The vehicle service contract (VSC) industry is a $33 billion industry that continues to grow. In 2016, the purchase of VSCs post-OEM warranty hit approximately 85 million vehicles, and sales are projected to peak in 2024 at 180 million vehicles.
VSCs represent a significant component of automotive sales and profitability, and dealerships, administrators, F&I agencies, direct-to-consumer marketers, payment plan providers and insurance carriers are all part of the VSC value chain.
As the consumer demand for VSCs rises, due to the 64 million U.S. drivers who can’t afford unexpected vehicles repairs, and the VSC industry continues to grow, we’ve outlined the trends to watch in 2018.
Trend #1: Car Sales Remain Robust
New vehicle sales are expected to remain above pre-crash levels, and Ford, Honda and GM already have robust product plans that should lead to market-share gains.
The used car market has also experienced growth with a steady increase in demand, due to Hurricane Harvey and the rise of off-lease vehicles in the market that offer consumer a more affordable alternative to new car models. In fact, over the past three years, used car sales have represented more than a quarter of gross revenue for largest dealer groups.
Both new and used car sales are projected to remain robust throughout 2018.
Trend #2: Increasing Margins & Recurring Cash Flow
Dealerships continue to push VSCs and F&I products as a way to increase margins and profitability. In 2009, F&I products represented about 15% of dealership gross profit, but today they represent about 24% of dealership gross profit.
Truly, there are three opportunities dealerships have to sell VSCs to consumers: at the initial vehicle sale, near the expiration of a factory warranty and at resale (of used vehicles). Because customers who purchase a VSC often come back to the dealership they purchased it from for maintenance and repairs, it creates recurring cash flow for the dealer, as well as long-term profitability and customer loyalty.
Trend # 3: Looking for New Channels to Sell VSCs>
Automotive dealerships and administrations are also looking for new channels to sell VSCs in. They are using direct to consumer marketing, leveraging online opportunities and exploring an untapped dealership channel through the service drive.
As modern vehicles continue to feature in-vehicle technology that can be costly to replace and overall vehicle quality declines, VSCs are more relevant than ever. For example, if the heater technology goes out in a heated seat, the entire seat needs replaced, not just heating components, making “repairs” expensive.
Simply asking customers, “What do you think of all these new technologies in vehicles?” can be a great way to start a conversation around the value of purchasing a VSC.
Trend # 4: E-Contracting
As the business world becomes more and more digital, electronic contracting has become a new sales feature in the automotive industry. E-contracting streamlines the sales and financing process—allowing dealerships to submit auto contracts to their lenders and get funded quickly.
Emerging technology like the Service Lane VSC Sales Tool that Budco Financial can offer, allows dealerships to get drivers set up with a VSC contract and payment plan in minutes. This tool also highlights missing information and errors, so dealerships can be confident everything is correct before submission.
For those dealerships and players in the VSC value chain that haven’t started looking at acquisitions and integration, margins and recurring cash flows, investment, and e-contracting, they will be falling behind the times in 2018.