Service Contracts in BHPH

Repairs are as much a part of BHPH as collections. What is the best way to handle the issue? The answer to that question has as many variations as there are BHPH dealers. Back in Texas when I was part of a large dealer group that had a BHPH operation, we started selling extended service plans (ESPs) to the customers to help keep the more expensive vehicles repaired and generate some back-end profit for the dealership. The dealer group had a policy against aftermarket ESPs, so our service contract penetration was limited by the BHPH inventory and the ESP’s limitations on years and miles.

At that dealership, during a managers meeting one afternoon, the collections manager was giving credit to the ESPs for improving collections. The service manager chimed in to tell us about the increases in revenues that corresponded with the ESP activity. He also explained how much better his day had become working with the customers relieved from the stress of big shop bills. Ever since then (which was about 10 years ago), service contracts have been a big part of my business model.

During the Best Ride startup seven years ago, there was a significant burden on the cash flow. The burden was offset by the additional markup on the product, interest we received from financing the ESP, the selling point in advertising, and word-of-mouth from satisfied customers after the sale. Four years ago, we opened our own service department. Since we already had a customer base equipped with ESPs, we were almost immediately profitable. Added bonuses of having a full-service shop on site were our recon expenses and the time it takes to turn inventory have been reduced.

We are able to deal with 85 percent of the mechanical problems our customers experience without putting the stress of a large shop ticket on them. The ESP we use is administered by AUL Administrators and comes with nationwide roadside assistance and towing. With that, our customers have been able to get help in 14 states when they experienced mechanical trouble. The roadside assistance allows the customer to call for a wrecker anytime without having to wait until Best Ride is open. 

Every BHPH and LHPH dealer has to decide how they are going to deal with post-sale vehicle repairs. It is a fact of life. I know dealers handle repairs differently. Some say it is the customer’s problem. Some stores offer a service contract for limited power train repairs and others fix what they have to and absorb the expense. We take care of repairs either through ESP claims or service receivables, so the vehicle works properly and retains value.

I have always heard and experienced the old adage, “If they can’t drive the car, they won’t pay.” Of course that is true in almost all cases. Another place where our upfront sacrifice has really paid off is our portfolio performance. In our pool of business sold from 2006 to 2009, we show a loss ratio below 10 percent.  There are other variables in our program that assist in our portfolio performance, but keeping the cars in better condition and the customers happy are undeniably critical to our success.