In my previous blog, I asked you to think about the true impact that 0% long-term financing has on your business. I suggested that there may be a far healthier strategy for your dealership. Before I get into that, let’s review the impact of 72 and 84 (even 96) month financing on your dealership and customers.
On the plus side, 0% financing and lower payments are hard to find fault with; every consumer likes the thought of “free” money, and the lower payments have brought many consumers back into the marketplace. We will all look back on the 6-month period following the onset of the COVID lockdown and celebrate everything that brought consumers back into your stores, whether virtual or in-person. But, there is a long-term price that your store will pay for those long-term loans and the sooner that you move away from such financing, the better off you will be.
I recall an Acura-Honda loyalty study years ago that found that the loyalty to a dealership or brand diminishes proportionally with the duration of the term. On a 5-year loan, consumers were only 11% likely to buy from the same dealership. (Back when the study was done, 6 to 8 year auto finance terms were unheard of; customer loyalty will clearly be even worse on those terms than on a 5-year loan.)
However, there is some good news: the shorter the term, the more loyal the consumer. On 4-year loans or leases, the loyalty factor jumps to 30%. That’s better. The true “AHA!” moment comes when you convince your customers to look at leasing. According to that Acura-Honda study, on a 3-year lease, the loyalty jumps above 72%. That means that nearly three-quarters of the customers that you put into 3-years leases will return to buy from you again. That same loyalty to the brand and your store climbs to a mind-boggling 91% on 2-year leases.
So, why is that? If you think about it, consumers in 3-year or shorter leases typically do not grow tired of the car and are always covered by the factory warranty. There are few, if any, surprises. According to a Digital Dealer study: “A high percentage of your lease customers are already accustomed to coming back to your dealership for maintenance. They also boast a shorter trade cycle of 24-48 months, compared to five- to eight years for a sold vehicle. Play your cards right and you’ll have lease customers coming in every couple of years to trade-up, resulting in more service revenue opportunity, PLUS, a continuous stream of off-lease vehicles to boost your used car inventory.” (https://www.digitaldealer.com/dealer-ops-leadership/dealer-management/increase-lease-penetration-rates-combat-shrinking-profit-margins/) The same study found that the best desking solutions offer grid presentations that display multiple different financing and lease options so customers can see side-by-side comparisons [Market Scan can help with that!].
There are other factors which speak in favor of shorter-term leases. First of all, the monthly payment on a 39-month lease is generally about the same as a 72-month loan. As indicated above, you can count on being able to easily put that buyer into their next car. So, that is two cars sold to that same consumer in 72 months, not one.
Short term leasing is also a way to attract millennials. According to Brian Skutta, writing in Dealer Marketing, “The findings suggest that millennials are more willing than older generations to sacrifice the long-term financial benefits of car ownership in favor of more affordable near-term options or more luxurious vehicles that are typically most affordable through leasing. This is really good news as dealers seek to capture and retain millennial-generation buyers.” (https://www.dealermarketing.com/leasing-and-millennials-gateway-to-customer-retention/)
I know that you have heard much of this before. However, deep down, you know that leasing is a better solution for you and for the consumer. You just have not wanted to educate/fight/incentivize your sales and finance teams to get it done. If ever there were a time to do this, it is now. There are several great leasing trainers and consultants. One of the best is Cedric Rashad. I had him in three of my stores and his combination of benefits training, suggested pay plan changes and staff motivation is magic in transforming a store’s focus to a healthier lease-orientation.
Know also that your customers are better off in shorter term leases. The residual value is a de facto ‘guaranteed buy-back.’ They are protected if the value of the car plummets during the lease; they simply turn the car in. On the other hand, if the car builds equity over the lease term, they can buy it and keep it – or trade it in, and participate in that increased value.
Allow me to give you another, even more compelling, reason to do this: The overall value of your dealership will skyrocket with a large portfolio of short-term leases on your books. Because consumers on short term leases are 72-90% likely to buy again from you, your store is bound to be worth far more to any buyer/consolidator knowing that a high percentage of previous buyers will be returning every month. I experienced this very thing when my partners and I sold our dealership. There were several major bidders for the store, but the bidding had stalled at a level that we would not accept. The Chairman of one of the groups vying for the store asked me why his group should pay more. I advised him that we had 5,400 vehicles out on short term leases, with 1,700-1,800 returning each year. The next day, that group raised their bid by $10 Million and bought the store.
Philip Reed, writing for Nerdwallet (08/21/2020), states, “In the end, brands [and dealers] with high lease penetration will always have a shot with the client.” Patrick Roosenberg, Director of Automotive Finance Intelligence at J.D. Power adds, “Retaining lease customers is crucial for dealer and lender profitability as they navigate a constricting market and economic downturn.” (https://www.jdpower.com/business/press-releases/2020-us-end-lease-satisfaction-study)
So, get about building your short-term lease portfolio. Train your people how to introduce and sell leasing. Realign your managers’ and salespeople’s pay plans to focus on and support leasing. Such a transition will also bring with it a far healthier culture: You will automatically create a true relationship-based business rather than one that is simply transactional in nature. If your retention and repeat business is very high, it means you will spend far less on advertising and promotional initiatives. Every department in the dealership – and your CSI – will benefit, and you will build a long-term annuity and greater value in your store. When it comes time to sell or transfer to your children, you will have created significantly greater value.
If you would like to discuss this at greater depth, please feel free to reach out to me directly at 805.823.4256 or ssmythe@marketscan.com. Thanks for stopping by!
Best Regards,
Stephen Smythe, Chief Executive Officer at Market Scan Information Systems
Steve joined Market Scan as its CEO in 2009 after 30 years in the retail automobile business, bringing extensive knowledge of the industry and what it takes to sell and lease automobiles. In his career, he spent 20 years as a Dealer Principal/Owner, operating multiple dealerships in major U.S. metro markets including Los Angeles and Washington, D.C. Among the brands his dealerships represented were Mercedes Benz, Toyota, Volvo, Bentley, Rolls-Royce and Acura. Today, the University of South Florida alumnus leads all non-technical aspects of Market Scan’s business.
Market Scan combines science, technology and data to provide industry leading solutions that enable OEMs and lenders to maximize their market penetration through analytics, and empower dealers to achieve digital retailing supremacy. Market Scan solutions help companies optimize their competitiveness and profitability, as well as deliver an enhanced consumer experience.
