Hyundai Extended Service Contract

PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century Chapter 24 EXTENDED SERVICE CONTRACTS Every customer that sits in front of you during delivery needs an extended service contract, and one of your primary responsibilities as a Business Manager is to educate your customers with respect to this basic need. Antiquated misconceptions about automobiles abound in your customer’s mind, and it is your responsibility to bring their thinking up to the turn of the millennium and beyond. Once upon a time, a long time ago, the ignition system of a vehicle consisted primarily of points, plugs and a rotor. The points and rotor lived in a place called a distributor, and a carburetor sat atop the engine and supervised the process. The exhaust came out of the manifold, through a pipe to the muffler, and 240 then spewed forth noxious gases from the tail pipe. This was the era of the super car! Terms like dual quads and three deuces defined fuel delivery, and the possibility that an engine might be aspirated by a super-charger, or even nitrous oxide was not out of the realm of possibility. Big block engines were placed in extremely light weight chassis, and power was king. Speed limits were much higher than they are today, and our toys would pass everything in sight with the exception of a gas station. That didn’t even make any difference to us back then because we could buy gasoline for 20 cents a gallon. This PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century was, in my humble opinion, the golden age of the automobile. I spent my teen-age years in the nineteen sixties, in Middle America, mesmerized by these beautiful works of art. Every small town back then had several measured and marked quarter mile straight-aways established on the black top roads leading to them. It was a much simpler time in more ways than one. Most notably the cars were much simpler! The best mechanic in town probably worked at a gas station, and the funeral home had the only ambulance. (Think about that for a second) Not only was there a mechanic at the gas station, when you pulled into the pumps you ran over a rubber tube that rang a bell, and someone came running out to pump your gas, wash your windows, check your oil and take your money while you were still sitting in your car. The reason that they did this was that they were in competition for your business, and all of the other gas stations performed at the same level of service. In this climate of competition the mechanic at the gas station, your neighbor under his shade tree, the mechanic at the tire store, and the mechanic at the dealership could all service or repair your vehicle. Ahhh! Those were the days! We must at this point insert some villains into our idyllic memories of automotive history. Ralph Nader and his consumer advocates, the ecological movement and the OPEC countries all conspired to destroy and forever change our beloved 241 muscle cars. The consumer advocates decided that they weren’t safe enough; the tree hugging ecologists decided that they polluted the atmosphere and placed massive back pressure on our exhaust manifold, and the Arabs cut off our supply of oil. With lines forming at the gas stations the large American gas hogs sat in the showrooms and the small fuel efficient Japanese products were selling like hot cakes. Computerized fuel management systems replaced the simpler systems, and catalytic converters invaded our exhaust. Everybody began to manufacture smaller more complex machines to meet the demand, but the American manufacturers didn’t know as much about small cars as the Japanese, so we experienced a quality gap. As we came out of this quality gap we had a much different product. It was smaller, more fuel efficient, safer, and cleaner, didn’t go anywhere as fast, and was much more complicated. Today’s modern products have more computers and more complex computers than the spacecraft that landed men on the moon. The modern technician is characteristically certified on systems rather than being able to repair any part of the vehicle like they were in the past. The term mechanic is as obsolete as the work that they were able to do. With this modern product, all repair work must be performed at the dealership. New vehicles have about 20,000 parts and 15,000 of them are moving parts, so let’s try and figure out how good a job of manufacturing the PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century industry can do. If we get our manufacturing effort to produce a vehicle that is 99% perfect we will experience one hundred and fifty part failures during the life of the product and everyone knows that this would be an unreasonable level of performance. We must come closer than that to perfection! 100% is an absolutely impossible level in any manufacturing process; you simply can not get there. If you have any doubt about this, ask yourself why every automobile dealership of any brand name out there has a service department. From Honda to Hyundai and Mercury to Mercedes they all have a service department. We are attaining manufacturing excellence in our industry, and are performing at just about 99.9% perfection in our new products. However this still produces a failure rate of 15 average part failures over the life of the vehicle. In the 1960’s a Mustang cost under $3,000.00 and was made out of predominantly steel. It now costs just a bit more and a significant amount of it is manufactured from plastic. The only thing that seems to have gone up faster than the cost of the actual vehicle is the cost of servicing the vehicle. The complexities of the electronics have spawned the diagnostic computer, and without one you can not have the car’s computer talk to you. This sounds strange, but the car’s computer is now telling another computer what is wrong with it. A diagnostic computer for a specific model of automobile exists in one place, and this is the dealership. 242 This has established a virtual monopoly in the dealership, and the resulting escalation of prices is characteristic of an established monopoly. The dealership has no effective competition anymore. This is obvious if you try to have your car checked the next time you pull in to get gas. You can’t get the attendant out from behind the bullet proof glass, and if you could get them out from behind the glass they would have no idea what was wrong with your vehicle. The tire store is good with your tires, and can possibly replace your battery, but is unable to do repairs on your vehicle. Turning your remarkably expensive investment over to a shade tree mechanic is so stupid that calling this behavior stupid is an insult to stupid people all over the world. You must be willing to bring your vehicle back to the dealership for service, and you must be willing to pay a technician about the same money per hour that your doctor makes! Would you seriously consider living life without medical insurance? You can’t even tow a new vehicle with a tow sling anymore. That Mustang that we used as an example earlier was made of steel and could be towed without damage by using a very simple mechanical wrecker. It consisted of a tow sling and a winch, didn’t have any hydraulics or many moving parts, and functioned beautifully. Now the only way to tow the modern product is to reach under the chassis and grab the vehicle by the tires using an excessively expensive hydraulic system. Wreckers now cost PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century remarkable amounts of money that make Italian sports cars look like a bargain, and they do not drive them out for a $10.00 charge like they used to. It is not uncommon for a towing bill to exceed $100.00 and in this modern environment this is only reasonable. Consider that the towing company is sending out an extremely expensive, heavily insured, capital investment driven by a skilled and probably union operator. With the escalation of prices towing a vehicle can now cost the customer as much as the entire repair cost in the past. Another thing that you should consider while you are explaining a new vehicle’s vulnerability to your customer is the impressive cost of replacement transportation. If you have rented a vehicle recently you are aware of the outrageous rates that are charged for even the least expensive of automobiles. In the “good old days” dealerships gave out loners to customers with vehicles in the shop. This practice has been virtually eliminated by the insurance companies who have done much to dictate operating practices of a dealership’s service department. Think about this for a second, because of the insurance companies, you can’t even stand next to your vehicle while it is being repaired. Insurance companies control and regulate the liability that they are willing to underwrite, and for this reason the “loaner” is virtually a thing of the past. Let’s consider your customer’s complete exposure of risk on the worst case scenario. During the 243 middle of the night the customer’s engine seizes up in the middle of a freeway bridge in a major urban center. The vehicle must be removed from the bridge to the dealership incurring a significant towing charge. The customer is facing a bill from your service department that will easily exceed a thousand dollars, and they have no way to get to work in the morning. Wouldn’t it be easy to hand your customer the keys to a rental car, charge him a small deductible, and give him his car back completely repaired. Your customer is happy because his towing bill has been paid, his car has been repaired with parts from his vehicle’s manufacturer, in his dealership’s service department by factory trained technicians so that the work is guaranteed, and he has had the advantage of replacement transportation while his car was in your shop. The only thing that has unexpectedly come out of his pocket is a small, say $50.00 or $100.00 deductible, and your customer satisfaction is dramatically enhanced. Because of the increased customer loyalty your dealer is happy. Your service and parts managers are happy because they have received full payment from the warranty company, promptly and without hassle. Everyone involved in the entire emergency is happy because the risk was carefully planned for and appropriate insurance was in place to answer every need. PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century Manufacturer’s warranties that are in place when the vehicle is new are merely insurance policies that have the premium included in the base price of the vehicle. These, unfortunately, only cover defects in material and workmanship, and have no provision at all to cover towing and replacement transportation. Extended Service Contracts help with these important liabilities from the first day your customer drives his new vehicle off of the lot augmenting the factory warranty. and have them forward you recent impressive checks to dealers in your area demonstrating the financially disastrous consequences of a modern major repair. SERVICE DEPARTMENT LABOR RATE COMPARISON 1855……………………….$26.57 Per Hour 1860……………………….$57.67 Per Hour 1865……………………….?????? Documentation The first bit of documentation that you should construct for your customers is to find out what your dealership charged per hour for labor in your service department five years ago and what they are currently charging. You then using the current year, five years ago and five years ahead construct the following graphic for your customers. This should be placed in your evidence book along with the credit union contracts, pertinent articles from the business pages and one other valuable and compelling category of evidence for your customers. Search your service department for repair orders that are expensive enough to impress your customers. This is a continuing effort because you want to keep your repair orders relatively current, say within three months of the current date. The other thing you can do to present evidence to your customers is to contact your warranty representative Analyze and Conquer By this point in the transaction you have a great deal of information on your customer. You have three major sources of information that you can use to form a logical argument to indicate that your customer can in fact afford the increase in monthly payment. You have all of the information on the vehicle that is being traded in, and all of the information on the vehicle that they are purchasing. From the credit application you know where they work, how much money they make, how much they pay for rent, where they live, how far they drive to get to work, where their bank accounts are and approximately how much money 244 PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century is in them. From the credit bureau report you know how much they pay on their card bills, whether they have any loans that will be repaid soon, and are looking at all of their revolving and installment credit. You have more financial information on your customer than any other human being in their life, with the possible exception of their mate. If their mate is not as good at analyzing credit, you probably have a better picture of the customer’s situation than their spouse does. Nobody in the business world is privileged to more usable information on their customers than the Business Manager of an automobile dealership. You should use all of this information on their situation to explain to them that not only can they afford this important coverage, but that they can not afford not to take advantage of this important coverage. Ask your customer if they got an income tax refund, and if they answer in the positive, explain to them that all they need to do is go to their personnel office, adjust their deductions, and get the money in their paychecks. Find out the amount of the refund, divide it by 12, and include it in your presentation. Continue with the differences in the automobile that they are trading in and the one that they are purchasing. What is the difference in gas mileage? How much maintenance have they been investing in the trade-in that they will no longer be required to shell out? Express the gas and mileage saving in a monthly amount and write it 245 down on a legal pad explaining to your customer how you concluded the amount by involving them in the computation. If average mileage of the trade work out to 1250 miles per month, the trade-in is getting 14 miles per gallon, the new car gets 21 miles per gallon and gas is 1.10 per gallon the savings is $32.74. If the customer has indicated that they spend about $10.00 per month on maintenance and repairs, and they are about to pay off an $18.40 installment debt on a refrigerator, construct the following justification on your legal pad: Gas Savings $32.74 Maintenance 10.00 Refrigerator 18.40 Total $61.14 If you can come up with an analysis like this you will have certainly justified the “twenty some odd dollars” of increase in monthly payment caused by the warranty. Whenever your customer asks how much the extended service contract costs you answer “twenty some odd dollars” because hearing the entire five year premium is counter PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century productive. You will disclose the cost to your customer when you present them with the retail installment contract, but premature disclosure is usually disastrous to your presentation. The product is designed to be included in the monthly payment of a vehicle loan, so the premium is collected up front in its entirety. To protect the outer five percent of the vehicle customers pay liability, comprehensive and collision insurance every six months. It is much easier to pay for insurance monthly than in six month increments, but that is how automobile insurance works. Customers must generally deal with an out of pocket expense of hundreds of dollars every six months, but if they would see a five year premium for automobile coverage they would probably have a fit. Thankfully it is easier and less expensive to protect the inner ninety five percent of a vehicle with an extended service contract than the outer fiver percent protected by collision and comprehensive insurance. When the lender gets the money back they apply it to the outstanding balance of the loan, but they will not change the monthly payment. Monthly payments are contractually fixed, and adjusting them would require a completely new contract. Armed with this information, you can generally convince your customer that canceling their coverage is not a good idea because when buyer’s remorse sets in the customer’s goal is generally to reduce their monthly payment. When you explain that this will not happen you can generally convince your customer to retain this vitally important protection, and save your dealership a costly charge back. Aggressive Selling You must present your case for an extended service contract as strongly as humanly possible for a number of reasons. If necessary take the customer to the point where they are getting angry with your tenacity, but be as persistent as you need to be to get the job done. You must adopt the position that you care about the customers in front of you, they need this important coverage and you are not going to let them leave without it. Selling product is vitally important to your finance and insurance effort, and a good balance of product to rate is essential to controlling your charge backs. Everybody that sits in front of you needs this product and your attitude about your product will have a significant effect on your ability to Cancellation If a customer decides to cancel their extended service contract, they do not get any money back and their payment is unchanged. The cash was advanced by the bank, and if the customer terminates their coverage the extended service contract company will send the money back to the lending institution. 246 PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century sell it to your customers. The number one reason for a business manager loosing his or her job is held offerings, but number two is a lack of service contract penetration. You must yourself truly believe in your product to communicate this urgency and importance to your customers. Responsibility When selling an intangible product to your customers you are in essence selling a promise. The reputations of your dealership rests on this promise, so selecting a warranty company that is responsive to claims is vitally important. There are things that no insurance company can be expected to do, such as repair a preexisting condition, but a warranty company tries to find ways to deny claims is no good to you at all. This can destroy the reputation of your dealership and produce the worst possible form of advertising. It is your responsibility to intervene if one of your customers has a claim that should be paid denied by the extended service contract company. If this happens you should immediately contact your warranty representative and have them intercede with their claims department. If they are not responsive to your problems, you have no alternative but to change to a company that will be responsive when it comes to paying their claims. If you are sending in a significant number of premiums each month they will be very interested in keeping you happy, so once again your selling performance is vitally important. The most inflexible extended service contract companies tend to be those set up by the manufacturer, i.e. Ford’s ESP, GM’s GMPP etc. It becomes almost impossible to reverse a decision once they have made up their minds, so this is a significant reason to go with an independent service contract company. As a general rule of thumb, the larger a bureaucracy the more inflexible it becomes. The other obvious criterion for selecting a warranty company is their price list. If you can reduce your costs, you can increase your profit margin, but remember that if it sounds too good to be true it probably is too good to be true. Steer clear of extended service contracts that have a price structure that is below the market rate. The third consideration is your service manager’s opinion of the company. Remember that you are a part of a team, and your service manager’s input is extremely important. A time consuming claims procedure or a company that is slow forwarding payment to your service department is not good for your dealership or your customer satisfaction index. Remember that you are the agent that sold your customer a promise that their vehicle would be repaired if they have a problem. All they have is your word that the piece of paper you sold them will work if the need presents itself. If a claim is for some reason denied you need to 247 PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century immediately find out why and take action to overturn this decision. You concurrently need to communicate with your customer so that they know that you are working on their problem. They should be kept continuously informed of your progress, and if you can’t get the denial overturned they are entitled to a complete explanation of the reasons why. If you do experience this problem, before you give up you should involve your General Manager and your Dealer Principle. This is one of the times when a telephone call from the owner can be extremely effective. No warranty company wants to loose a good account over a problem like this. understand all of the features and benefits of the product as it would relate to them. When the customer responds in the positive bring up your already loaded and printed contract, disclose its appropriate features, and indicate the locations of your customers required signatures. Objections You are better off to answer the customer’s objections during your presentation, so make it as comprehensive as possible to anticipate potential objections. If a customer still has an objection to the product you must ferret out the objection so that you can deal with it, educating the customer to their obvious needs. These responses to the most common objections are merely ideas that hopefully will spark your own creativity in dealing with the problems. The number one objection has got to be: It Costs Too Much! Don’t be afraid to remind your customers of the fact that “Good things aren’t cheap and cheap things aren’t good.” Break down the cost of parts plus the labor rate and divide the premium by this new value to achieve the number of in shop hours that they are actually paying for. Like so: Labor $90 Parts $120 The Presentation Begin with the warranty company’s brochure. Not the one that says it covers everything but the following components. This is almost as negative a device as asking the customer “You wouldn’t want to buy an extended service contract, would you?” Never work from a negative like a list of things that are not covered. Get a brochure that lists all of the things that are covered, and in great detail describe exactly what is covered. Expand the value of the product in minute detail, including the towing and rental car options, and make sure that the customer understands everything in fine detail. Answer all of the customer’s questions that they have about the product, and be sure that they 248 PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century So the average hour in the shop costs $210.00 So a $1,000 premium works out to 4.76 hours in the shop Does your customer really think that over the life of the vehicle it won’t spend one day in the shop? If this analysis doesn’t work reverse the process and ask the customer if they would be willing to accept a monthly payment twenty some odd dollars and agree to: • Sign a legal document stating if my car breaks down you have it fixed by a factory trained mechanic Provide towing assistance Give me a car to drive for up to five days while the work is being done, and an additional five days if there is a delay because of parts availability Give me your credit card to take along with me if I break down away from home Agree not to cancel this arrangement if I experience numerous repairs • • contract to comprehensive and collision insurance. To begin these presentations ask the customer “Do you have collision insurance on your car? Even if it was not required, can you imagine leaving your driveway with no protection the way they drive here in Townburg. So that makes it a necessary evil, right? How much do you spend a year on comprehensive and collision protection? Write out the following comparison to graphically illustrate your point to your customer after asking them the following question: If it makes sense to spend $2,500.00 to protect the outside of your car, doesn’t it make sense to spend $200 per year to insure that it runs well? Physical Damage Extended Service Insurance Contract $500 per Year Cost $200 per Year $250 deductible $50 Can Increase rates never go up Can be Canceled claims Unlimited No transferable Yes (Increases resale) Accident use minor and major Repairs • • Would you take all of these chances with someone else’s car, not knowing how they intend to care for it? This is exactly what our product is going to do for you at an extremely reasonable monthly investment. I’ll take my chances! For this objection, go back to the comparison of an extended service Close this time with the question: Do you think that five years will be enough or do you think that six years would suit you situation better? 249 PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century Remind your customer of the other high points of your presentation, and do not give up! Remember tenacity is your greatest ally in selling extended service contracts! My friend works on my car for me! This program eliminates the necessity of burdening a friend with your car problems and makes the cost of having the work done professionally worry free. In order to professionally work on these new products our dealership has invested in a significantly expensive diagnostic computer that the manufacturer insists that we have. Does your friend have access to one of the new state of the art computers that your new vehicle requires for the diagnosis of problems? Does he get his parts for free? Would he tow your car in if you didn’t break down in front of his shop? Does he supply you with alternative transportation? If he is a good friend would you really want to impose upon him like that? With this program we are paying the bill, but you chose where you want the work done. If you still want your friend to do the work, and he has a real repair business, we will cut a check for the repairs to his business. Can you see how our program eliminates the necessity of burdening a friend with your car problems and makes the cost of having the work done professionally completely worry free? Don’t be afraid to get your customers up and take them on a tour of your service department. If 250 your salesperson has done their job, this will be the second time that they have seen the service department, but take them anyway. Show them the more impressive pieces of computer equipment, and have one of the technicians explain its complexity. Remember, you care about the customers and you aren’t going to let them leave without this vitally important coverage. I’ve never had a problem! Twenty some odd dollars a month is very little to invest when you consider the cost of 99.9% problem free driving. Do you realize how many components are covered with this product? Wouldn’t you say the very best that we could hope for over a five year period would be 99.9% repair free driving? Write out the following illustration for the customer: • • • • • 15,000 Covered Components Times 99.9% Components that won’t break Equals 15 Probable breakdowns Times $400.00 Average Cost per Repair That’s $6,000.00 of Probable Expense Over the Life of Any New Vehicle PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century Close with the question, do you think that you would prefer the 60,000 mile or do you think that you need the 100,000 mile policy? The factory coverage is enough for me! Let’s give this customer an interesting twist by taking the factory coverage away from them. Hypothetically, if the factory didn’t give you a warranty you would expect a significant discount, wouldn’t you? So the first three years of protection is worth a significant amount of money to you right? How much would you figure your factory warranty is worth? (I have never had a customer name a number less than a thousand dollars when I have asked this question) When do you think that you should expect a repair, during the first two years or after the parts have experienced some significant wear and tear? Average miles on a vehicle are based on a 15,000 mile year not a 12,000 mile year, so if you are an average driver, the factory warranty will expire at just after two years of normal driving. Can you see that the last three years of ownership, when the parts have experienced some wear and tear, and you can start to expect some failures, should be worth at least as much as the first two years when the parts are all new? Now, hopefully you can consider the fact that you augment your factory warranty with towing and replacement transportation coverage. Close immediately with: Would you like to use your credit 251 card, pay cash or include it in your monthly payments?1 Selecting a Service Contract Company If you are selecting a service contract company, make sure that their price list reflects market conditions. Satisfy yourself that they have a proven track record, (more than a couple of years in the business) and that they are backed by an “A” rated insurance company with more than a billion dollars in assets, and are listed as “insured” on the declaration page of the policy. Make absolutely certain, to your complete satisfaction that they are going to be responsive to your dealership, and your customer’s needs.2 For the section on objections I used an anonymous source document. Information is frequently faxed all over the automobile business, and I would certainly enjoy giving appropriate credit to the author, but unfortunately I have no idea who did the work. 2 I extensively interviewed Mr. Mark Muller from Mechanical Breakdown Protection Inc., in Kansas City. I certainly appreciate all of the information that he was able to provide. 1 PRINCIPLES OF DEALERSHIP MANAGEMENT In the Twenty-first Century Key Concepts Service contract penetration is a life and death, career changing issue for Business Managers, so you must aggressively present this product in order to produce the numbers necessary for survival. Each and every customer must get a high quality presentation every time, no exceptions and no deviation from this rule! You must adopt the attitude that you care about your customer, that they absolutely can not live without this vital coverage, and that you are not going to let them leave your office without it. 252