Are service plans profitable for your business?
Service plans have been a way for dealers to keep hold of price sensitive customers and fight off independent garages for post warranty customers.
The question for this issue’s poll came up after a dealer spoke to AM of how unprofitable they had been for his business.
He said: “Service plans mean a franchised dealer becomes differentiated on price and it’s pricing on the lowest level. It negates all arguments about service and price based on quality of care and that being a reason for a customer to come back.
“Is it a good business model for sustainable high margin business? If service is the most important part of the business for covering overheads should dealers be giving away work so cheaply?”
The current average overhead absorption rate for UK dealers is 58.8%, according to the ASE data. The benchmark is 80%.
There’s a clear positive here in the plan acting as a retention tool, locking that customer in to come back and this is reflected in the overall result.
By selling a service plan you are essentially guaranteeing that customer’s return to the business. Dealers can keep a relationship going, which will then lead to future car purchases or recommendations down the line.
One comment from the poll mentioned that tailoring a specific package with a third party is more likely to return a profit on service plans sold to customers. However, the opposite is true of if it’s a manufacturer scheme.
The dealer said: “Manufacturer service plans have cut down the service times and in the main charge warranty rate, making overhead absorption much more challenging.”