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Dealers should focus on higher renewal rates – not pursue a ‘race to the bottom’ on monthly payments

Dealers should focus on higher renewal rates – not pursue a ‘race to the bottom’ on monthly payments, says Chrysalis

DEALER ‘ADDICTION’ to the lowest possible monthly PCP payments is unsustainable for motor retailers and their brands in the long term.

Instead they should be focusing harder on boosting sustainable business by shortening the change cycle – which means working harder to qualify customers.

That’s the view of finance retention specialists Chrysalis Loyalty as evidence grows that longer PCP terms are increasingly being used as a quick fix in an increasingly challenging market.

Many dealers and brands are already losing greater long-term profit opportunities – and risking their relationships with customers – by chasing short term wins from 48 month PCPs.

But if dealers fail to challenge the industry mantra that ‘it’s all about the monthly payment’ they only pursue a race to the bottom, rather than sustainable growth, say Chrysalis.

According to Mark Fretwell, of Chrysalis Loyalty “some dealers are addicted to the lowest possible monthly payment as a way of signing the customer immediately while sacrificing future loyalty and profitability”.

Using the example of switching a 48 month PCP to 36 months on a popular volume brand model, he argues that both the dealer and customer benefit from shorter PCP terms in the medium to longer term.

Based on industry-standard CAP residual values and a finance rate of 4.9% he contrasts a zero cash down four year term for the car with a deposit of two monthly payments and a term of 36 months.

The increase in the monthly cost to the customer is less than 10% while the opportunity to renew the vehicle for little or no cost to change comes more than a year sooner.

“The model we use to illustrate this is a representative volume vehicle with an on-the-road price of £29,050* and a £1,000 brand deposit contribution toward the deal,” he explains.

“The temptation for the dealer is to go for a 48 month PCP to achieve a monthly payment of £452. But by encouraging the customer to put down a deposit of two monthly payments and increase the monthly payment by less than 10% to £496, the term can be reduced to 36 months and they will be able to enjoy a new car much sooner.

“If this approach were implemented at scale it would result in a 33% increase in sales volumes from renewing customers over the longer term”

“It is even possible for the dealer to achieve a 100% long term increase in this example by explaining to the customer that a £4,000 deposit and a 24 month PCP will enable them to halve the time in which they can change their car.”

Mark Fretwell acknowledges that such an approach involves much more rigorous qualification of customers. But he argues that the increase in overall sales volumes over time – and the customer goodwill that stems from being able to change cars sooner – will bring substantial rewards.

He says: “Instead of taking the path of least resistance with the lowest possible monthly payment conversations should focus on the bigger picture, which must include how often the customer likes to change their car.

“This is about giving the customer all the information they need to make the best decision for them as well as for the dealer.

“The benefit of a relatively small increase in payment and the addition of a deposit makes for a more sustainable long term strategy.

“If we do put customers into four-year deals we know they will want to change earlier but will inevitably find out that they cannot. They are then less satisfied with their existing vehicle but feel stuck and that can only come at a cost to your relationship with that customer.

“Of course brands can keep increasing their deposit contributions to keep the business flowing, but ever-increasing support of that kind is still not a sustainable business model.

“In such a low monthly rate-driven environment how long will it be before we start talking about 60-month PCPs and how will the customer then feel when their opportunity to change has been pushed even further into the future?

“As we face a more challenging market today than for several years it surely makes sense to work a little harder now to maintain the quality of customer relationships and preserve the opportunities to renew.”

 

*How the quotations are calculated: monthly payments highlighted in bold

PCP length (months) 24 36 48
On the road price £29,050
Brand deposit contribution £1,000
GFV (95% of CAP Gold Book)

February 2018

£13,870 £12,136 £10,188
With £0 customer deposit £525 £452.13
With £992 customer deposit £496.10
With £4,000 customer deposit £502.79

 

Picture credit: freestocks.org

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Chrysalis announce appointment of product and marketing director

Expansion is under way at finance retention specialists Chrysalis Loyalty with the appointment of Mark Fretwell to the role of Product & Marketing Director.

Mark Fretwell – whose automotive data and technology background includes senior positions at CAP and KeeResources – is the first in a series of planned appointments in 2018 as Chrysalis Loyalty accelerates an ambition to be recognised as the global leader in motor finance retention.

Independently owned and UK-based Chrysalis Loyalty currently operates in 12 countries, helping more than 2,500 motor retailers consistently and sustainably generate repeat business by identifying the moment a customer can most cost-effectively trade into a new car.

The company partners with nine major automotive brands and finance providers through their franchise networks and the expansion plans range from deeper and wider British market penetration to launching into new geographical territories worldwide.

Founder and CEO Jolyon Barker said: “We are primarily a technology-driven expert data business and that is why Mark is such a great fit for us at this exciting moment, bringing with him more than 20 years’ experience and understanding as well as an impressive track record of success in that world.

“Mark is also highly entrepreneurial and understands that success means delivering value to both sides so his appointment is equally good news for our customers too.”

Branded as ‘Key2Key’ the Chrysalis Loyalty system has been transformational for dealers, who typically report the doubling of their retention and renewal rates after adopting it. By automating the identification of customers in a position to change, Key2Key addresses one of the most challenging tasks in the dealership, delivering pre-calculated offers that produce high levels of repeat business and are also in the best financial interests of the customer.

Mark Fretwell said: “Smart use of data to remove friction and unlock commercial opportunities is one of the most exciting fields in the automotive world and Chrysalis Loyalty is a real innovator in that space. We already have exciting plans to expand our offering in the UK and elsewhere around the world and I’m delighted to be in at the beginning of this new chapter for the business.”

 

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