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Why car dealers will ditch PCP discounts to lock in buyers

By Dr Richard Parkin

The UK new car market has been somewhat of an enigma in recent times, given its relative buoyancy versus the Eurozone countries. A combination of better economic growth, lower unemployment and PPI pay-outs have provided the consumer confidence and means for many to acquire a new car, which for some is a new experience.

     
  Richard Parkin, Glass's
 

Dr Richard Parkin is director of valuations & analysis at Glass’s, where he coordinates the editorial and analysis team. Prior to joining Glass’s in 2012, he spent six years as a strategy consultant at Ernst & Young, with a focus on the automotive industry.

 
 

Seeing the obvious opportunity, UK national sales companies (NSCs) have aggressively pursued a strategy of affordable new cars for all, chiefly through various forms of cash discounts sewn into Personal Contract Purchase plans (PCPs). The attractiveness to dealers is that such sales can engender customer loyalty as it becomes much harder to walk away from the brand: existing customers can always be enticed to extend their contract with a new car for similar money before the end of the original term, although such tactics only apply to the original owners. However, the downside of such a strategy is that the residual value (RV) can be damaged, especially for a nearly-new example.

But market share can be maintained or even increased by using other forms of discounting that don’t involve reducing the price paid per se, but provide additional benefits instead. More optional equipment as standard is one way of achieving this; another is to provide reassurance to the buyer in the form of an extended warranty, as illustrated below.

Unlike “cash-like” forms of discount, provision of extended warranties not only supports customer loyalty through good customer experience, but it can provide a demonstrable uplift in RVs. Indeed, EurotaxGlass’s has previously shown in Germany that RVs for otherwise identical 36-month-old models improved by 1-3% with an extended warranty bundle, provided the benefit is transferable to a subsequent owner when the vehicle enters the used marketplace.

Growth in “share of spend” through extended warranty benefitsAnother challenge for OEMs and franchised dealers alike is to keep the servicing and repair revenues in the network for as long as possible, as this is where the margins are often being made. The problem is that peak maintenance spend on a car typically lies inside a vehicle’s second or third ownership cycle, where owners are more likely to use independent garages – and non-OE spares – for repair and servicing work. However, extended warranties can help retain a link between the dealer and subsequent owners, thereby keeping more of the aftermarket spend in the network and ensuring that OE parts are used.

In the future then, expect to see more PCP deals offering extended warranties and/or free servicing rather than deposit contributions, as the desired new sales volumes and market share can be achieved without the risk to RVs.

 



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Comments

  • christopher.smith - 03/10/2014 12:42

    What's the point of an extended warranty when the majority of PCP terms fit within the 3yr/60k offered by most mfrs?

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    • gezza06 - 03/10/2014 14:52

      @chris - I think what he might be implying is the (perceived) higher p/x value of a 3 yr old car with extended warranty.

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  • Nobby123 - 03/10/2014 13:55

    .

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  • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 03/10/2014 14:27

    For years I have been advocating that manufacturers support deals by adding valuable specification as opposed to throwing money at the deal. These actually cost the manufacturer less (£600 Nav Systems don't cost the manufacturer £600, but £600 of cash discount does), and the upside is that the RV should be improved, thereby offering an additional benefit to the lessee. Unfortunately too many within my industry sector (leasing) believe that discount is king when in fact all it does is to undermine the long term RV's of the affected models. There also appears to be a bit of a misunderstanding of the product itself by the author, and how these vehicles are dealt with at the end of the term, or even what the contractual options actually are. And why such a focus on PCP alone .... how do they think PCH's are affected?

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    • DP - 03/10/2014 17:52

      @Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - RV's will only benefit from additional uplift from options such as Sat Nav only if they have a specific CAP code for that model with Sat Nav. Sat Nav in itself are not enough to raise an RV- they need to be part of a defined specification pack. By enabling a £600 discount at the front end you make the car more affordable, a Sat Nav or appropriate spec upgrade will not prompt a sale quicker than a demonstration of affordability. Plus it limits your marketing affordability message,

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 03/10/2014 18:03

      @DP - Yes, I understand that adding in an option such as Sat Nav to a cooking car won't necessarily add to the value. I should have qualified my example a little better, but it was only an example and nothing more. I had in mind the brands that we primarily deal in, but in any event any leasing company retain the ability to adjust their RV's as they see fit - and they do when taking into account Metallic Paint, Navigation/Tech or Media Packs, Winter Packs, Leather upholstery and such like. Chilli Packs in MINI's are another perfect example. Certainly something such as Metallic Paint would usually affect the RV of the vast majority of vehicles to one degree or another. Supporting Maintenance costs are also another good way of using additional support and gaining the double whammy effect - i.e. the support actually helps the Disposal price as opposed to hitting the RV's. This is another thing I have been arguing for over the years - especially as the overwhelming majority of our clients opt for a Maintained Contract (irrespective of the contract mileage).

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  • Tom Power - 03/10/2014 15:43

    I don't agree with the premise made here. A typical PCP for the average or low mileage user does not need a warranty extension or service plan. You may have only serviced it once with long-life servicing by the time you've moved on to the next car. Deposit contributions help get the most car for the smallest payment and with premium manufacturer large RV's that's why they work. Audi sales have gone through the roof with this tactic

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  • Not funny - 03/10/2014 16:03

    He has never sold a car! Does not understand PCP and is in a dangerous position setting RVs! It's like putting David Moyes in charge of Man Utd!

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  • Abner Maload - 03/10/2014 17:52

    Couldn't disagree more! Hard cash off the front end of a PCP deal is all that matters. It lowers the cost of finance, reduces the monthly payments (which then improves the prospects of the owner for obtaining other important finance like a mortgage) and is easily quantified by the customer. When will consultants learn the actuality of the motor industry and stop peddling theoretics?

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  • barrie reeves - 03/10/2014 18:53

    Understanding PCP The purpose of the PCP is to give the lowest cost of driving with the joy of new every 2 years not 3 or 4 years as most dealers do,it also gives a supply of unique used cars where the history is no mystery a balance of fully loaded and basic cars are required to give the used car dept a good stock mix to help meet customer requirement, therefore only add ons that help to give the lowest cost of driving should be included in a PCP contract.Manufacturers should continue to give cash support to help customers have lower monthly payments not satnavs.

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    • PCH Vs PCP - 06/10/2014 10:43

      @barrie reeves - Isn't PCH typically more cost effective than a PCP on the majority of new cars?

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 06/10/2014 12:05

      @PCH Vs PCP - It can be Barrie, and for entirely illegal reasons. This is an issue I am pursuing at this very moment. Some manufacturers play by the rules, but for far too long too many haven't been and still bury their heads in the sand over the issue. I have been on the radio and in the trade press very recently and am actively tackling the manufacturers over it through the authorities. This very publication has featured the article that originated from Fleet News.

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    • PCH Vs PCP - 13/10/2014 08:49

      @Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - You got the link to the FN story?

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 13/10/2014 09:14

      @PCH Vs PCP - Yes. See here: http://www.fleetnews.co.uk/news/2014/8/13/manufacturers-warned-over-leasing-discrimination-/53243/ I have already taken it beyond this.

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 13/10/2014 09:18

      @barrie reeves - Barrie, you seem to be saying that PCP's are there to the benefit of the dealers rather than to provide the customer what they actually want? This isn't simply an exercise in providing dealers with decent used stock, even if that is a spin off benefit much of the time.

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    • barriereeves@hotmail.com - 13/10/2014 11:42

      @Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - Rob; If a PCP is set up correctly with a full explanation of the product to the customer then it can benefit all parties but over the years it has become a finance payment product and because of a lack of training little understanding of the real value of the product.

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 13/10/2014 11:55

      @barriereeves@hotmail.com - I agree Barrie, but unfortunately as with a lot of the way the leasing industry has gone over the past few years, too many sell it on price alone, as if it were a tin of beans. The manufacturers are massively guilty of making it all rental led, but some of the major leasing companies are also guilty of the same thing. Those who allow their rates on to price comparison sites are doing themselves, the industry and the product a major disservice. How on earth are Mercedes, in particular, going to pull themselves out of the price-led hole they have dug for themselves over the past couple of years? PCP's didn't get off to a very good start back in the 90's when many Ford dealers sold it very badly - customers got their fingers burned. Some people try and compare the cost of a PCP against the cost of HP (see Saturdays very stupid article in the Telegraph Motoring section as evidence of that) - it's a false comparison and depends entirely on what the clients buying habits and motivations are. If the client always has the intention of owning the vehicle in full then a PCP is the wrong product for them. They'd be better off by entering into a Lease Purchase agreement as the charges are lower and they can set the Balloon Payment at a more manageable and risk free level. If they have no intention of owning the product, control the cost of running the vehicle and want to keep their options open at the end of the contract then a PCP is an excellent product for them.

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 13/10/2014 11:55

      @barriereeves@hotmail.com - I agree Barrie, but unfortunately as with a lot of the way the leasing industry has gone over the past few years, too many sell it on price alone, as if it were a tin of beans. The manufacturers are massively guilty of making it all rental led, but some of the major leasing companies are also guilty of the same thing. Those who allow their rates on to price comparison sites are doing themselves, the industry and the product a major disservice. How on earth are Mercedes, in particular, going to pull themselves out of the price-led hole they have dug for themselves over the past couple of years? PCP's didn't get off to a very good start back in the 90's when many Ford dealers sold it very badly - customers got their fingers burned. Some people try and compare the cost of a PCP against the cost of HP (see Saturdays very stupid article in the Telegraph Motoring section as evidence of that) - it's a false comparison and depends entirely on what the clients buying habits and motivations are. If the client always has the intention of owning the vehicle in full then a PCP is the wrong product for them. They'd be better off by entering into a Lease Purchase agreement as the charges are lower and they can set the Balloon Payment at a more manageable and risk free level. If they have no intention of owning the product, control the cost of running the vehicle and want to keep their options open at the end of the contract then a PCP is an excellent product for them.

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  • Barrie Reeves - 04/10/2014 08:25

    What's a RV? In a PCP contract there is no RV it's a GFV with 3 great Options at the end of the contract 1 sell or px 2 keep the car 3 Hand the car back, The reason customers don't understand this product is because of a lack of product knowledge by management of dealerships, finance houses and manufacturers , please get to no the product and stop calling a GFV a RV.

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 04/10/2014 09:58

      @Barrie Reeves - The GFV is derived from the Residual Value set by the leasing company. So the RV is fundamentally important to any and all lease products.

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    • Barrie Reeves - 04/10/2014 13:51

      @Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - Rob this is not a lease its a PCP RV my be set by leasing company's in a lease agreement but GFV are more often set by manufacturers or there finance company.

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 04/10/2014 14:14

      @Barrie Reeves - A finance agreement where an element of the vehicle value is deferred until the end of the agreement term is a lease. I think I've learnt something in my 25 years in the leasing industry. I helped launch the first PCP from a major independent leasing company in 1994. I think I understand what constitutes a lease. 'Lease' is a generic term and not a product in its own right. Vehicle manufacturers do not have a monopoly on the PCP market. I apologise if that comes as a surprise to the dealer market.

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    • Abner Maload - 04/10/2014 14:35

      @Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd -

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    • Abner Maload - 04/10/2014 14:42

      @Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - No, a lease is not a finance agreement with an element of the vehicle value deferred until the end of the agreement. A lease is a finance agreement where the lessor does not take ownership of the leased asset. It's particularly important for VAT purposes in the motor industry as a finance agreement which allows the customer to take ownership means the finance company can't recover VAT on the purchase price of the asset, so the amount financed is much higher along with the underlying rental (as any MD of a leasing company would know).

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 04/10/2014 15:03

      @Abner Maload - so please explain a Lease Purchase. You sound a little confused.

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    • Barrie Reeves - 04/10/2014 17:49

      @Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - I did not realise this was a competition but if we are comparing experiences I learnt from the Master Eustace Wolfington and was one of the original Half A Car consultants That introduced PCP to the UK.Rob you may understand leasing but you don't seem to understand PCP.

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 04/10/2014 21:25

      @Barrie Reeves - You clearly know everything there is to know. I'll just let you get on with it because splitting hairs with the likes of you really isn't that important. But please feel free to call me and debate the issue if you wish. I'm not difficult to find.

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    • Abner Maload - 05/10/2014 08:50

      @Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - Lease purchase is an industry misnomer, it's actually a hire purchase, but acquiring an asset on HP has historical connotations that a lot of folk don't like so the motor industry uses the term 'lease purchase' when it means hire purchase. Don't take my word for it, have a look at 'lease' in a dictionary, or worse try http://en.wikipedia.org/wiki/Lease for a definition. Leasing is just another word for renting - once the funding agreement contains a facility for ownership to transfer to the customer it's no longer a lease. Ask your accountant, the VAT man or your local tax inspector.

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 05/10/2014 09:14

      @Abner Maload - It's an HP agreement with the PROFILE of a lease. You are trying to explain the difference between an operating lease and a finance lease, and in the process are splitting hairs. Tell me where the Residual Value risk lies in a PCP.

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    • Abner Maload - 05/10/2014 15:13

      @Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - Er, no, a lease purchase agreement is not an HP agreement with the profile of a lease. Lease purchase only exists in the minds of marketing men; ask your lawyers to draw up a lease purchase agreement for you. Legally it can't exist. As for payment profiles, a lease can have any payment profile the lessee and lessor agree upon, straight line, balloon, advance rentals or whatever, but in the end the lessee still never takes ownership of the asset. In an HP agreement the customer can eventually take ownership of the asset if (s)he makes all the required payments. As for splitting hairs, the entire concept of leasing is quite importantly based around splitting hairs. Split them the wrong way (give residual risk to the customer) and the finance company can never claim capital allowances on the vehicle, nor can it recover the VAT on the purchase price. And as for residual value risk in a PCP, it's not the residual value risk that makes it an HP agreement rather than a lease (ignoring the finance law limitations on the definition of HP) . The customer in a PCP agreement can make the final balloon payment, complete the finance agreement and take ownership of the vehicle, which (s)he can then sell back to the finance company for the GFV. In practice the finance company accepts the vehicle back as settlement of the final payment if the customer doesn't want to complete the agreement. Either way, a PCP agreement can't be a lease because in a lease the lessee doesn't get to own the asset even if (s)he has an interest in the residual value (e.g. through a rebate of rentals after the asset is sold by the lessor). As regards the difference between an operating lease and a finance lease, this is quite well explained (and in fact pretty much prescribed) in International Accounting Standard IAS17 and it has nothing at all to do with what I was trying to explain.

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 05/10/2014 16:44

      @Abner Maload - Dear lord. Get a life. It's Sunday.

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    • Abner Maload - 05/10/2014 17:47

      @Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - Ha Ha Ha! But who checked in to see the reply? :) Anyway, what happened to the 24 hour society? And, of course, some of us sadly have to work on Sunday.

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    • Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 05/10/2014 18:16

      @Abner Maload - email updates. That simple. Work on Sunday? More fool you.

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    • Abner Maload - 06/10/2014 12:02

      @Rob Chisholm, Managing Director, Applewood Vehicle Finance Ltd - 'Work on Sunday? More fool you' - Hmmm, I think all the police officers, nurses, supermarket check-out staff and motor dealer employees who have to work on Sunday might take exception to that. Never mind, one day I might live in an Ivory Tower too. Until then I guess I will just have to concentrate on learning more about 'lease purchase', not knowing about it has obviously held me back (sigh).

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