experiences, there is an urgency for auto manufacturers, their captive finance divisions, and dealer partners to reimagine and intelligently orchestrate the fragmented channels, processes, decisions, and messages necessary to cultivate customer loyalty. Today’s consumers expect and demand it. Only by understanding buyers’ experiences on a deeper level can the industry serve up more personalized recommendations and effortless interactions that drive F&I revenue growth. This will not only protect customers’ automotive purchases long-term, but will also deliver better experiences every time consumers use their vehicles and dealers service them.
Despite what many of my long-time industry mentors might still believe, these kinds of capabilities for OEMs, lenders, and dealers are no longer complex science experiments nor too difficult to execute with a large independently-minded dealer network. In fact, after all these years, perhaps now is the right time for this long-time automotive student to become the teacher.
(Class is now in session.)
- See more results from Pega’s survey on SlideShare.
- Discover how Pega can personalize automotive engagement and provide aftermarket services that help OEMs, captive finance companies, and other lenders remove silos and deliver more intelligent customer experiences.
- Read how OnStar is leveraging business-driven decisioning to stay connected with drivers.
- Discover how Pega for Service and Warranty™ orchestrates end-to-end processes when a problem is detected.
- Analysts agree – Pega is a leader in CRM applications and BPM platform. Read the reviews.