DEERFIELD BEACH, Fla. -

With more and more consumers seeing used-vehicle purchases as smart, cost-conscious choices and then holding onto these models longer than ever, mechanical coverage has become an even stronger selling point for dealers.

Auto Remarketing recently reached out to a variety of service contract and warranty companies throughout the country, recognizing that especially in the face of the recent scandal with U.S. Fidelis, whose former owners now face numerous charges, including insurance fraud, the need to have a reputable company behind the product is key.

Recent Polk analysis found that consumers are holding onto their used vehicles an average of 46.1 months, which is a climbing trend. This number stood at just 40 months in 2008. The company even went so far as to point out that these trends can serve as a business opportunity for dealerships.

And one of these key opportunities is up-selling a customer into a service contract on a used vehicle.

Of the various providers reached out to, Auto Remarketing heard back from JM&A Group, Interstate National, National Auto Care, Ally Insurance, EasyCare and AUL Corp.

The majority of these companies confirm the growing interest in mechanical coverage by dealers and consumers. And here are a few key points on how these offerings can help dealers and consumers. Moreover, these experts also offered tips on going about due diligence for dealers.

Importance of Service Contracts in the Market

Across the board, most providers Auto Remarketing spoke with pointed to an increased consumer demand for service contracts

Over at JM&A Group, James Cahn and Jeff Knittel, both senior sales trainers at the performance development center, say that offering service contracts is very important in today’s market.

“It isn’t always possible to know how a vehicle has been driven or maintained. Most automobiles today are built with advanced computer and electronic technologies that are costly to replace. Furthermore, dealership labor rates often exceed $100 an hour. All of these factors may add up to an unexpected expense, which places a tremendous financial burden on the average consumer. A service contract provides peace of mind by limiting the consumer’s exposure to costly repairs,” explained Knittel.

Ally Insurance president Tom Callahan pointed out that both new- and used-vehicle purchases are a significant expense for the customer, so protecting these purchases via service contracts is a way to ensure “they aren’t surprised by the cost of unexpected repairs.”

“In the used-vehicle market, VSCs also serve an important role in augmenting the remaining coverage from the OEM’s factory warranty. For example, the consumer of a used vehicle whose driving needs are greater than the typical 12,000-mile per year standard offered by most OEMs could find himself with very little warranty left at the time of purchase,” Callahan highlighted.

“VSCs provide consumers with the opportunity to have the same peace of mind that the original owner had knowing that most potential repairs will be covered for an extended period while they own the vehicle. For dealers, VSCs are a win-win proposition that provides them with a proven method of increasing customer satisfaction and building relationships that drive repeat business while generating revenue. Sales of F&I products are an important part of a dealer’s profitability.”

Over at EasyCare, Larry Dorfman, president, revealed, “In today’s economy, consumers are buying with limited dollars and assuring an expensive breakdown doesn’t add stress to already stretched family budgets makes a service contract purchase on a used vehicle even more important than ever.

“The profit a dealer makes on the sale of a service contract on a used vehicle is clearly important, but when the dealer offers the right VSC program, it can mean much more to the bottom line than just the front-end profit. Used-vehicle sales represent opportunities for parts and service business, as well as repeat vehicle purchases on trade-in, and to other members of the customer’s family and their friends,” he added.

According to AUL Corp., customers are generally more than happy to buy service contracts, especially with the current economy.

“Also, VSC sales are a key component of a dealer’s bottom line. For example, the dealership makes more profit on any product sold in F&I and the profit from that ranks second only to finance reserve. Additionally, studies show that service contracts increase customer retention by bringing them back to the dealership for repairs. Service contracts also help increase repeat sales and keep customers driving and paying for their cars,” explained Jason Garner, general sales manager at AUL Corp.

Paul Leary, national sales manager/strategic relationship manager at National Auto Care, also offered some tips. “Customers are looking at used cars as long as they have a warranty or the customers can buy service contracts. Customers are afraid of the unknown. It is just like buying life insurance, you don’t want to have to use it, but you are glad you have it,” said Leary.

Over at Interstate National, Lawrence Altman, executive vice president and chief underwriting officer, also responded to Auto Remarketing.

“With the higher average used vehicle transaction, there appears to be a bump in interest in service contracts as a value proposition,” he said.

Bottom-Line Support and Advantages

So how can these contracts help a dealer’s bottom line? 

According to Knittel they add additional profit for F&I department; help with customer retention in the service department and also drive incremental service and parts business.

Moreover, he noted that customers happy with their cars are more likely to become repeat customers, and service contracts can also help drive higher customer satisfaction scores.

He went on to explain that while many automakers now offer strong warranties, for customers that keep their cars longer, this extra protection can be a very important thing.

“However, with customers keeping their cars for longer periods of time (usually well beyond the factory warranty period), the need to extra protection is important since aging cars generally require more repairs,” Knittel pointed out.

“Additionally, more consumers are purchasing used vehicles, many of which are beyond the factory warranty period for comprehensive coverage. Due to uncertain driving habits of the previous owner, these used-vehicle owners are motivated to purchase service contracts in order to obtain future peace of mind,” he added.

And as for the best way to introduce a customer to a service contract or warranty, Cahn said is to place the marketing material next to the window sticker or FTC Buyer’s Guide.

“This is a no pressure method of having the customer consider what coverage already exists and what additional protection may be needed,” he stressed.

Ally Insurance’s Callahan remarked, “Dealers who aren’t maximizing their efforts to offer VSCs to their customers are missing extremely valuable opportunities to improve their customers’ satisfaction and build lasting relationships. Additionally, VSCs offer significant incremental revenue generation opportunities both through the sales of the product and increased business to their service operations.”

Meanwhile, EasyCare’s Dorfman added, “The experience a customer has when they breakdown while traveling or too far away from their selling dealership to return for service is vitally important to dealership profitability as well. If that customer has an outstanding claims experience that includes paying full retail for the repairs, providing alternate transportation without hourly restrictions and allowing for hotel and food expenses if the claim takes overnight, all assure the customer will have a deep appreciation that their selling dealership provided these coverages.

“Although we work to get the customer back to the selling dealership, we realize that this isn’t always possible, so we have a national network of franchised dealers covering every make and model that we can refer EasyCare customers to when they break down away from home,” he continued.

Garner, of AUL Corp., pointed out, “Service contract penetration rates have risen slightly over the last few years along with the average length of ownership of a vehicle. Dealers are becoming more sophisticated in their approach to service contract programs and understand the importance of VSC sales with today’s longer-owned vehicles.

“We also find that dealers who don’t offer service contracts are open to understanding the benefits both to them and their customers,” he continued.

National Auto Care’s Leary said, “Dealers know that selling products in F&I can help them achieve a positive bottom line. The issue that most dealers are running into is getting the banks to advance enough for the service contract to be included in the finance deal. For those dealers who do not offer service contracts, they are doing an injustice to the consumer and to their own bottom line.”

Later on, he added, “This will also enable the dealers the opportunity to increase the average gross on the vehicles they sell. As far as warranties, these help dealers market the vehicles to a consumer base that may be looking at vehicles on franchise lots.”

Altman, of Interstate National, also commented on this topic, saying, “When properly priced as a value for the consumer, the customer gains peace of mind, while the dealer makes a fair profit. In addition, if the dealer has a service department, service contract holders are far more likely to utilize the dealer’s service, thus driving additional profits to the dealer. By servicing the vehicle, the opportunity for repeat sales is greatly enhanced."

Do the Due Diligence Before Selecting a Provider

And given that the industry often hears news about service contract providers having issues, with the most recent and explosive being Fidelis, these companies agree that dealers definitely need to do their homework before jumping on board with a provider.

JM&A Group’s Cahn suggested that dealers looking for a provider with a good reputation and financial strength, in addition to products that offer comprehensive vehicle protection plans.

“Coverage, or lack thereof, is the number one issue that comes up in service departments. Service contracts are a good example of the adage, ‘You get what you pay for.’ In order to maximize all of the advantages from selling service contracts, dealers want to make sure they have a high quality partner,” he said.

So how can a dealer go about doing due diligence?

“It’s no longer enough to choose a service contract provider simply because they offer what appears to be the best products or lowest rates. You also have to know the financial security of its underwriting insurer. Many service contract providers fail because of insufficient funding. Moreover, providers that are financially weak may deny more claims leading to customer dissatisfaction. You also want to investigate a provider’s reputation with other dealers who have partnered with them. Actual experience with a provider can tell you what you can and cannot expect if you should decide to go with a certain provider,” Cahn explained.

Interestingly, Callahan said while financial strength is very important, reputation and ability to work with service departments seamlessly is another key need for the providers dealers select.

Many providers also offer training and support, so he recommended reviewing what type of training and support is available.

“We recommend that dealers look for a company with a deep bench of experienced professionals and the results that prove their ability to offer better solutions,” Callahan said. “Essentially, it’s the difference between dealing with a supplier of products to dealing with a trusted adviser. Your ability to use a trusted company’s experience to improve your bottom line is a key strategic advantage that goes well beyond any incremental savings you could achieve by looking only at products.”

Basically, he recommends dealers ask: How does the total value proposition of your F&I provider or independent agent stack up versus several companies for individual products?

“Leveraging a single source for the majority of your business could provide greater benefits. Your trusted adviser should look at the F&I office from a holistic viewpoint, taking into consideration every opportunity to increase success and profits for the dealer. If they’re not delivering enhanced PVR for the dealer, they’re not doing their job," Callahan continued.

According to Dorfman, over at EasyCare, the key thing to look for in a provider is if  they will be around to take care of the customer when a claim comes up.

“There are a number of companies that offer low-priced coverage, which allows dealers to make a substantial profit when they sell a service contract. However, we consistently hear from dealers that have used or are using some of these low-priced plans, and they always tell us how difficult those companies are to work with when there is a claim,” he suggested.

“The bottom line is that the contract should be backed by a major insurance company providing first dollar coverage, and administered by a company who has a great reputation for claims payment and customer service. Check references, talk to dealers using the program and, more importantly, talk to the service managers and writers at dealerships using the program being considered. They really know. Go online and research the company thoroughly before offering their VSCs. In the end, it is still the dealership’s reputation on the line,” Dorfman explained.

As for AUL Corp., Garner said, “Dealers should fully investigate the service contract provider and look for a solid track record, proof of compliance with all states they do business in and backing by an A-rated carrier. They should also fully weigh all of the options for structuring their program, including retrospective commission and reinsurance plans. Dealers can greatly increase their wealth through a properly structured program.”

Gina Eagerton, AUL Corp.’s marketing and compliance manager, noted that a dealer should understand his own tolerance for risk before choosing a provider.

“A good question to ask companies is whether they belong to any organizations that stay on top of ever changing state rules and regulations regarding the service contract industry,” she went on to say. “For example, The Service Contract Industry Council is a national trade association which monitors regulator activities regarding the service contract industry. If a company you’re considering partnering with is a member of this type of organization, that’s a good indication that the company is conscientious of service contract laws.”

As with any vendor, National Auto Care’s Leary recommends dealers evaluate service contract and warranty providers as well.

“It would not be in dealers’ best interest to do business with service contract companies that do not have an insured service contract program. As a dealer, you should talk to your representative, talk to the company representatives and also get references. Know that the company you do business with has the support and service that not only you need as a dealership, but that your customers deserve,” he explained.

He ultimately concluded this discussion by saying, “Dealers should look for companies with a long history of providing service in this market.”