Focus on higher PCP renewal rates, not winning a price battle, dealers urged

Car dealers’ ‘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, says finance retention specialists Chrysalis Loyalty.

It sees growing evidence that longer PCP terms are increasingly being used as a quick fix in an increasingly challenging market.

Mark Fretwell (pictured), of Chrysalis Loyalty, said: “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.

“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, Fretwell 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,” Fretwell said.

“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.”

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