Electric vehicles threaten dealership profits

McLaren serviceA 2018 report by Bloomberg New Energy Finance shows that worldwide electric vehicle (EV) sales will grow from 1.1 million in 2017 to 11 million in 2025, and then surge to 30 million in 2030. By 2040, a full third of the planet’s vehicles will be electric.

While the rising wave of vehicular electrification may be good news for proponents of clean air, it has dealerships worried about the future of the bottom line. Currently, as much as 44 percent of dealer income can be generated by the service department. As an industry, vehicle service generates an estimated $247 billion per year.

Service is so profitable, in fact, that dealerships will often accept a lower initial vehicle price for future potential revenue. Customers can haggle over heated seats or an upgraded stereo, but hourly labor charges and parts costs are non-negotiable.

Electric propulsion systems are mechanically much simpler than internal combustion ones, however, and will require fewer service visits.

“No doubt service revenue will go down, because EVs contain about 40 percent fewer parts,” said Frederiek Toney, President of Global Customer Service Division at Ford. Toney was speaking at J.D. Power’s 2019 Auto Summit in Las Vegas.

McLaren service

With no transmissions to maintain, no mufflers to replace, and no engine oil to be changed, future revenue from EV service will depend on brakes, tires, wheel alignments, and battery refurbishment.

Even more important to the bottom line in the future world of EVs, however, will be the service department’s ability to capture and maintain client relationships. “It all rests with great customer satisfaction,” said Toney. “It is the key to keeping customers coming back. If we can hang on to market share, we can make up for (fewer repair orders).”

McLaren service

One of the most prominent new ways dealerships retain customers and create opportunities for service upsells is through prepaid maintenance programs (PPM). A widely quoted white paper indicates that PPMs are currently increasing service revenue by 15 percent and customer retention by 60 percent. A related study found that buyers with a PPM visited their service department more frequently than those without, every 2.87 months instead of every 5.95 months. PPM buyers spent more, too: $982.34 annually compared to $384.55.

For both the dealer and the manufacturer, PPMs (and other loyalty programs) present an even greater opportunity that initial sales revenue: brand loyalty.

“The dealership service staff essentially acts as a second salesperson to the customer after they have purchased the vehicle,” said Ryan Robinson of J.D. Power and Associates. “The interactions they have with customers after the sale is critical to ensuring that customers not only purchase the same make of vehicle in the future, but also do so at the same dealership. The link between service satisfaction and future vehicle purchase intent is a critical one.”

Very critical.

J.D. Power found that 42 percent of customers who rate their dealer service experience 10 out of 10 indicated they “definitely will” buy the same make again. For customers who rate their service experience between one and five, the “definitely will” percentage number drops to just seven.

McLaren service

Manufacturers are already looking ahead. Ford, Mercedes-Benz, Chevrolet, Kia, Alfa Romeo, Volvo and seemingly all others offer OEM-branded dealership PPMs. This partnership creates more than just initial revenue; it creates an opportunity to carry customers from the old world of internal combustion to the new world of battery power. Most importantly, it creates loyal customers—and continuing profits—for decades to come.

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