Today’s auto dealerships are constantly seeking innovative ways to differentiate themselves and enhance their profitability. One such opportunity lies in the strategic use of limited warranties, not just as a vehicle sales tool, but as a cornerstone of a sophisticated wealth-building program.
While the utilization of limited warranties has become commoditized, integrating these warranties into a comprehensive reinsurance or dealer-owned warranty company (DOWC) strategy can provide significant financial benefits for dealerships. This approach not only enhances customer satisfaction and loyalty but also creates a robust revenue stream that can contribute to long-term financial stability and growth.
Benefits To Consumers
Limited warranties offer a unique value proposition for both consumers and dealers. For consumers, these warranties provide peace of mind by covering specific major mechanical components which typically are the costliest to repair or replace. They are free to the consumer, may or may not have a deductible, and can include additional benefits such as towing or rental car coverage.
Limited warranties also help consumers minimize the need to worry about costly repairs. In fact, a recent report showed that only 41 percent of U.S. adults would use their savings to pay for an unexpected emergency expense, such as $1,000 for a car repair.
The eligibility criteria for these warranties can vary, covering new and used vehicles, including specified domestic and import vehicles. The duration of coverage can range from as short as one month to the lifetime of the vehicle’s ownership.
Opportunities For Dealers
For dealers, limited warranties provide exceptional value to the consumer, fostering loyalty and encouraging repeat business. When a dealership offers a limited warranty, it creates market separation and a compelling reason for customers to return to the dealership for repairs and maintenance, thereby driving service revenue.
Additionally, the opportunity to upsell to a more comprehensive vehicle service contract or Wrap coverage to match the limited warranty term becomes more viable. These contracts can cover powertrain components for longer periods of time and can include coverage for air conditioning, brakes, and suspension, providing an additional profit stream for the dealership.
The real game-changer, however, lies in the integration of limited warranties into a reinsurance or DOWC dealer wealth-building program. Dealer wealth-building programs, typically associated with vehicle service contracts, involve the dealer setting aside a reserve to pay future claims. Instead of placing this reserve into the account of a third-party provider, the funds are placed into the dealer’s wealth-building program. This allows the dealer to invest these funds conservatively, growing the money while deferring taxes. The reserve can be used for various financial planning purposes, including loans, retirement planning, and distributing portions of the funds.
Building Wealth
With limited warranties embedded into this wealth-building strategy, dealerships can multiply their financial benefits. For example, if a dealer places a 3-month/3,000-mile limited warranty on each eligible used vehicle, they can offer this warranty free to the consumer while earning underwriting and investment income.
During the sales process, the dealer can then market and upsell to a more comprehensive and even longer-term vehicle service contract for a profit. This approach not only enhances the perceived value of the vehicle but also provides the dealer with two products to place reserves into their reinsurance account, rather than just one. This up-selling or dual-product strategy accelerates the accumulation of reserves, providing a more substantial financial cushion and greater investment opportunities.
The timing and strategy of offering limited warranties can vary based on the dealer’s objectives. A short-term limited warranty, such as 3 months/3,000 miles, can have a smaller number of claims and lower risk due to the short exposure period. This allows the dealer to accrue reserves quickly while providing basic powertrain coverage to the consumer. On the other hand, as an option, a long-term limited warranty can offer more extensive coverage, appealing to consumers looking for long-term peace of mind. Dealers can choose to implement one or both strategies, depending on their market positioning and financial goals.
Limited Warranties as Part of a Wealth Building Program
The benefits extend beyond immediate financial gains. Offering limited warranties as part of a wealth-building program can significantly enhance a dealership’s market differentiation. For instance, a dealer offering a lifetime powertrain warranty on all eligible new vehicles, in addition to the manufacturer’s warranty, can create a strong competitive advantage. Consumers are more likely to choose a dealership that offers such extensive coverage, perceiving it as a higher value proposition. This can lead to increased foot traffic, higher sales conversion rates, and greater customer loyalty.
Moreover, the integration of limited warranties into a reinsurance or DOWC program aligns with the broader trend of financial innovation in the automotive industry. As vehicle prices fluctuate and profit margins erode, dealerships must find new ways to sustain and grow their profitability. Reinsurance provides a viable solution by turning a traditional cost center — warranty claims — into a profit center. By managing their own reserves, dealers can control their financial destiny by leveraging their investment opportunities to build wealth over time.
The commoditization of limited warranties helps dealerships to innovate and enhance their profitability. By tying limited warranties into a sophisticated reinsurance or DOWC program, dealers can create a powerful wealth-building strategy that benefits both the consumer and the dealership. This approach not only provides immediate financial gains through the sale of vehicle service contracts but also builds long-term financial stability through strategic reserve management and investment.
Dealerships that embrace this innovative approach will be well-positioned to thrive in the competitive landscape, offering unparalleled value to their customers and securing their financial future.
Related Stories:
