Pre-Paid Maintenance

The risks and rewards of selling pre-paid maintenance packages.

I have heard a lot of good things about selling pre-paid maintenance (PPM) packages, but I don’t know what to do to get started. What are the risks versus the rewards?

The answer this month comes from Best Operators Club member Curtis Sloan. Curtis is the vice president and GM of Sloan’s Motorcycle/ATV Supercenter in Murfreesboro, Tennessee. He is also in charge of the BOC groups’ online data entry system that is used to develop financial composites — basically Curtis is the numbers guy for the BOC.

By definition, PPM is a program that can be sold either at the time of purchase or after the sale. Typically, it reflects the product manufacturer’s recommended maintenance schedule. Maintenance packages are generally sold for a specified time period. In most states, they can also be transferable.

Curtis, tell us a little about your pre-paid maintenance program.

Curtis Sloan says it is a numbers game that both the dealer and customer can win.

At Sloan’s we call it Care Plus Pre-Paid Maintenance. We feel that this softens the term and makes the concept of pre-paid maintenance easier for the customer to embrace. Our program covers scheduled maintenance for a three-year period. If they don’t use all of the program benefits during this period, they lose whatever is left at the end of the three years.

What made you decide to sell PPM?

Obviously, there is the profitability of PPM. More importantly however, is the fact that PPM does a better job than any other product sold in the business office of tying the customer to your dealership. The customer’s repurchase intention is pretty much 100% when needed future services are already paid for!

What have been the additional benefits to your dealership?

Well, let’s see:

  1. It improves cash flow because we’re holding the money.
  2. It improves customer loyalty by getting the customer in the habit of coming back to you.
  3. PPM improves the exposure of new products to the customer via those repeat visits.
  4. We have the ability to fill slow spots in the work flow by pro-active follow-up with customers. For example, we increase redemptions during winter months because our service advisors call and remind people about the status of their maintenance schedule and the program.
  5. If the service department properly executes their mission, we build word-of-mouth buzz amongst the riding community. This positive buzz helps build referral business and conquest sales.
  6. Unlike most other business office products, PPM is a product that can be sold after the initial sale and even after the OEM’s warranty period.

What have been some of the benefits to your customers?

Primarily, they save money versus buying service work ala carte – in most cases 25%-35%. In addition, we make buying and servicing their motorcycle or ATV easier.

What are some of the pitfalls or other issues you encountered?

There are no substantial pitfalls. However there are some things to pay attention to. Record-keeping in Lightspeed is a bit cumbersome for the customer who buys PPM separately from the initial bike transaction or if ownership of the protected motorcycle or ATV transfers to a new owner who claims the benefits. However, these incidents are few and far between. These can usually be handled manually so long as the service staff will use common sense and do a little sales history searching to verify coverage. Some states are now beginning to regulate this product much more than before. Some may require the selling dealership to have some type of re-insurance for the programs. Be sure to review the regulations for your state before implementing a PPM program.

How do you structure your pricing?

We have a sort of master model list (an exhaustive project initially) that the service department worked up to determine very general, average three-year service costs on a model by model basis. Even though we have this master price list, we really manage by reserve and don’t concern ourselves with trying to micro-manage plan pricing on a model by model basis.

What about the reserve (how much, how is it accounted for in your system, etc.)?

The chart spells out how we determine the income and the reserve. Notice that the percentage reserved decreases substantially as the funds increase. This encourages the business office to maintain the margin by increasing earned income based on the table. This formula has been developed over a substantial period of time and works well for our dealership. Looking at the chart, you can see that our business office receives a higher percentage of their sale as an incentive to maintain adequate reserves. No one in the business office gives away PPM knowing that in doing so, over time, they would lower the reserve which in turn lowers their percent of income earned.

  If Total Reserved
Funds Are:
    The Earned
Income Is:
    The Amount Reserved
(Cost Of Goods Sold) Is:
Less than $150k 30% 70%
$150,000 35% 65%
$175,000 40% 60%
$200,000 45% 55%
$225,000 50% 50%

Curtis, what is the percentage of customers who utilize 100% of your Care Plus PPM program?

Actually, it is surprisingly small. What this means to us is that we make good money on the program even though the services are discounted to the customers. The customers who don’t use the whole program more than make up for the cost of the service discounts. Overall, this is a highly profitable and very beneficial program for our dealership.

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